SAT Permits NSE To Release Co-location Income from Escrow Account
In a major relief for the National Stock Exchange (NSE), the Securities Appellate Tribunal (SAT) has allowed the Exchange to release Rs6,085 crore from the escrow account which the Exchange earned by providing co-location (Colo) facility. However, according to sources, there is a rider; NSE has to retain Rs420 crore in an interest-bearing account. SAT has also announced that it would be conducting a brief hearing on the Colo matter on 11th June. It is not immediately known if the Securities and Exchange Board of India (SEBI) will file an appeal against this order. 
 
NSE had earlier sued SEBI to get access to Rs5,991 crore of its revenue which had been deposited into a separate account for over four years. 
 
Sources say that SEBI did not make any strong arguments against the move. It is also learnt that there is a lot of pressure from NSE's foreign investors to wind up the algo scam and let the Exchange off. The Exchange has also  been keen on its initial public offering (IPO) and wants to finish all the legal matters regarding the Colo scam.
 
The order copy is awaited and there has been no official confirmation yet from SEBI or NSE. 
 
In September 2016, the capital and commodity market regulator SEBI had asked NSE to deposit income generated from providing co-location (Colo) facility into an escrow account. SEBI had found in their investigation that co-location (Colo) facility gave preferential access to some brokers due to which they made unlawful gain.  Hence, SEBI had ordered NSE to keep all earnings from Colo in an escrow account. 
 
However, in April 2019, SEBI said it did not have enough evidence the NSE committed a fraudulent and unfair trade practice but it had established that the Exchange did not exercise due diligence when putting in place the co-location (Colo) servers. SEBI also directed NSE to disgorge amount worth Rs624 crore and also imposed a penalty of Rs62 crore. NSE challenged this order at the SAT in June 2019 and SAT told NSE to deposit this amount with SEBI. However, hearing of this matter was not concluded So, NSE moved SAT to allow it to withdraw the amount from the account. NSE also wanted the Tribunal to pass an order discontinuing the need for the bourse to put its co-location (Colo) revenues into a different account. 
 
What Is the NSE Colo Scam?
 
In January 2010, NSE started offering co-location (Colo) facility whereby members could place their servers in Exchange’s premises for a fee. The term 'co-location' means 'a set-up wherein the broker's computer is located in the same area as the stock exchange's server’. This allowed them faster access to the buy and sell orders being disseminated by the Exchange's trading engine. A market manipulation scam by NSE emerged where select players obtained market price information ahead of the rest of the market, enabling them to front run the rest of the market. 
 
As details of the scam emerged, former managing director Chitra Ramkrishna was asked to quit. Other investigation agencies including Central Bureau of Investigation (CBI), Enforcement Directorate (ED) and Income Tax department also commenced probe into the matter.
 
Here is the order issued by SAT in this matter...

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    SAT Says It Can Function without Technical Member after SEBI Raises Objections
    The Securities Appellate Tribunal (SAT) has said that its bench consisting of the presiding officer and a judicial member has the powers to hear matters even in the absence of a technical member.
     
    The two-member bench has ruled that it has the authority to run the Tribunal, hear matters and pass orders, even in the absence of a technical member.
     
    The issue came up after the Securities and Exchange Board of India (SEBI) raised  objections to the absence of a technical member in the SAT. SEBI’s contention is that the Tribunal should not hear appeals till such time a technical member is appointed by the Central government.
     
    SAT, which comprises  judicial and technical members, hears appeals against decisions that SEBI takes as securities market regulator.
     
    The Tribunal functions with a presiding officer, a judicial member and a technical member. However, the technical member demitted office on 31 March 2021. Since then, the bench of the Tribunal consists of the presiding officer and the judicial member.
     
    The government had appointed CKG Nair (who has a doctorate in economics and market regulation) as a technical member with effect from 1 April 2016, and his five-year term ended recently.  The other two members of the tribunal are former judges — former Bombay High Court justice MT Joshi and former Meghalaya High Court chief justice Tarun Agarwala who is the presiding officer. 
     
    “A reply has been filed by SEBI and one of the points urged is that this (tribunal)...is not properly constituted. A very serious ground has been taken and, therefore, it is necessary for the respondent to argue on this issue before we proceed to hear this matter on merits and any other appeals. We direct the matter to come up for consideration on this point on 7 May 2021,” said the order dated 6 May 2021.
     
    SEBI has been emphatic that every SAT bench must have at least one technical member and since there is no technical member now, the constitution of the bench is defective and orders passed by the bench would be 'coram non judice'.
     
    The contention of the regulator was driven primarily by the proviso to Section 15L(2)(b) of SEBI Act which stipulates that every bench must have at least one technical member as a mandatory provision.
     
    SEBI raised a similar objection while filing their replies in other appeals. Hence, the bench said it has become imminent to decide this issue. Consequently, this Tribunal is now enjoined to rule its own jurisdiction, SAT said in the order.
     
