Context:

The capital markets watchdog SEBI ordered the NSE to disgorge money totalling ?1,100 crore for not exercising proper due diligence while offering co-location services that allowed certain entities to gain access to information before others did.

Details:

• Information asymmetry is not allowed under SEBI laws, and this violation led to the regulator acting in a manner hitherto not witnessed in the history of Indian capital markets.
• SEBI has also taken strong action against the former and current top brass of the exchange as well, with two former chief executives being directed to disgorge a part of their salaries and barred from being associated with any exchange or listed company.
• The move assumes significance as NSE is the country’s largest bourse in terms of market share in both equity and equity derivatives, where it has a virtual monopoly.
• It features among the top exchanges globally as well in terms of volume in the derivatives segment.
• A lot in terms of money and market safety and efficiency is at stake when it comes to NSE.

Issues:

• While the SEBI action is unprecedented and welcomed by many in the market, it has also raised important questions, the foremost being the rationale of directing NSE to disgorge money at a time when neither the regulator nor the exchange knows who lost money in this game.
• There have been two high profile instances in the past when SEBI came out with disgorgement orders. One was in the IPO irregularities scam and then in the Satyam matter.
• In both matters, the regulatory probe clearly showed that investors lost money due to fraudulent activities done by certain entities.
• In the IPO scam, even cheques were issued to various retail individual investors that were believed to have suffered losses due to the fraud.
• SEBI itself is saying that there is no fraud in this matter, but then goes on to pass a disgorgement order,” said a former SEBI official, adding that passing a disgorgement order for not exercising proper due diligence could set a bad precedent.
• Indeed, the SEBI has explicitly stated in its order that there is no sufficient evidence to say that fraud was committed.
• Another issue is that ever since the matter came out in the open, it was widely believed that a set of brokers — predominantly OPG Securities — made the most of the gains due to preferential access to information.
• OPG Securities and its directors have been barred from the market for five years, though the amount to be disgorged is only around ?15 crore.
• “Disgorgement orders are passed in cases where you are able to establish that money or gains were made in a manner in which it shouldn’t have been made,” said another former SEBI official.
• “If SEBI is able to identify the entities that lost money in the process, then it needs to disgorge the money to such entities or else the money can go to the Consolidated Fund of India. In this particular case, the money will go to the government fund,” he added.

Way forward:

• It is widely believed that the best way forward for the stock exchange is to disgorge the money and move on instead of stretching the matter by challenging the order at the Securities Appellate Tribunal or the high court.
• Incidentally, the exchange already has more than the required amount of money kept in a separate bank account in which — based on a SEBI directive — revenues from co-location services were being credited since September 2016.
• “SEBI has directed that pending completion of investigation to the satisfaction of SEBI, all revenues emanating from 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,” the NSE stated, as part of the notes with its financial statements.
• This probe was also the biggest overhang in NSE’s plans of going public to raise funds.
• So, clearing the matter by disgorging the money would pave the way for the exchange to get listed in the coming months.