The markets regulator has approved the National Stock Exchange’s (NSE) application for settling alleged violations relating to its Trading Access Point (TAP) Architecture and Network Connectivity framework. This allows it to go ahead with its initial public offering plans.


WHAT WERE THE ALLEGATIONS AGAINST NSE? 

There were several allegations against the NSE. These can be summarised as:

  • The NSE failed to take measures to prevent TAP from being bypassed and implement encryption features in TAP;
  • It failed to bring a complaint received in November 2013 to its Standing Committee on Technology (SCOT). The complaint alleged that high-frequency traders were misusing TAP to discreetly execute orders at the expense of other trading members;
  • It failed to comply with the Securities and Exchange Board of India’s (SEBI) circular on cybersecurity and cyber resilience dated July 6, 2015, by failing to bring the complaint to the SCOT;
  • The NSE’s appointment of a chief information security officer was delayed beyond the specified timeline;
  • The NSE’s chief technology officer was not designated as a key management personnel.
  • Some of these charges were also framed against key NSE employees, including its former chief executive officer (CEO) Vikram Limaye. These employees were included in the show-cause notice.


WHAT IS THE TAP FRAMEWORK? 

Tap is a software application that was deployed by the NSE in 2008 on the servers of TMs for managing connections and messages in relation to orders and trades. It was used to send orders from the member servers to the NSE, and it could reduce latency by 400 microseconds to 100 microseconds.

The software application permitted TMs to connect with the NSE’s trading system for the purpose of communications relating to orders and trades. The NSE introduced Trimmed TAP in December 2013 and Direct Connect in February 2016 as alternatives to TAP. However, it continued with TAP till September 2019 in the equity segment and till November 2020 in the securities lending and borrowing segment.


WHAT ACTIONS WERE INITIATED BY SEBI?

Following its initial investigation, SEBI issued a show-cause notice in February 2023 to the NSE and certain key employees, including Limaye. In response, the NSE filed a settlement application with SEBI. After holding internal discussions with SEBI, the NSE filed a revised settlement proposal which was placed before the SEBI High Powered Advisory Committee (HPAC). The HPAC recommended that SEBI re-examine the settlement amount based on the revenue and profits generated from TAP subscriptions and also consider non-monetary settlement terms.


WHAT WERE THE TERMS OF SETTLEMENT?

After the discussions with the HPAC and internal meetings within SEBI, the market regulator approved composite payment of Rs 643 crore settlement fees by the stock exchange and also 14 days of pro-bono community service by certain NSE employees during FY25. The settlement amount was paid by the NSE on behalf of itself and its employees, including its former chief executive officer Limaye. The NSE paid the settlement fees and the employees submitted undertakings to SEBI confirming that they will comply with the community service requirements.


WHAT DOES THE SETTLEMENT MEAN FOR THE STOCK EXCHANGE?

In view of this settlement, SEBI closed the show-cause proceedings. Therefore, the matter stands concluded, without admission or denial of the findings of facts and conclusions of law. However, as is the case with all settlements, the regulator clarified that the matter can be reopened if the terms of settlement (that is community service) are breached or if it is found that the NSE did not make a full and true disclosure.

The settlement came just a few days after SEBI withdrew the co-location case against the NSE for lack of evidence. This matter had prevented SEBI from granting approval for the NSE’s IPO, which had been attempted several times since 2016. Most recently, the NSE applied for SEBI’s no-objection certificate for the IPO in August.

Now that these matters have been resolved to SEBI’s satisfaction, the NSE should be able to move forward with its IPO.

 

This article was originally published by the Financial Express.

 

This article has been written by Armaan Patkar (Partner).