Regulatory Overhang Eases? NSE Offers Rs 1,388 Crore Settlement in Co-Location, Dark Fibre Cases

The National Stock Exchange has offered ₹1,388 crore to the Securities and Exchange Board of India to settle the long-standing co-location and dark fibre cases, The Economic Times reported.  This is the highest settlement amount offered by any entity till date, the report added.

Of the total offered amount, the exchange has offered ₹1,165 crore to settle the co-location case and ₹223 crore for the dark fibre case. “The case can be settled as the people who had done the violations have all gone from the exchange,” the report quoted a person familiar with the matter as saying. The move to offer the settlement amount will likely clear the legal and regulatory hurdles for the NSE’s long delayed initial public offering.

In a separate update, Moneycontrol reported that the SEBI is likely to give a No Objection Certificate to NSE's IPO by the end of next month. If everything goes smoothly, NSE would get listed by the last quarter of the current financial year, the report said.

The NSE first filed the draft papers for IPO in 2016, in which it aimed to sell 22% stake for ₹10,000 crore. However, this plan faced legal and regulatory hurdles due to an allegation surrounding co-location.

What is the Co-Location Case?

The controversy of co-location stems back to 2015, when a whistleblower alleged that some traders are getting preferential treatment on NSE’s systems. It was alleged that some high-frequency traders were given preferential access through co-location servers, giving an edge over others. This enabled them to execute trades faster, and thus it raised concerns of unequal access and market manipulation.

The landmark case raised questions on trading fairness and integrity of the largest exchange in India. It was found that the exchange's tick-by-tick data system was prone to manipulation. Sanjay Gupta, one of the directors of OPG Securities, Chitra Ramkrishna, former Chief Executive Officer of the NSE, and Ravi Narain, former Managing Director of the NSE were arrested in this controversy in 2019.

Also, the SEBI directed the stock exchange to pay ₹624.89 crore as penalty with 12% interest towards the Investor Protection and Education Fund, according to a report by LiveLaw. This order followed a couple of Securities Appellate Tribunal’s orders.

What is Dark Fibre Case?

Alleged differential access given by the NSE to certain broking firms over dark fibre, an already laid but passive optical fibre. The market regulator had said that the exchange provided connection to some members across its co-location facilities over such fibre.

The SEBI had penalised 16 entities including the NSE and its former management personnel, for allowing an unauthorised vendor to install dark fibre that was used for high-frequency trading. It was found that the stock exchange allowed Sampark Infotainment to lay dark fibre for Way2Wealth Brokers and GKN Securities. Sampark was not an authorised service vendor.

Matters Pending Before the Supreme Court

The SEBI orders were challenged before the SAT, which then quashed the orders giving relief to the NSE. The SAT order said that the matter pertaining to ‘dark fibre’ is negligent in nature but not fraudulent, and hence the tribunal reduced the penalties for the NSE.

The tribunal’s order was then challenged before the Supreme Court of India by the SEBI. The capital markets regulator questioned the downplay of the severity of problems and asked why the tribunal overlooked the NSE’s neglect. If the stock exchange and the regulator reach a settlement in this out-of-court agreement, the cases pending before the top court will be withdrawn.

Besides these cases, the SEBI has also raised concerns about the technology infrastructure at the NSE.