    "We are of the confirmed opinion that the functioning of the tribunal presently comprising of a presiding officer and a judicial member is not defective on account of non-availability of technical member and that the bench constituting the presiding officer and judicial member can proceed to hear and decide the appeals, etc which are filed before the SAT," the SAT order said.
     
    Additionally, the Tribunalsaid it has resolved the issue but the permanent solution is that Central government should expedite and fill up the vacancy.
     
    A fourth post of a technical member was created through a notification in May 2019. However, no steps have been taken by the Central government to fill up this vacancy, even though two years have elapsed.
     
    SAT noted that the government was aware that the only technical member was going to retire on 31 March 2021.  Despite this, no steps have been taken to fill up the post whereas such steps should have been taken at least a couple of months before the retirement of the technical member, it added.
     
    While making amendments in the Act, care should be taken to resolve the discrepancy that may arise in the charging provision, the Tribunal said.
     
    The Tribunal has requested the Central government"to fill the vacancies at the earliest and also recommend to make necessary amendments and resolve the discrepancy in the charging section to the proviso under Section 15L(2)(b)".
     
    "Today, SEBI has raised an objection. Tomorrow, a private litigant would raise a similar objection. It would be a never ending process. This issue needs to be resolved on the judicial side as well," SAT highlighted in its order.
     
    In a rare instance, SAT has directed its registrar to send a certified copy of this order to the secretary, ministry of finance, department of economic affairs, with a request to fill up the vacancies at the earliest and consider making appropriate amendments.
     
    Further, a copy of the order will be sent to the secretary general of the Supreme Court of India with a request to place the order before the chief justice of India and, if desired, to treat this order as a public interest litigation (PIL) and resolve the issue on the judicial side so that the matter is resolved once and for all from the highest court.
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    Madras HC's Intervention Sought To Prohibit NSE Co-location Services
    The National Stock Exchange of India (NSE) should be prohibited from providing the co-location (Colo) facility that has already been considered as discriminatory by various authorities, including the Securities and Exchange Board of India (SEBI), according to a petition filed in the Madurai Bench of Madras High Court.
     
    A public interest litigation (PIL) has been filed recently in the Madras High Court bench at Madurai to seek the court's prompt intervention on the SEBI's gross failure in prohibiting this assault on the integrity of the Indian stock market and its continued facilitation till date.
     
    "The NSE co-location services are illegal and Ultra Vires the Constitution as well as against the fundamental principles of transparent price discovery and equal market opportunity," said the petition.
     
    Notably, various investigative and forensic studies conducted by SEBI's technical advisory committee (TAC), Deloitte, and EY (Ernst & Young) unanimously concluded that the Co-location (Colo) service of NSE was prone to manipulation and market abuse and there has been preferential access given to a select few brokers over the entire industry, according to the petition.
     
    NSE introduced its paid (Colo) facility to a select group of brokers/trading members in 2009. Co-location (Colo) allows stock brokers to place theirallows stockbrokers to place their servers and systems in the racks assigned within the Exchange premises near the primary servers of  NSE to have a low latency connection to the Exchange.
     
    MR. Venkatesh, the counsel for the PIL, pointed out that the Co-location (Colo) facility per se is discriminatory as the brokers availing co-location (Colo) facility get preferential access to the price gaining advantage over others. Further, the brokers availing co-location (Colo) facility have an entire view of the pending orders along  with the price (tick-bytick -- TBT) which helps them view the entire market depth as opposed to common retail investors. The brokers availing co-location (Colo) facility have a preference to push more orders to the exchange thereby enabling them to take advantage of the preferential price access.
     
    "The NSE played fast on the entire industry, including the SEBI, by introducing co-location in 2009, and that too without any regulatory approval. Instead of arresting the crime, the SEBI has bent backward and allowed the criminality," said Mr.Ventakesh.
     
    Further, the SEBI's orders of 30 April 2019, levied penalties on NSE (Rs624.89 crore with interest at 12%pa--  per annum --from 1 April 2014, which comes to around Rs1,000 crore) and also its personnel thereby confirming that the Co-location (Colo) facilities offered by NSE were illegal and also provided preferential access to few brokers against the market at large.
     
    The petition also sought to challenge the vires and the constitutional validity of the SEBI circular of 13 May 2015, permitting stock exchanges like NSE to offer Co-location (Colo) facility to market participants, and consequently all its subsequent circulars in this regard as it violates fundamental principles of equality as enshrined under Article 14 of the Constitution.
     
    The petition also sought an order of stay against NSE from providing co-location (Colo) services as it has already been declared discriminatory and arbitrary and declare the May 2015 SEBI circular as unconstitutional and ultra-vires of the SEBI Act, 1992 and the Regulation 41(2) of the SECC Regulations, quash them and, consequentially, direct SEBI to permanently suspend the Co-location (Colo) services offered by NSE, Mr Venkatesh added.
     
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