Sebi found evidence of NSE helping certain firms but, with no proof of who ordered it, Sebi stuck to a level-playing-field charge.
Though NSE officials have reacted to Sebi asking it to pay fines of around `1,000 crore—including interest payments—by saying they need to study the five orders before deciding on whether to contest them, it does appear the market watchdog let off both NSE lightly as well as its ex-CEOs Ravi Narain and Chitra Ramakrishna. Indeed, news reports suggest NSE has, over the years, kept aside much larger sums for potential penalties, so it will find it easy to pay the penalty should it choose not to contest the order; though its IPO has been pushed back for six months, there is now clarity on when it will take place. Both ex-CEOs have to pay a fourth of the salary they earned during the years when the unfair practices—preferential access to tick-by-tick trading data to a select few trading firms—took place under their watch; between the two of them, this works out to around `7 crore and they have both been barred from associating with any listed company or any market intermediary for the next five years.
Economist Ajay Shah, who, along with his wife and sister-in-law, has many dealings with NSE, and is on many of its committees, was found guilty of using NSE’s trading data—that he got for developing a liquidity index (LIX)—to develop trading products for market participants. He has not been asked to pay any fines, but has been banned from associating with any listed company for two years. And while NSE claims it gave data to any researcher who wanted it, an e-mail from Shah to his sister-in-law says “you have to swear everyone to silence on the fact that the data that we are getting out of NSE for VIX and LIX is being used for algorithmic trading work—it would be a severe problem if this fact comes to light since NSE has not given anyone else this data”.
In light of the whistle-blower complaint and what Sebi’s investigations show, the penalties aren’t too stiff. While the complaint was that certain trading members got preferential access to NSE’s tick-by-tick feed, inputs from various consultants such as EY and Deloitte and other committees made it clear that this had indeed happened; Sebi says that once NSE moved to a more modern multicast—this means everyone got it simultaneously—of the tick-by-tick data instead of the earlier TCP/IP protocol, the business of one of these firms, OPG Securities, “fell off the charts”; OPG’s revenues rose dramatically as it got the preferential access and were higher on the days of this access. This priority access took place by allowing OPG to log onto NSE’s secondary servers that had less traffic than the primary one; indeed, despite routine requests asking OPG to get off the secondary server—making it clear NSE realised the problem—this was never enforced. While certain hardware, like a ‘load balancer’ and a ‘randomiser’ would have mitigated the problem, these were not put in place. Even without this, Sebi says, the tick-by-tick architecture was not in keeping with what NSE’s development team had stipulated.
Under normal circumstances, this would have been enough to throw the book at those responsible, but Sebi concludes, “in the absence of any evidence leading to the culpability of any specific employee of NSE or the collusion or connivance from the side of NSE with any (firm), I am compelled to rule against the possibility of existence of a ‘fraud’”. Sebi then falls back on rules that say NSE had to provide equal access to all players, and since it did not, it had failed to comply with the regulations. Once NSE is pronounced guilty of not having “exercised the requisite due diligence while putting in place the (tick-by-tick) architecture”, Sebi then looks at the revenues it earned during the breach and calculates the amount that needs to be disgorged. And while the ex-CEOs expressed their lack of technical knowledge to be able to know there was a problem in the technology that allowed this favoured treatment, Sebi says this is unacceptable. Yet, levying a large fine on a corporate that can afford to pay it, while not holding any employee criminally liable, means the problem can be put down to a ‘system failure’ and everyone can move on in a general sense.