One of the rare of the rarest cases, Securities Exchange Board of India fined National Stock Exchange, the largest stock exchange in India, with Rs. 1100 crores and also barring the bourse from accessing securities market for 6 months.
It was in 2010, National Stock Exchange (NSE) had started a facility to allow its brokers to have their servers in the same place where the exchange keep their trading servers. These trading servers are also called trading engines and are the core asset of any trading exchange. It is natural that in highly competitive environment, brokers always tries to get fastest access to informations and want their servers as near as possible to exchange servers.
Three brokers, OPG Securities, GKN Securities and Way2Wealth Securities, used this facility and kept their servers in the same place where NSE keeps their main exchange servers. Every thing was going fine but the problem started when a Singapore based whistle blower in 2015 complained to SEBI among other points that the system NSE used while disseminating informations and other datas through co-location facilities allowed certain users to get informations before others, there by creating an information asymmetry.
This preferential treatment to these three brokers continued unchecked till 2014 and the scam got a name as co location scam or co-lo scam. This scam also involved putting up optical fibre networks within NSE’s premises by unauthorised vendors which were used to access the exchange’s servers.
All were thinking that the exchange trading system and servers have a fool proof security system where trespassing is impossible. But his incident into the affairs of one of world’s largest securities market and India’s largest, of course a surprise. That also got unchecked for more than four years. Investors across the globe was felt cheated as some of the brokers were making fortunes, at the cost of some.
What SEBI says?
Mr G Mahalingam, whole time member SEBI noted that it was established beyond doubt that NSE was not exercised expected due diligence while putting in place the co location mechanism and TBT architecture. He explained, NSE being a market infrastructure institution can not be treated at par with other market intermediaries or participants as it derives its power to act as a stock exchange from recognition granted to it.
SEBI took serious exception to this breach of ethics by NSE and brokers. In its order SEBI asked NSE to pay Rs. 625 crore and 12% interest from April 1, 2014 for its role in co location scam. In addition another fine of Rs 62.6 crore and 12% interest from September 2015. The fine need to be paid within 45 days from the date of the order. The brokers are also fined with interest. OPG Securities to pay Rs 15.6 crore, Way2Wealth Rs 15.34 crore and GKN Securities Rs 4.9 Crore penalty and also they need to pay 12% interest for four to five years on the amount of penalty.
Over and above the monetary penalties imposed by SEBI, NSE also banned from the stock market for six months, that means the exchange can not go for its IPO, which is already in pending mode for years due to regulatory reasons. The regulator also asked the exchange not to introduce any new derivatives contracts for the next six months. Also the order banned the three brokers from the market for up to five years and asked them to disgorge illegal gains and interest on the same.
On individuals at the helm of affairs on the time of scam, SEBI banned Ravi Narain and Chitra Ramakrishna , both former MDs of NSE for fives years from the market and also digorge part of their salaries for the years when NSE had demonstrated favouritism to the three brokers. The order also banned Ajay Shah, former finance ministry official and an economics professor, from associating with any listed companies for two years, as he had used confidential trading data from NSE for personal benefits. The order also been banned or fined by SEBI, which includes software vendors who helped the brokers to creep in to the co located exchange servers.
The incident is an eye opener, how ever strong the policing will be, there are chances for misusing the system by unethical and intelligent people. So we need to be careful, what may be the situation and be ready for surprises. But this order proves one thing, you may be as big you are, escaping from accountability is difficult.