NSE co-location case: SEBI may appeal against SAT order in Supreme Court

Securities Appellate Tribunal (sat) on Monday set aside Sebi’s profit recovery order 625 crores in NSE co-location issue but directed the exchange to pay 100 crore to the regulator for lack of due diligence in the matter.

Sources said Sebi is actively considering filing an appeal against the SAT order

Some market experts, while welcoming the SAT order upholding certain SEBI directions, also pointed out “inconsistencies” in the judgment.

While SAT has upheld some of the violations found by SEBI, it has set aside the regulator’s order for withdrawal of around Rs 1,000 by NSE. 625 crore and instead directed the exchange to pay 100 crores for lack of due diligence.

A lawyer from the securities market said, “The basis for the reduced amount has not been specified in the SAT order.”

“In an earlier order of the SAT against an audit giant in the Satyam Computer case, the SAT had upheld the recovery of fees charged by it against the auditor. However, in this case, the draining of revenue by the NSE was not upheld. And it’s amazing,” he said.

Pointing out that there appear to be other discrepancies in the SAT order, he said, “The SAT itself has observed about ‘unequal distribution in allotment of IPs’, ‘absence of load balancer’ and ‘failure to monitor connections continuously’ by the NSE.” ‘Secondary Server’ and then to conclude that SEBI’s findings hold NSE responsible for its failure to provide equal, unrestricted and fair access is completely wrong.

SAT in its order had said that SEBI should have been more proactive and serious in conducting its investigation which appears to be erroneous and excessive.

SEBI first received the complaint in January 2015 and immediately started probing the issues.

Commenting on the technical aspects, a market expert said, “It seems that SAT attributed SEBI’s finding regarding dissemination of TBT (tick by tick) data feed to the sequential manner in which data is received in the same order.” Whereas the emphasis in the SEBI order was on unfair and disproportionate approach to promotions by NSE and not to receipts by trading members.”

In the order, the SAT concluded that the SECC regulations cannot be applied to the present issue as the choice of TCP/IP architecture was placed in the year 2010.

SECC regulations relating to contracts in stock exchanges and clearing corporations came into effect from June 2012.

“Since the TCP/IP structure was in place from 2010 to 2014, it is natural that SECC regulations would be applicable in this case. Interestingly, a SEBI circular, which also came into force in 2012, has been invoked in an instant. case by the tribunal,” he said.

SAT has also commented that it is strange and not in line with the logic that how SEBI directed NSE to conduct investigation against itself which is again wrong.

SEBI, on the advice of its Technical Advisory Committee, is understood to have asked the NSE board to appoint a third party forensic auditor to thoroughly examine the issues highlighted in the complaint.

The above-mentioned lawyer said, “It is not unusual to appoint a forensic auditor for the first time in a SEBI investigation.”

SAT also observed that the market regulator adopted a casual approach, which was opposed by the expert cited above, who said that in view of the technical complexity involved in the matter, SEBI has considered seven reports of experts while passing the order.

The tribunal has directed SEBI to consider the allegation of collusion and collusion of brokerage firm OPG and its directors with any employee/officer of NSE.

However, SAT also noted that SEBI found that the allegation of collusion and collusion between NSE and OPG was not substantiated as there was insufficient evidence.

Further, SAT has directed that SEBI shall decide on issue of directions/penalty for concealment/destruction of material information and re-look at ‘Point No. 2’ relating to exclusion of other market participants.

However, the whole-time member of SEBI has already dealt with these issues in the order, the expert claimed.

SEBI had in April 2019 directed the National Stock Exchange (NSE) to book back profits of over Rs 200 crore. 687 crores, which includes the initial amount 625 crore with 12 per cent annual interest in the case.

Also, the regulator had imposed a six-month ban on the exchange on launching new derivative products, barred some current and former executives from the market and initiated strict action against stock brokers.

In addition, SEBI directed Ravi Narayan and Chitra Ramakrishna – who served as MD and CEO of the exchange – to forego 25 per cent of their respective salaries during a specified period.

The case pertains to alleged loopholes in high-frequency trading offered through the NSE’s co-location facility, wherein some entities allegedly got preferential access to high-frequency trading.

Setting aside Sebi’s deregistration order, SAT said there was no violation of SECC regulations by NSE. These are related to stock exchanges and clearing corporations.

SAT observed that there was lack of due diligence on the part of NSE while allotting IPs at different ports and that there was uneven distribution of IPs. In addition, there was a failure by some trading members to monitor persistent connections to the secondary servers.