The regulator also asked NSE not to introduce any new derivatives contracts for the next six months. Sebi, through five different orders, also banned the three brokers from the market for up to five years and asked them to disgorge illegal gains and interest on the same, aggregating about Rs 51 crore.
Sebi also banned Ajay Shah, a former finance ministry official and a professor of economics, from associating with any listed company for two years. Shah had used confidential trading data from NSE for personal benefits. Several other people and software vendors who played crucial roles in facilitating the brokers make illegal gains have also been either banned or fined by Sebi. While Narain had resigned as MD of NSE in May 2013 and took over as its vice-chairman, Ramkrishna took over as MD.
NSE’s preferential treatment to the three brokers for access to its trading servers, called co-location of servers scam or co-lo scam, continued between 2011 and 2014. The illegal operation also involved putting up optical fibre networks within NSE’s premises by unauthorised vendors which were used to access the exchange’s servers.
For its role in the scam, Sebi also banned NSE from the stock market for six months, meaning the exchange cannot go for its IPO, which has been stalled for years on regulatory directions. An NSE spokesperson said that the exchange was in the process of examining Sebi’s order and will take appropriate steps as may be legally advised. Narain and Ramkrishna did not reply to TOI’s calls and messages for their comments.
According to NSE MD Vikram Limaye, the orders will not impact regular trading on NSE and “the trust on NSE and the Indian markets for all investors is rock solid”. He also pointed out that the matter pertained to incidents that happened five to nine years ago. Since then NSE’s systems have undergone a sea change and are much robust than earlier, he said. Limaye joined NSE in July 2017 as part of Sebi’s “clean-up process” of the bourse’s board and management post the co-location scam.
In 2010, NSE had started a facility to allow brokers to place their servers in the same room where the exchange had its trading servers, also called the trading engines. These servers are the core of any exchange. Brokers always try to have the fastest access to trading engines and hence the nearer their own servers are to the engines, the faster is their ability to execute orders. The three brokers had used a glitch in NSE’s trading system to get faster access to the trading engines, and NSE knowingly allowed them to exploit that glitch to make illegal gains. It was in August 2015, through a letter from a Singapore-based whistle-blower, that Sebi got a whiff of the co-location scam and started its investigation.
In the order, Sebi’s whole time member G Mahalingam noted that it was established beyond doubt that NSE had not exercised the requisite due diligence while putting in place the TBT architecture (a specialised trading software process). “The same created a trading environment in which the information dissemination was asymmetric, which cannot be considered fair and equitable,” he noted. According to Mahalingam, “NSE being a market infrastructure institution cannot be treated at par with other market intermediaries or participants as it derives its power to act as a stock exchange from the recognition granted to it.”
In its order, Sebi asked NSE to pay Rs 625 crore and 12% interest from April 1, 2014 for its role in the co-location scam. It also directed NSE to pay Rs 62.6 crore and 12% interest from September 11, 2015. The fine has to be paid within 45 days from the date of the order. It also asked OPG Securities to pay Rs 15.6 crore, Way2Wealth Rs 15.34 crore and GKN Securities Rs 4.9 crore penalty. These three brokers will also pay 12% interest for four to five years on the amount of penalty.
Sebi also penalised current and former NSE officials Ravi Varanasi, Suprabhat Lala, Subramanian Anand, Nagendra Kumar SRVS, Deviprasad Singh, and officials at the three broking houses.