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NSE case: Sebi may recast panel after two members raise con ict on interest issue

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NSE had filed an application with Sebi to settle the matter through the consent mechanism.

MUMBAI: The Securities and Exchange Board of India (Sebi) may have to examine the constitution of its high-powered advisory committee (HPAC) on consent orders after two members were seen to have a potential conflict of interest in the National Stock Exchange (NSE) case on co- location and alleged preferential treatment.

The two members are lawyer Dharmishta N Raval and Deloitte Haskins & Sells LLP chairman PR Ramesh. “I will request Sebi to permit me to recuse myself,” Raval told ET. Ramesh said he wouldn’t comment on the matter.

An email sent to Sebi went unanswered. Raval, a former executive director of Sebi, is on the board of NSE. Deloitte had conducted a forensic audit of NSE’s algorithm trading system as part of the investigation into the unfair access allegations.

NSE said on July 20 that it had led an application with Sebi to settle the matter through the consent mechanism. The regulator has been investigating allegations that NSE gave a few high-frequency traders and brokers preferential access to its trading platform.

The HPAC consists of a retired high court judge and three external experts having securities market expertise. The current panel consists of retired Bombay High Court judge Vijay C Daga, former Reserve Bank deputy governor Anand Sinha, Raval and Ramesh.

“Considering the sensitivity of the case, everything will have to be looked into by Sebi and how to address these issues,” said a person close to the development. Lawyers said Sebi rules require a quorum of three to decide on any consent case.

That poses a problem. “In the event of the committee being of less than three people, the committee would legally be unable to decide the case,” said Sandeep Parekh, founder of Finsec Law Advisors. “Sebi will have to see whether it is willing to create an alternate bench like in the judiciary to make a quorum excluding the recused members by inviting a new member for a specific case.”

Introduced in 2007, Sebi’s consent mechanism is modelled on the lines of the US Securities and Exchange Commission’s settlement system, o ering quick remedies to cases that can otherwise get entangled in long-drawn litigation. It is a negotiation platform between the regulator and the entity without admission or denial of guilt.

The consent involves the party paying a settlement amount and, in some cases, agreeing to undertake certain restrictions voluntarily after suggestions from Sebi.

The consent process involves several stages. Once the settlement terms are agreed upon by the regulator and the entity, it is then placed before the independent advisory committee, which after examining the terms either recommends them, rejects them or suggests modifications.

Based on the panel’s recommendations, Sebi’s two whole-time members then pass the final order, which is binding on the applicant and can be only challenged by a third party investor impacted by the consent.

“If the members have finished the term of three years or where public perception appears to be compromised by an interest held by a member, Sebi can technically reconstitute the committee,” said Sumit Agrawal, partner, Suvan Law Advisors.