Colocation case: Sebi likely to challenge SAT's relief to NSE in SC

Legal experts cite 'inconsistencies' in Tribunal's order

The Securities and Exchange Board of India (Sebi) is likely to move the Supreme Court against an order passed by the Securities Appellate Tribunal (SAT) in the case pertaining to unfair access to the National Stock Exchange’s (NSE’s) colocation facility. 

The tribunal on Monday had set aside Rs 625-crore-plus disgorgement orders passed by the market regulator in 2019 against the NSE and its former heads Chitra Ramkrishna and Ravi Narain.

Legal experts in the know said Sebi’s decision to move the apex court could have been prompted by certain “inconsistencies” in the 235-page order passed by the SAT, in which its bench termed the disgorgement action as “unwarranted.”

Instead, the tribunal directed the exchange to pay a sum of Rs 100 crore, without stating how it arrived at the figure.

A query sent to Sebi on the issue remained unanswered until the time of going to press.

Lawyers said the SAT’s move is inconsistent with its earlier orders, such as the one against PWC in the Satyam scandal where it had upheld disgorgement of fees. The Rs 625-crore disgorgement figure was arrived at by Sebi based on the revenues earned by NSE during years when its colocation architecture was allegedly compromised.

Furthermore, experts said the tribunal upheld some critical observations made by Sebi with regards to providing inequitable access but at the same time termed Sebi’s move to hold the NSE responsible for its failures “wholly erroneous.”

“We have also found that there was a lack of due diligence while allocating IPs on various ports and that there was an inequitable distribution of IPs. We also found that a load balancer should have been placed for equitable distribution of the IPs,” the SAT order observed. However, the order went on to say that “when the whole-time member has given a finding that early logging in does not give any advantage and could only be given a probabilistic advantage the question of calculating profits on the basis of early login becomes wholly erroneous”.

One of the key bases of Sebi’s 2019 order was “unfair and inequitable dissemination” of tick-by-tick data feeds at the NSE, which placed some brokers at an advantage over others.

In its order, the SAT concluded that there was no violation of the Stock Exchanges and Clearing Corporation (SECC) Regulations as trading architecture at the NSE was put in place in 2010, while the regulation came into force in 2012.

“The observation can be challenged as the said architecture was in place between 2010 and 2014, when the SECC Regulations were in force. Also, the SAT in its order has upheld the applicability of Sebi’s March 2012 circular and therefore, the provisions of SECC Regulations too could be made applicable,” said a lawyer.

In its order, the tribunal pulled up Sebi, saying it should have been proactive and serious while conducting its investigation.

The colocation controversy came to light following a whistle-blower complaint against the NSE in 2015. After this, the market regulator directed the exchange to appoint a third-party forensic auditor to examine the issues highlighted in the complaint. The tribunal also criticised Sebi’s move to direct the NSE to conduct its own investigation.

“Appointment of forensic auditors at the first instance is not unusual as far as Sebi investigations are concerned. Moreover, the nature of the allegation was highly technical in nature. As a result, the regulator had to engage several technical experts to assist it with its findings in the matter, which the regulator did shortly after receiving the complaint letter,” said lawyer.

Before passing the final order in 2019, Sebi relied on expert findings and reports submitted by seven different entities.