SEBI [Securities and Exchange Board of India] has passed five different orders against various entities involved with the dark fibre and co-location case involving NSE. This issue was also mentioned in the risk factors of the DRHP filed by National Stock Exchange in its proposed public offer. This issue was also responsible for claiming the sudden resignation of its then Managing Director and CEO Chitra Ramakrishna, immediately after the DRHP was filed.
The order against NSE involves disgorgement of Rs 624.89 crore on account of rack charges and co-location charges. The above amount has been derived based on the revenues stated by NSE in their balance sheet for the period 2010-11 to 2013-14 which was Rs 811.54 crore. Their average net margin for the period was 77 per cent which therefore comes to Rs 624.89 crore. NSE has to pay this amount with interest at 12 per cent per annum from April 1 2014.
Further NSE is banned from accessing the capital markets directly or indirectly for a period of six months. This means that once NSE has paid the fine and served its six-month period of ban, they can launch their IPO. This should be a big relief for NSE.
The two senior professionals on NSE namely Ravi Narain and Chitra Ramakrishna who were Managing Director and CEO have similar punishments of disgorging 25 per cent of their salary. Ravi has to do so for the period 2010-11 to 2012-13 while Chitra has to do so for 2013-14. Further they are barred for five years from being associated with any listed company or being associated with a market intermediary or a market infrastructure institution.
The second order is about NSE co-location and Ajay Shah. Here there were five people involved. Ajay Shah, Suprabhat Lala, Assistant Vice President NSE, Sunita Thomas and Krishna Dagli who were the directors of Infotech Financial Services Private Limited and the company Infotech Financial Services Pvt Ltd who was awarded the contract of Liquidity Index. The plot thickens here as Sunita Thomas is the wife of Suprabhat Lala and the wife of Ajay Shah is the sister of Sunita Thomas. Susan Thomas and Sunita Thomas are sisters married to Ajay Shah and Suprabhat Lala and the contract is awarded to a company where Sunita Thomas is a Director with Suprabhat Lala a Vice President of NSE. Conflict of interest at its best.
SEBI has barred all the entities involved from being associated with the capital markets for two years. There is no monetary penalty on any of these entities.
The third order relates to OPG Securities Limited and its Directors who were trading members of the NSE, BSE and MCX exchanges. The broker was found to have made an unfair gain of Rs 15.57 crore which is to be disgorged with interest of 12 per cent from April 7, 2014. Further the firm is barred from making any new clients for one year. The broking firm is barred from capital markets in its proprietary capacity for five years from dealing in the capital market. The three directors of the firm Sanjay, Sangeeta and Om Prakash Gupta have been barred from the capital markets for a period of five years.
The fourth order relates to the role of NSE, its former MD's and the part played by Ajay Shah and Susan Thomas. Here, SEBI has directed NSE to review all third-party contracts regarding data sharing. They also have to submit an Action Taken Report on the same. The two former MD's namely Ravi Narain and Chitra Ramakrishna are debarred from being associated with any entity registered with SEBI or any company having its securities listed for three years.
The fifth and final order concerns dark fibre and NSE where select brokers were allowed leased line connectivity. Sampark Infotainment India Limited had given point to point service to two brokers namely Way to Wealth and GKN Securities. The concerned vendor was not approved by NSE, yet provided these services. SEBI has directed that NSE pay Rs 62.58 crore along with interest of 12 per cent from September 11, 2015. On the completion of every six months i.e. June and December, they have to get the network architecture audited and submit a report to SEBI.
Further they are prohibited from introducing any new derivative product for six months. The two brokers have been asked to disgorge gains made with Way to Wealth asked to pay Rs 15.34 crore with interest at 12 per cent from September 10, 2015 and GKN Securities Rs 4.9 crore with interest at 12 per cent from September 11. Both brokers are debarred from accepting new clients for one year and proprietary trading for 2 years. Similarly, Sampark Infotainment is barred from providing new telecom services to any market intermediary for a period of two years.
What would be the action taken by the various notices if any, is the moot point. NSE would pay the fine and move on with life as they have provided for substantially larger amounts than they are required to pay. In the DRHP of December 2016, they have mentioned that a sum of Rs 451.24 crore and Rs 553.96 crore being the revenue generated from co-location was deposited in a separate account. Further, since September 2016 onward under direction from SEBI, they have been depositing money in a separate account on this expected liability and accordingly they had deposited Rs 145.52 crore for September 2016. The amount thus set aside till September 2016 is about Rs 1,150 crore.
NSE would pay the disgorgement amount and move on with business and their proposed IPO. Coming to the two former MD's, they have been asked to disgorge a very small amount of their salary at 25 per cent and they have been barred from capital markets as is standard SEBI practice. They have two choices where they can appeal against the order or accept it. While appealing against would be a time-consuming process and may not necessarily be in their interest or favour as things would get murkier.
The employees of NSE have little choice but to accept the verdict and suffer their debarment. The big sufferer is the family of Ajay Shah, Suprabhat Lala and their wives Susan and Sunita Thomas. Their close links of over 25 years with NSE and the capital markets has been shattered and their personal gains at the cost of the system exposed. Having been on various committees and panels this would be a body blow.
SEBI the regulator needs to be appreciated for having come to a logical end on a very disturbing trend that had begun in capital markets and was done with the connivance of the top professional of the exchange. The final outcome can always be questioned in its quantum, but it sets the ball rolling and allows NSE to move on with its IPO. If NSE now gets their act together one could foresee the possibility of NSE going public in the fourth quarter of FY 2020.
* Arun Kejriwal is founder of Kejriwal Research and Investment Services and an IANS columnist. He writes a weekly column- Market Watch.
Disclaimer: Views expressed are solely that of the author and may not necessarily represent this publication.