In a partial relief to NSE in co-location scam, Supreme Court directs SEBI to refund Rs 300 crore

The National Stock Exchange of India (NSE) has been embroiled in a co-location case for several years now, and the latest development is a mixed bag for the stock exchange. The Supreme Court of India has directed the Securities and Exchange Board of India (SEBI) to refund Rs 300 crore to the NSE, which the exchange had deposited under disgorgement orders. However, the apex court has refused to stay the Securities Appellate Tribunal's (SAT) order, which had struck down SEBI's disgorgement order, directing the NSE to pay Rs 625 crore plus interest.

This partial relief to the NSE has come with a scathing critique of SEBI's slow pace of investigations and orders. The Supreme Court has questioned whether the regulator has been asleep, indicating that the investigations and orders should have been completed much sooner.

The co-location case dates back to 2015 when allegations of preferential treatment to certain brokers were made against the NSE. Co-location refers to the practice of placing a broker's server at the exchange's data center to reduce the time taken for data transfer and order execution. The NSE allegedly provided a few brokers with faster access to the exchange's servers, which could have given them an unfair advantage in trading.

The SEBI investigation found that the NSE had violated several provisions of the SEBI Act and the Stock Exchanges and Clearing Corporations (SECC) Regulations. In 2019, SEBI passed an order directing the NSE to disgorge Rs 625 crore plus interest, and also imposed a penalty of INR 1,000 crore on the exchange.

The NSE had challenged SEBI's order before the SAT, which set aside the disgorgement order in January this year. The SAT had observed that while the NSE had committed some violations, there was no evidence to show that the exchange had derived any undue gains from the co-location facility.

The Supreme Court's latest order means that the NSE will get back Rs 300 crore, which it had deposited with SEBI as part of the disgorgement order. However, the exchange will still have to pay a penalty of Rs 1,000 crore, which it has deposited with SEBI. Additionally, the NSE will have to wait for SEBI's appeal against the SAT order challenging the disgorgement order's set aside.

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The co-location case has been a significant setback for the NSE, which has been striving to regain investor trust and credibility. The exchange's management has been proactive in addressing the co-location issue and has undertaken several measures to strengthen its systems and processes. However, the legal battle with SEBI has been a long-drawn and expensive affair.

The Supreme Court's order has brought some relief to the NSE, but the regulator and the exchange will have to work towards resolving the co-location issue expeditiously.

Also read: Stock exchange to now pay SEBI Rs 100 crore as SAT slashes disgorgement order