NSE fined Rs 62.58 crores for giving preferential dark fiber connectivity to select brokers violating PFUTP Regulations 2003

SEBI Board found NSE and multiple entities guilty of unfair trade practices regarding co-location facility irregularities. NSE allowed unauthorized service provider Sampark to provide preferential Point-to-Point dark fiber connectivity to brokers, giving them latency advantages during April-August 2015. The Board held this violated PFUTP Regulations 2003 and constituted fraud through discriminatory treatment. NSE was ordered to deposit Rs. 62.58 crores to SEBI's Investor Protection Fund, implement comprehensive auditing procedures, and prohibited from introducing new derivative products for six months. Key officials faced employment restrictions ranging from 2-3 years in securities market entities. Brokers were fined and restricted from accepting new clients.

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Issues Involved:
1. Non-transparent communication by NSE regarding changes to authorized service providers.
2. Preferential treatment of certain stock brokers by NSE.
3. Installation of MUX in NSE MMR without verifying licenses.
4. Latency advantage to W2W.
5. Continuation of Sampark connectivity by W2W and GKN.
6. Site inspection conducted for some brokers but not for W2W and GKN.
7. Arrangements facilitated by NSE between Sampark and Reliance.
8. Violations of SECC Regulations, 2012 and SEBI Circulars.
9. Collusion and fraud under PFUTP Regulations, 2003.

Issue-Wise Detailed Analysis:

1. Non-transparent Communication by NSE:
NSE amended its Circular dated August 31, 2009, through a website publication in October 2013, without issuing a formal circular or referring to the original circular. This led to confusion among brokers and even NSE's Colo support team was unaware of the changes. This mode of communication violated the principles of transparency and consistency, thereby breaching regulation 41 (2) of SECC Regulations, 2012, and Clause 3 of SEBI Circular CIR/MRD/DP/07/2015 dated May 13, 2015.

2. Preferential Treatment of Certain Stock Brokers by NSE:
NSE allowed W2W and GKN to establish P2P connectivity through Sampark, an unauthorized service provider, while denying similar requests from other brokers like Millennium and Mansukh. This discriminatory approach violated regulation 41 (2) of SECC Regulations, 2012, and Clause 3 of SEBI Circular CIR/MRD/DP/07/2015 dated May 13, 2015. NSE's actions were inconsistent and unfair, leading to allegations of preferential treatment.

3. Installation of MUX in NSE MMR without Verifying Licenses:
NSE permitted Sampark to install its MUX in NSE MMR without verifying its license, contrary to its policy. This lack of due diligence allowed an ineligible entity to provide services, violating SECC Regulations, 2012, and SEBI Circulars.

4. Latency Advantage to W2W:
W2W arranged its cabling in the NSE Colo rack to gain lower latency compared to other brokers. This was supported by internal emails and statements. NSE failed to monitor and ensure fair access, resulting in a latency advantage for W2W, violating principles of fairness and equity.

5. Continuation of Sampark Connectivity by W2W and GKN:
Despite discovering that Sampark lacked the requisite license, NSE allowed W2W and GKN to continue using Sampark's services. This decision was taken to avoid disruption, but it perpetuated the preferential treatment and violated SECC Regulations, 2012, and SEBI Circulars.

6. Site Inspection Conducted for Some Brokers but not for W2W and GKN:
NSE conducted site inspections for brokers like Millennium, GRD, and SMC but waived this requirement for W2W and GKN. This inconsistent approach indicated preferential treatment and violated principles of fairness and transparency.

7. Arrangements Facilitated by NSE between Sampark and Reliance:
NSE facilitated the arrangement between Sampark and Reliance to regularize Sampark's unauthorized connectivity. This action was seen as an attempt to legitimize an unauthorized activity, violating SECC Regulations, 2012, and SEBI Circulars.

8. Violations of SECC Regulations, 2012, and SEBI Circulars:
NSE's actions, including non-transparent communication, preferential treatment, and failure to verify licenses, violated various provisions of SECC Regulations, 2012, SEBI Circulars, and recommendations of SMAC.

9. Collusion and Fraud under PFUTP Regulations, 2003:
NSE, W2W, GKN, and Sampark were found to have engaged in collusion and fraudulent activities. Their actions, including unauthorized connectivity and preferential treatment, amounted to fraudulent and unfair trade practices, violating Section 12A(c) of the SEBI Act, 1992, and PFUTP Regulations, 2003.

Conclusion and Directions:
- NSE is directed to deposit Rs. 62.58 Crores to the IPEF of SEBI and undertake various corrective measures.
- W2W and GKN are directed to deposit Rs. 15.34 Crores and Rs. 4.9 Crores, respectively, to the IPEF of SEBI.
- Chitra Ramakrishna, Subramanian Anand, Ravi Varanasi, Nagendra Kumar, and Deviprasad Singh are barred from holding positions in stock exchanges and related entities for specified periods.
- Sampark and Prashant D’Souza are barred from offering telecom services to stock exchanges and related entities for two years.

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