NSE and SEBI in Advanced Talks to Settle Long-Pending Co-location Case Ahead of IPO

Background and Context of the Co-location Case

The Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE) are engaged in advanced discussions to resolve the long-standing co-location controversy that has impeded the NSE’s Initial Public Offering (IPO) ambitions. The co-location case centers on allegations that certain brokers exploited NSE’s co-location facility by placing their servers physically closer to the exchange’s trading servers, enabling faster data access and an unfair trading advantage over competitors.

SEBI originally imposed significant penalties on NSE in April 2019, directing the exchange to disgorge Rs 625 crore along with 12 percent annual interest from April 2014. However, the Securities Appellate Tribunal (SAT) diluted the penalties in 2023, ruling that NSE had not committed fraud but had only partially failed to comply with certain regulatory circulars.

Highlights:

• NSE’s co-location facility allegedly gave some brokers unfair speed advantage.

• SEBI’s original penalty: Rs 625 crore plus interest.

• SAT ruling in 2023 softened SEBI’s penalty, finding no fraud.

Current Settlement Talks and Potential Financial Implications

The talks restarted about six weeks ago, focusing primarily on agreeing to consent settlement terms, including the quantum NSE would pay to SEBI. Sources familiar with the negotiations suggest the settlement amount could be substantially higher than the Rs 643 crore NSE paid in 2023 to settle SEBI’s costly Trading Access Point (TAP) case.

SEBI’s settlement demands are formulated based on factors such as the severity of violations, timing of settlement application, and the entity’s history of compliance. The amount SEBI may seek could be nearly double the TAP settlement, reflecting the gravity of the co-location violations.

Negotiations are expected to be challenging, as NSE holds a favorable SAT ruling and may resist a steep settlement amount. Both sides are reportedly pursuing a pragmatic resolution to enable the IPO and restore market confidence.

Highlights:

• Settlement amount may approach twice the Rs 643 crore TAP case payout.

• SEBI uses a formula factoring violation severity, timing, and compliance history.

• NSE’s favorable SAT ruling may lead to hard negotiations.

Regulatory and Legal Framework for Settlement

SEBI’s settlement framework allows entities to pay penalties without admitting or denying wrongdoing. Once NSE and SEBI agree on the consent terms, the proposal must gain multiple layers of approval:

1. Internal SEBI Committee Review: Preliminary evaluation of settlement terms.

2. High Powered Advisory Committee (HPAC): Comprised of a retired judge, a former SEBI Whole-Time Member, and experts, HPAC reviews and recommends.

3. SEBI Whole-Time Members’ Panel: Final decision-making authority.

4. Supreme Court Approval: Since the case is pending before the Supreme Court, approval is mandatory to withdraw the matter.

Once approved, NSE must pay the settlement amount, after which SEBI issues a formal closure order.

Highlights:

• Multi-layered SEBI approval required for settlement.

• Supreme Court’s consent is essential to end ongoing litigation.

• Settlement closes the case without NSE admitting guilt.

NSE’s Proactive Steps Toward Settlement

NSE has expressed willingness to resolve the outstanding co-location case amicably. In a March 28 letter to SEBI, the exchange emphasized its intent to settle all pending regulatory issues through the consent mechanism. NSE’s Governing Board has approved the plan to pursue a settlement and has requested a No Objection Certificate (NOC) from SEBI for the process.

Earlier, in August 2023, NSE had sought a consolidated settlement for all cases pending before SEBI and other forums, signaling a strategic approach to clear regulatory hurdles ahead of its IPO.

Highlights:

• NSE actively seeking to resolve cases via consent settlement.

• Governing Board approved the settlement exploration plan.

• NSE requested SEBI’s NOC to proceed with consent discussions.

Significance and Outlook

Resolving the co-location case through a consent settlement is critical for NSE to move forward with its IPO, a key milestone for India’s capital markets. A pragmatic and timely settlement would also reinforce market confidence and signal institutional maturity in handling regulatory controversies.

Experts emphasize that a balanced resolution respecting regulatory concerns and NSE’s position would benefit all stakeholders. If SEBI and NSE reach an agreement, the settlement process could take approximately three to four months post-Supreme Court approval.

Highlights:

• Settlement pivotal for clearing NSE’s IPO path.

• Balanced resolution could restore investor confidence.

• Consent process completion estimated within 3-4 months after court nod.