In the high-profile NSE co-location case, market regulator SEBI wants its forensic audit to quantify unlawful gains made by some brokers, allegedly in connivance with the exchange officials, which may put in limbo a settlement plea proposed by the bourse.
There is a strong view within SEBI that settlement should not be considered at the moment as the case relates to a top market infrastructure institution and its outcome may have a significant impact on investor sentiments about regulatory framework in India, a top official said.
When contacted, a spokesperson for the National Stock Exchange declined to comment on the status of the settlement plea, saying the bourse would not want to say anything on a matter between the exchange and the regulator.
Sources aware about NSE's thinking said the work is on for the consent settlement, and the exchange on its part is also working out the quantifiable gains made by brokers, if any. They also said SEBI has welcomed consent mechanism in many cases before, and that is a positive sign.
Regulatory sources maintained, however, that any settlement is unlikely at this juncture as the case is under the scanner of various regulators.
They said the regulator has already decided to get an independent forensic audit done to quantify the alleged unlawful gains made by some brokers as probes conducted by NSE itself and through an exchange-appointed auditor have failed to answer some very important points.
The regulator will also engage with various shareholders of the exchange as well as with the government and other major stakeholders in the capital market given the enormity of the case, sources added.
The Securities and Exchange Board of India is looking to complete its probe at the earliest in the matter, which was first brought to its notice in 2015 by a whistleblower but the investigation gained pace only in the recent months.
The case relates to some brokers allegedly getting preferential access through co-location facility at the NSE, early login and dark fiber, which can allow a trader a split- second faster access to data feed of an exchange.
Even a split-second faster access is considered to result in huge gains for a trader.
Pending investigations, Sebi has directed that all revenues emanating from co-location facility including the transaction charges on the trades executed through co-location facility be placed in a separate bank account.
Accordingly, NSE has transferred Rs 375.51 crore to a separate account for September 2016 to March 2017 period.
The regulator also wants to ascertain what component of this amount could have had an impact on the alleged preferential access to some brokers, sources said.
The probe is already casting its shadow on the long- pending Rs 10,000 crore initial public offer of the exchange, while it has already seen a flurry of top-to-medium level executive exits, including NSE's Vice Chairman and former CEO Ravi Narain. He was among the last from the key senior-level team that was instrumental in setting up the exchange which began operations in 1994. The others from the startup team included Chitra Ramkrishna, who quit as CEO in December last year.
While the exchange's first chief RH Patil is no more, among the other members of the startup team Ashishkumar Chauhan is now CEO of rival BSE, while K Kumar is heading Indian Clearing Corporation Ltd (a subsidiary of BSE Ltd).
Another member of the five-member team was Raghavan Putran, who later went on to work with some group entities of the NSE. However, it could not be ascertained whether he is still with the group.
SEBI has recently issued 14 show-cause notices in the co-location case including to the NSE, Narain and Ramkrishna.
In its notice, the regulator has observed that the exchange did not co-operate with it or the forensic auditor appointed by NSE on the regulator's direction. Also, it failed to provide the requisite information sought by Sebi, the regulator said.
“NSE has failed to ensure trading in transparent, fair and open manner and has therefore failed to fulfill the main object with which it was incorporated,” the notice said.
Earlier, the NSE had appointed forensic auditors on the direction of Sebi to look into the issues related to the co- location issue.
Some staff members allegedly told the forensic auditors appointed by the NSE that they acted on "advice from seniors" regarding preferential access for some to the co-location facility.
The exchange has now approached the regulator to settle the matter under the consent mechanism, which allows settling pending proceedings with Sebi after payment of certain fee and other expenses without admission or denial of any wrongdoing in certain cases.
Earlier this month, NSE Chairman Ashok Chawla had said the exchange is in the process of "settling fully and finally" with SEBI some legacy issues.
Sebi chief Ajay Tyagi said last week that the markets regulator will engage a forensic auditor for its ongoing probe into the NSE co-location case to ascertain whether brokers made unfair gains in connivance with the exchange officials.
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