Sebi slaps heavy penalties in NSE 'dark fibre' case, bourse fined Rs 7 cr

Market regulator Securities and Exchange Board of India (Sebi) has slapped heavy penalties in 2015 ‘dark fibre’ case, where certain brokers exploited National Stock Exchange's (NSE) internet infrastructure to get faster connectivity to its co-location facilities (colo).

NSE has been slapped with a penalty of Rs 7 crore, its former Managing Director and CEO Chitra Ramkrishna, former Group Chief Operating Officer Subramanian and current Chief Business Development Officer Ravi Varanasi Rs 5 crore each. The regulator has also imposed a Rs 3 crore penalty on internet service provider Sampark Infotainment. Meanwhile, broking firms Way2Wealth Brokers and GKN Securities have to pay Rs 6 crore and Rs 5 crore, respectively.

It has been alleged that the cabling for NSE’s co-lo rack was done in such a manner that Way2Wealth and GKN Securities got the benefit of lower latency compared to other trading members connected to the Sampark.

In the latest order, Sebi has said, “undoubtedly, GKN established direct P2P connectivity between its racks located in NSE Colo & BSE Colo center with the help of dark fibre or near dark fibre provided by an unauthorized service provider which assured more speed and low latency thereby assuring faster data transmission and assuring GKN of faster access to the market data disseminated by NSE in comparison to the other high frequency trading brokers located in the Colo facility of these two exchanges.”

The regulator also didn’t buy GKN’s contention that its turnover didn’t increase manifold due to the advantage it gained from early access to market data.

“The entire issue is about gaining more speed and accuracy in executing its trades as per its trading strategy, resource allocation, view on market price. It is nobody's contentions that more speed and latency will necessarily result in more trading volume,” Sebi order said.

The order further says even “W2W was a direct beneficiary of preferential treatment by NSE, since NSE allowed W2W to continue to use the Sampark line even after knowing that Sampark did not have the requisite licenses to provide such connectivity.”

Sebi also didn’t accept W2W’s submission that the lapses were due to an oversight and it had no knowledge about the license status of Sampark.

Sebi says this deprived other brokers using co-loc facility “who in good faith and in compliance with the NSE guidelines did not take dark fibre services from any unauthorized vendors and instead, stuck to their regular telecom service providers.”

Coming hard at NSE, Sebi order says NSE had failed to conduct a site inspection of GKN “indicating favorable treatment by NSE which shows the collusive nexus between NSE and GKN in the matter of P2P connectivity to the detriment of several other rule abiding stock brokers.”

Justifying the penalty on Ramkrishna, Sebi order says, “the CEO of an organization cannot escape from accountability and responsibility with respect to the day to day operations of various functional divisions.”

The order makes similar arguments in case of Subramanian and Varanasi that given their key positions at the exchange, they can’t be absolved of the responsibility for the lapses at the co-lo facility.

The order also penalises officials at NSE and Sampark for facilitating an arrangement between Sampark and Reliance Communication to take over its existing infrastructure, which Sebi says was “an attempt to give post facto legitimacy to an unauthorised activity of Sampark.”