NSE IPO: SEBI, Exchange in advanced talks to settle co-location case ahead of long-pending IPO

NSE IPO: SEBI, Exchange in advanced talks to settle co-location case ahead of long-pending IPO.

The capital markets regulator and the National Stock Exchange have begun discussions to settle the long-running co-location case that has dogged the bourse’s IPO ambitions for years, people familiar with the matter said.

The Securities and Exchange Board of India (SEBI) is in advanced talks with NSE to arrive at a consent settlement in the co-location matter that’s currently pending before the Supreme Court. SEBI has appealed against a Securities Appellate Tribunal (SAT) ruling that diluted the original penalties imposed on NSE in 2019.

Settlement talks restarted

“The discussion on the most important issue of resolving the co-location case has started, around one and half month back,” a person aware of the matter said. “Currently both sides are negotiating on consent terms, specifically the amount that NSE should pay to SEBI for settlement of the case.”

In the co-location case, it was alleged that some brokers exploited NSE’s facility by placing their servers physically closer to the exchange’s servers for faster data access, gaining an unfair edge over competitors.

Settlement sum could be steep

A second person said the regulator could ask NSE to cough up nearly twice the Rs 643 crore that it paid in 2023 to settle the Trading Access Point (TAP) case, SEBI’s costliest settlement to date. “Based on settlement amount of NSE Trading Access Point (TAP) case, it’s expected that SEBI may ask a huge sum for settlement from NSE in co-location case also, may be nearly double of the amount, it ordered in 2019,” the person said. “Its’s also important to note that, NSE had a favorable order from SAT in the matter. Hence may not agree for a huge sum and a hard negotiation is expected from both the sides.”

At the time of the TAP settlement, there were questions about whether the regulator would have demanded a similar amount from a promoter-led company.

How SEBI calculates settlement amounts

SEBI’s settlement regulations allow entities to pay a penalty without admitting or denying allegations. The amount is determined using a formula based on the severity of violations. The components include:

• A base amount for each violation
• The Proceeding Conversion Factor (PCF), which incentivizes early settlement by lowering the multiple if entities apply sooner
• The Regulatory Action Factor (RAF), which accounts for the applicant’s history of non-compliance or need for stronger deterrence

“SEBI and NSE need to adopt a pragmatic and stakeholder-centered approach in addressing the long-standing co-location controversy,” said advocate Vishwanathan Iyer. “Equitable and prompt settlement would be in public interest, restore market confidence, and indicate institutional maturity,” he added.

Emails sent to SEBI and NSE seeking comment on the discussions did not receive a response.

NSE’s request for consent settlement

In a letter to SEBI dated March 28, NSE conveyed its intent to resolve outstanding matters. “NSE is keen to resolve all pending matters amicably through settlement mechanism, as available and appropriate,” the exchange wrote. The Governing Board has already approved a plan to explore amicable settlement, and NSE has sought a No Objection Certificate (NOC) from SEBI. The exchange had earlier written to SEBI on August 27, 2023, to request a consolidated settlement of all cases pending before the regulator and other legal forums.

Supreme Court approval needed

Any settlement is contingent on SEBI and NSE reaching an agreement on consent terms and securing approval from the Supreme Court to withdraw the case.

Legal experts say the moment an in-principle agreement is reached, the terms will be placed before the top court. SEBI had appealed the SAT order in the co-location case before the Supreme Court. If allowed, the consent process could proceed and may take three to four months to complete.

Consent process: Multi-layered approval

As per SEBI’s framework, the settlement application will first be reviewed by an internal committee. It will then be evaluated by the High Powered Advisory Committee (HPAC), which comprises a retired judge as chairperson, a former SEBI Whole-Time Member, and other legal and financial experts.

The HPAC’s recommendation is forwarded to SEBI’s panel of Whole-Time Members for a final decision. If approved, a demand notice is issued, and once NSE pays the settlement amount, the matter is closed with a formal order.

Background: Co-location order and SAT’s reprieve

SEBI’s April 2019 order had directed NSE to disgorge Rs 625 crore, along with 12 percent annual interest from April 1, 2014, for a range of violations. However, in 2023, SAT partially overturned the ruling.

The appellate tribunal found SEBI’s disgorgement demand unwarranted. It noted that NSE had not violated the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations and that no fraud had been committed by the exchange or its employees.

SAT observed that “it is only a case of non-adherence of a circular to some extent,” and concluded that NSE’s conduct didn’t breach the SEBI Act or its regulations.