SEBI’s ‘capital’ punishment to NSE, an unprecedented move

The Securities and Exchange Board of India (SEBI) does not have a history of acting tough against stock exchanges, which are also the first level regulators for listed companies. There have been instances in the past when processes and procedures of exchanges have been a subject of regulatory probe, but more often than not, the bourses managed to get away with a censure or warning.

However, this changed last week. The capital markets watchdog ordered the NSE to disgorge money totalling ₹1,100 crore for not exercising proper due diligence while offering co-location services that allowed certain entities to gain access to information before others did.

Information asymmetry is not allowed under SEBI laws, and this violation led to the regulator acting in a manner hitherto not witnessed in the history of Indian capital markets.

SEBI has also taken strong action against the former and current top brass of the exchange as well, with two former chief executives — Ravi Narain and Chitra Ramkrishna — being directed to disgorge a part of their salaries and barred from being associated with any exchange or listed company.

‘The move assumes significance as NSE is the country’s largest bourse in terms of market share in both equity and equity derivatives, where it has a virtual monopoly. It features among the top exchanges globally as well in terms of volume in the derivatives segment.

For the nine months ended December 31, 2018, NSE reported a consolidated net profit of ₹1,343 crore with revenues totalling ₹2,563 crore. Some of the trading segments of NSE registered a volume growth of over 50% in the period.

Simply put, a lot in terms of money and market safety and efficiency is at stake when it comes to NSE.

Hence, the conduct of the exchange in terms of its people and procedures is largely expected to be like Caesar’s wife, above suspicion.

While the SEBI action is unprecedented and welcomed by many in the market, it has also raised important questions, the foremost being the rationale of directing NSE to disgorge money at a time when neither the regulator nor the exchange knows who lost money in this game.

There have been two high profile instances in the past when SEBI came out with disgorgement orders. One was in the IPO irregularities scam and then in the Satyam matter.

In both matters, the regulatory probe clearly showed that investors lost money due to fraudulent activities done by certain entities. In the IPO scam, even cheques were issued to various retail individual investors that were believed to have suffered losses due to the fraud.

“SEBI itself is saying that there is no fraud in this matter, but then goes on to pass a disgorgement order,” said a former SEBI official wishing not to be named.

With agency inputs