Market regulator Securities and Exchange Board of India (SEBI) has imposed penalties on National Stock Exchange (NSE) and its former chiefs Ravi Narain and Chitra Ramakrishna in the co-location (colo) scam in yet another order on this issue. SEBI’s adjudication officer has imposed a penalty of Rs1 crore on NSE for the Exchange's failure to ensure a level playing field for trading members subscribing to its tick-by-tick (TBT) data feed system.
NSE's former managing directors (MDs) and chief executives (CEOs) Ravi Narain and Chitra Ramkrishna, are penalised with a fine of Rs25 lakh each.
Previous orders of the regulator on the colo scam have been contested by the Exchange and several of the indicted officials. Meanwhile, more notices have also been issued. It is unclear how and why SEBI has chosen to split the investigation into multiple orders. However, the order shows that even here, despite a mountain of data and specific reports and simulations by various consultants and expert agencies, the regulator has made no attempt to pin down who was specifically responsible for the lack of processes, systems and documents that led to the algo scam. It is unclear if this indicates a lack of expertise in SEBI to evaluate various submissions and investigations and draw firm conclusions.
In an order, Amit Pradhan, adjudicating officer (AO) of SEBI says, "I observe that the violations in this case are serious in nature, even though there are no investor complaints on record arising out of such violations. Such nature of default with regard to non-adherence to the laid down obligations under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (SECC Regulations) as observed in this case would compromise the regulatory framework and should be dealt with by imposing monetary penalty on the Noticees so as to send an effective message to the market participants as a whole. Further, the violation has continued for a long period of time."
"NSE has failed to comply with the provisions of SECC Regulations in letter and spirit and Ravi Narain and Chitra Ramkrishna are vicariously liable for the acts of omissions/ commissions committed by NSE during the investigation period. In the facts and circumstances of this case, the conduct of NSE, Ravi Narain and Chitra Ramkrishna are blameworthy being in defiance of the obligations casted under SECC Regulations. Considering the nature of violation and conduct of the Noticees, I am of the view that the default is grave and the gravity of this matter cannot be ignored. Therefore, no lenient view should be taken and the case deserves imposition of monetary penalty against NSE, Ravi Narain and Chitra Ramkrishna," the AO says in the order.
"...many trading members had repeatedly resorted to accessing the secondary server without any checks and balances and actions on the part of the first-level regulator except for certain emails and advisories" the SEBI order says, adding "NSE as a stock exchange failed to ensure a level playing field for trading members subscribing to its TBT data feed system."
Review of TBT system architecture indicated data was disseminated to members in a sequential manner whereby the member who connected first to the POP server received the ticks (market feed) before the members who connected later. Hence, the system architecture of the TCP-based TBT system was prone to manipulation, it said.
SEBI order says it is alleged that, during the relevant period, Ravi Narain and Chitra Ramkrishna have failed to take any step to ensure proper systems, checks & balances to provide fair and equitable access to all.
It observed, " The manner in which OPG Securities gained preferential access day after day on select servers indicates laxity and dereliction of duty on the part of Ravi Narain and Chitra Ramkrishna. It was their duty to prevent manipulation of the system architecture and ensure fair, transparent, and equitable access. Therefore, by not taking preventive as well as curative measures proactively, Ravi Narain and Chitra Ramkrishna facilitated fraud and manipulation by OPG. Further, consistent unfair access by OPG despite NSE's consistent denial clearly establishes that NSE and its officials were completely oblivion of the principle of fair and equitable access."
In addition, the AO says, "I note that they had held the position of MD and CEO of NSE in succession, during the relevant point of time. Having held the senior most management position in the NSE and being in charge of the affairs of the conduct of the stock exchange business, they cannot limit their roles to the non-technology issues of the exchange. The MD and CEO of a stock exchange cannot abdicate his or her responsibility by citing limited knowledge in certain spheres of the business activities."
According to SEBI, a stock exchange with a commercial focus can introduce technological innovations for enhancing the overall efficiency of the platform. It ought to have also reinforced the mandates laid down in the law, with respect to equal and fair access to trading members, in the interests of the market participants and the investors in the market.
"Ravi Narain and Chitra Ramkrishna having officiated as the MDs of the Exchange during the relevant time, I find them liable for breaches of the provisions of Part A and Part B of Schedule II of SECC Regulations read with Regulation 26(1) and Regulation 26(2) of SECC Regulations and Clause 3.8.1 of SEBI Master Circular dated 31 December 2010," the SEBI order says.
The co-location case, which dates to 2015, sparked controversy when Moneylife published a letter by a whistle-blower going by the name Ken Fong in June 201
5. The whistle-blower wrote to the SEBI, with a copy to Moneylife
, alleging the NSE was giving a few high-frequency brokers preferential access to its servers by allowing them to place their servers in the NSE premises that benefited both the parties at the cost of others.
In May 2019, SEBI had indicted well-known market economist Ajay Shah, and Suprabhat Lala, a senior official of NSE in the algo trading scam. The order said a private firm of Sunita Thomas (Mr Lala’s wife and sister-in-law of Ajay Shah), 'commercially exploited' confidential data obtained from the NSE for writing algo trading software. SEBI had also directed NSE to take legal action against Mr Shah, Ms Sunita Thomas, her firm Infotech Financial Services Pvt Ltd, and Krishna Dagli, director of the company. One of the orders indicts Ravi Narain and Chitra Ramakrishna, both former MDs of NSE, for overlooking conflict of interest in awarding contract to Infotech Financial. (Read: NSE Algo Scam: SEBI Says Ajay Shah, Suprabhat Lala & Their Wives ‘Commercially Exploited’ Confidential Data
Before that in April 2019, SEBI had ordered disgorgement of profits from NSE and salaries of former MDs, Ravi Narain and Chitra Ramkrishna. The regulator has also asked the Exchange to disgorge an amount of Rs624.89 crore along with interest calculated at the rate of 12% per annum to the Investor Education and Protection Fund (IEPF).
In a second order last year, related to “dark fiber” involving unregistered service provider, Sampark Entertainment, SEBI had said that since NSE is a recognised stock exchange and the leading market infrastructure institution, it occupies a pivotal role as a front line regulator. Therefore, apart from reformatory steps under section 11, 11(4) and 11B of the SEBI Act, 1992 and Section 12A of the SCR Act, 1956, “considering the gravity of the allegations that have been established…, additional exemplary directives need to be issued could pose an effective deterrence and dis-incentive to the noticee (NSE) to perpetrate such kind of violations in future so far as administration and governance of its Colo facility is concerned.”