Market regulator the Securities and Exchange Board of India (Sebi) today issued warning to leading bourse the National Stock Exchange (NSE) for being "negligent in discharge of its duties" in a case of modification of client codes, but did not impose any monetary penalty.
Passing an order against NSE in a case dating back to March, 2010, Sebi's whole-time member Prashant Saran asked NSE "to be more cautious and perceptive in discharge of its regulatory duties".
The order follows an investigation by the Sebi into "modification of client codes" by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March, 2010.
Modification of the client codes is a practice under which brokers change the client details in sale and purchase orders of securities after the trades are conducted.
While it is legally permitted to rectify inadvertent errors in punching the orders, there have been concerns that such modifications could be misused for manipulative activities in the market.
In March, 2010, the percentage of institutional trades where client codes was modified vis-à-vis total institutional trades was 1.58%.
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However, it noted that the percentage of orders modified has now come down to as low as 0.01% in terms of number of orders, on updation of the data by NSE since March 11, 2011.
The order said that Sebi was "convinced that NSE has been negligent in discharge of its duties even though it might not have been a party to the mischief...".
"While dealing with matters concerned with discharge of regulatory functions, there would be few occasions where monetary penalty would be appropriate," it said.
Suspending or interrupting the working of the stock exchanges is also not an appropriate penalty, it said, as it involves negative externalities and could be considered only in extreme cases.
"Therefore, given the nature of the lapses and the efforts made, I am of the opinion that penalty of warning would be appropriate in this case," the order said.
On an analysis of the data obtained from NSE, the order said, it was found that the volume of transactions wherein modifications were done, exceeded Rs 55,000 crore in terms of value, during the month of March, 2010.
"It was also seen that certain brokers carried out a very large number of modifications in the month," it said, adding that total number of client code modification was definitely high during March, 2010, compared to the other months.