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Sebi to keep NSE’s consent plea on hold till algo-trading system audit is complete

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The NSE IPO is set to get delayed further as Sebi’s forensic audit of the bourse’s algo-trading system is currently underway

Mumbai: Markets regulator Securities and Exchange Board of India (Sebi) will not move on a settlement offer by the National Stock Exchange (NSE) till Deloitte Touche Tohmatsu India LLP and EY India complete a joint audit of the exchange’s algorithmic trading systems, two persons with direct knowledge of the matter said.

The move could potentially delay NSE’s initial public offering (IPO).

A Sebi spokesperson did not respond to an email seeking comment. NSE declined to comment. Spokespersons for Deloitte and EY also declined to comment.

Sebi wants the exchange to go public only after the allegations are resolved, Mint reported on 4 July. 

NSE had in July sought a settlement with Sebi (through the so-called consent process) over allegations that it had provided unfair access to its high-frequency trading systems to some brokers, thereby giving them an edge in trading.

The consent process allows entities to settle charges by paying a penalty without admission or denial of guilt. “Typically in situations where an investigation is pending, Sebi does not allow consent or settling charges,” one of the two persons cited above said on condition of anonymity. 

In September 2016, Sebi ordered NSE to conduct a forensic audit of its trading systems. Deloitte, the auditor appointed by NSE, found evidence of preferential access, but could not ascertain if anyone had made ill-gotten gains, and if there was any collusion by NSE officials.

In August, almost a year after the first audit, Sebi ordered its own forensic audit, to be jointly conducted by Deloitte and EY; this is currently under way.

On 22 May, Sebi asked the exchange and 14 of its current and former officials to respond to charges that they provided some brokers unfair access to its algorithmic, or high-frequency trading systems that allow thousands of orders to be executed in less than a second. Sebi said the exchange had failed in its fiduciary responsibility.

According to Sumit Agrawal, partner, Suvan Law Advisors, Sebi does have the discretion to agree to settle a case through consent, but that in some cases, “discretion is not envisaged in law till the process of fact-finding is complete”.

“In cases where there is a pending audit or investigation or inspection in respect of any alleged default, the regulator may find it difficult to consider any application for settlement,” he added.

The auditors are expected to submit their report within the next two to three months, the first person cited above said. 

If Sebi chooses to not act on the consent application while the audit is still underway, the NSE management and board may have to delay a planned initial public offering.

Twenty seven NSE shareholders plan to sell their shares in the IPO, accounting for a 22.5% stake in the operator of India’s largest exchange. The shares have been kept in an escrow account that is set to expire in November.

One person involved in NSE’s IPO said the shareholders, bankers and consultants to the process are factoring in a delay. “We have factored in that (the) IPO may be delayed and may not happen in this fiscal. Whether the valuation will be impacted depends on the future prevalent market conditions and probe findings,” said this person, declining to be named. The unfair access issue arose in January 2015 when a whistle-blower wrote to Sebi that NSE’s systems were prone to manipulation and allowed certain brokers preferential access.