Ahead of its proposed IPO, NSE settles inspection case with Sebi with a Rs 40.35 crore payment

Before the IPO, NSE settles inspection case with SEBI

The National Stock Exchange (NSE) has settled few minor cases with market regulator Sebi by paying Rs 40.35 crore, as per a settlement order issued on August 1.

These cases pertain to outsourcing of certain activities, issues in client code modifications, sharing of unpublished price-sensitive corporate announcements and shortcomings related to the review of error trades, among others. Sebi’s settlement order follows the findings of an inspection covering the period from February 1, 2021 to March 31, 2022.

“The High-Powered Advisory Committee (hereinafter referred to as ‘HPAC’), in its meeting held on February 5, 2024, considered the settlement terms proposed by the applicant and recommended that the case may be settled upon payment of Rs 40,35,00,000 (Rupees Forty Crore Thirty-Five Lakhs only), subject to the applicant complying with the non-monetary terms specified by the Internal Committee (IC),” Sebi’s settlement order said.

According to the order, NSE allowed a third-party vendor to store media tapes containing historical trade data without a legally binding written contract. This resulted in NSE failing in its obligation to safeguard trade-related data and prevent unauthorized use of proprietary, member-related, and potentially market-sensitive information.

Another violation was the outsourcing and sharing of confidential, price-sensitive information of listed companies with NSE Data and Analytics Limited (NDAL), which in turn shared it with a third-party vendor without a valid legal agreement. Sebi also found that NSE’s system architecture allowed NDAL clients to receive unpublished corporate announcements before they were posted on the NSE website.

The order further said that NSE had no policy in place for defining brokers as ‘frequent modifiers’, as a result, no action was triggered against such brokers, despite Sebi’s mandate.

Sebi also observed that client code modifications were being permitted for trades between unrelated institutional clients without proper due diligence, such as verifying genuineness or imposing penalties. NSE failed to establish an adequate mechanism for verifying the authenticity of such modifications.

Additionally, NSE did not formulate any policy for reviewing error trades or defining the frequency of such reviews. This resulted in the failure to conduct comprehensive reviews of error accounts, in violation of Sebi’s directives.

“The HPAC also recommended that the applicant be advised to conduct an internal review, identify the officers-in-default, and take appropriate measures during their performance appraisals,” the order said.

NSE informed Sebi that its Internal Disciplinary Committee had carried out an internal review to identify officers-in-default, wherein it was found that the concerned decisions were taken at organizational/Board level, and no specific individual was found accountable or responsible.

Separately, NSE had filed a consent application on June 20 to settle the long-pending co-location and dark fiber case with Sebi in order to obtain a No Objection Certificate (NOC) for its proposed IPO. The exchange is expected to settle the matter by paying Rs 1,400 crore to Sebi. The application is currently under review, and a resolution is expected soon.