Apart from a Rs 1,000-crore penalty in the co-location probe, the market regulator separately fined 16 entities, including the National Stock Exchange of India and its two former heads, for allowing an unauthorised vendor to lay dark fibre that was used for high-frequency trading.
The regulator asked the exchange to deposit Rs 62.58 crore along with interest calculated since Sept. 11, 2015 within 45 days, according the order uploaded on the website of Securities and Exchange Board of India. BloombergQuint’s calculations suggest that the total penalty works out to nearly Rs 90 crore.
The second order, which also names Ravi Narain and Chitra Ramkrishna, former managing directors at the NSE, stems from the regulator’s larger probe into alleged preferential treatment to some brokers through the co-location service. The regulator on Tuesday ordered recovery of Rs 624.89 crore along with 12 percent, and also barred the exchange from accessing the securities market for six months.
The Background
Dark fibre is usually unused optical fibre lines that can be leased later. The NSE in 2015 allowed Sampark Infotainment Private Ltd. to lay dark fibre for stock brokers Way2Wealth Brokers Pvt. Ltd. and GKN Securities. But Sampark was neither an authorised service vendor nor approved by the Department of Telecommunications.
The fibre provided a bandwidth of 1 gigabyte and a lower latency or delay of 1 millisecond in connectivity with co-location facilities of the NSE and the BSE. Sampark provided the service between May and September 2015 to the two brokers, after which it was transferred to Reliance Communications Ltd., an authorised vendor.
SEBI found that NSE officials did not verify the eligibility of Sampark while granting it permission to lay the fibre for the brokers. The exchange also waived its policy of physical inspection of broker premises at the BSE prior to granting permission for the point-to-point connectivity to Way2Wealth.
The regulator found that the exchange didn’t allow other stock brokers to avail connectivity from Sampark till Reliance took over the infrastructure. Moreover, the NSE didn’t allow other unauthorised vendors like Sampark to lay fibre.
SEBI found this detrimental to the interests of other trading members.
Penalty Calculation
SEBI asked the NSE to deposit a “reasonable portion” of revenue earned during the period Sampark provided connectivity to Way2Wealth and GKN. That money will go to the Investor Protection and Education Fund.
NSE earned Rs 532.28 crore in revenue from its co-location facility in 2015-16. The revenue for period under review stood at Rs 177.43 crore. Considering the NSE’s net profit margin of 35.27 percent in 2015-16, the regulator arrived at a penalty of Rs 62.58 crore.
To be sure, SEBI order doesn’t specify the quantum of illegal gains made by the two brokers or the revenue the NSE earned from them during the period.
Way2Wealth and GKN
SEBI held that the two brokers violated the code of conduct for stock brokers. It found Way2Wealth’s conduct replete with deliberate misrepresentations, circumvention of regulatory norms and policies of NSE and manipulation of the network pathways at the co-location facilities of the NSE and the BSE to achieve, at any cost, fastest access to market data feeds as compared to peers.
SEBI’s order does not specify the quantum of illegal gains made by the two brokers. And the regulator followed the same principle as in the case of NSE to arrive at a penalty for them. Way2Wealth has to deposit Rs 15.34 crore and GKN Rs 4.9 crore.
Tighter Compliance
SEBI asked for half yearly independent technical audits and reports on co-location network and architecture for the next three years, making the top executive and the board responsible for compliance.
The audit report—with comments from managing director and CEO, and approved by the board—will list deficiencies and remedial steps taken. The second report will certify that the co-location network conforms with SEBI’s norms to provide “fair and equitable, transparent and non-discriminatory treatment to all the market intermediaries”.
The regulator also barred the exchange from introducing any new derivatives product for the next six months.
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