Sebi's co-location order delays announcement of NSE's FY19 results

The NSE board will approve FY19 financial statement after legal view on the case

The National Stock Exchange (NSE) had to defer the announcement of its 2018-19 financial result after the markets regulator imposed a hefty penalty on the bourse in the co-location (colo) case. 

The NSE’s board was to approve on Friday the annual financial statement for the year ended March 31, 2019, but it decided to defer the matter till its legal team firmed up a view on the Securities and Exchange Board of India's (Sebi's) order, sources said.

On Tuesday, Sebi directed the NSE to pay over Rs 1,000 crore for lapses at its colo facility that allowed unfair access to certain brokers.

“The Sebi order came ahead of the scheduled board meeting. The board couldn’t have approved the result without discussing the order. As the legal team is yet to firm up a view on the Sebi action, the board had to postpone the decision,” said a person with direct knowledge of the development.

“The board of directors of the company at its meeting held today has decided to postpone the agenda item surrounding the adoption of audited annual financial statements (on standalone basis and also on a consolidated basis) for the year ended March 31, 2019, and the same will be considered by the board at its next meeting,” the NSE said in a statement on Friday. 

Legal experts say the NSE faces a dilemma on whether to challenge the Sebi order before the Securities Appellate Tribunal (SAT). “The NSE will have to take a decision on whether to take the order on its chin and move on or challenge the Sebi order. The order is a halfway house, where Sebi has not found sufficient evidence of fraud but has still asked the exchange to pay disgorgement. Ultimately, the price of the problem will have to be borne by its investors who will indirectly pay the disgorgement as well as the cost of delay in its IPO,” said Sandeep Parekh, founder, Finsec Law Advisors.

Sebi in its order said even though it had not found “sufficient evidence” to conclude the NSE had committed fraud or unfair trade practice, it was “established beyond doubt”  that the exchange had not exercised “requisite due diligence”. 

Rishabh Mastaram, founder, RGM Legal, said the exchange would have to decide on the treatment of the penalty amount while it finalised its financial statements. “The disgorgement amount is in excess of Rs 1,000 crore. The board will have to decide on the treatment of this amount when they declare the results -- whether to record it as contingent liability or crystallised liability. How the penalty amount will affect them and its acknowledgment is the question. Probably that could be the reason for the NSE to defer the result announcement,” he said.

The NSE has already set aside Rs 2,000 crore from its revenues for the colo case.

“Sebi has directed that pending completion of investigation to the satisfaction of Sebi, all revenues emanating from the co-location facility, including the transaction charges on the trades executed through co-location facility with effect from September 2016, be transferred to a separate bank account. Accordingly, as of December 31, 2018, an amount of Rs 1,994.77 crores was transferred to a separate bank account and the same has been invested as per the Company's investment policy as approved by the board of directors,” the NSE had said in a note to the December 2018 financial statement.

Exchange staffers move SAT

While the NSE has yet to decide on its next action, three of its officials have moved the SAT. The tribunal will take up the plea of Deviprasad Singh, Ravi Varanasi and Nagendra Kumar of the NSE on Monday. The three individuals are seeking a stay on Sebi’s directive barring them from associating with any market intermediary for a period of three years.