Blessing in disguise: Why the $158 million penalty is good news for NSE

NSE's IPO was delayed after the NSE's December 2016 offer document disclosed an independent auditor report stating that its trading system was prone to manipulation

India’s largest exchange has cleared its biggest hurdle to an initial public offering planned since 2016 with the imposition of a fine this week by the nation’s market regulator for allowing preferential access to some high-frequency traders.

“Even as the regulator bars us from raising funds through the capital markets for six months, the fact that an order has been delivered finally is a big positive as it removes a big overhang on our IPO,” Vikram Limaye, chief executive officer at Mumbai-based National Stock Exchange of India Ltd., said in a phone interview. The Securities & Exchange Board of India’s penalty totals 11 billion rupees ($158 million), he said.

The IPO was delayed after the NSE’s December 2016 offer document disclosed an independent auditor report stating that its trading system was prone to manipulation and allowed some brokers to gain unfair access from December 2012 to May 2014. The NSE has since closed the loophole, according to the regulator’s order.

“We are seeking legal advise on the order and all we can say is that the penalty is much bigger than what we anticipated,” Limaye said. The fine must be paid within 45 days from April 30 to the regulator’s Investor Protection and Education Fund.

The delay led rival BSE Ltd. to beat the NSE to a listing, raising 12.4 billion rupees through an IPO in February 2017. Still, the NSE -- backed by investors including Temasek Holdings Pte and Goldman Sachs Group Inc. -- dominates most of the nation’s equity market trades, handling nearly all derivatives orders and 91 percent of cash transactions.

Group net income of NSE for the nine months of the financial year from April 2018 rose 22 percent to 13.4 billion rupees from a year earlier, according to the latest presentation on the exchange’s website. Revenue increased 17 percent to 25.6 billion rupees.