Sebi should disclose documents related to NSE probe: Expert

Disclosure of information critical to market integrity cannot be linked to listing, IIM professor argues

Senior academician and expert on financial market regulation Jayant R Varma has asked the Securities and Exchange Board of India (Sebi) to disclose the documents related to its ongoing probe at the National Stock Exchange (NSE).

Referring to disclosures relating to alleged unfair access to the bourse’s colocation platform in the recent draft red herring prospectus (DRHP) filed by the NSE, Varma, who teaches at IIM Ahmedabad and sits on the regulator’s internal committees, said such details which concern the integrity of the market infrastructure could not be linked to listing.

He also criticised the apparent double standards in Sebi's treatment of material information in its/exchanges' hands vis-a-vis other listed companies.

In his personal blog posted on the IIM A website late on Tuesday, Varma wrote, “In my view, all the documents whose existence has now been disclosed represent material information about the operation of one of India’s most critical Financial Market Infrastructure (FMI). These documents ought to have been disclosed long ago, but it is still not too late for the regulator to release suitably redacted versions of all these documents.”

He listed key disclosures made in risk factor number three, which refers to complaints about unfair access being provided to some trading members at the NSE. The DRHP revealed that Sebi received these complaints nearly two years ago and the NSE response to Sebi more than a year ago.

Other critical pieces of information confirmed in the DRHP are that a year ago, Sebi engaged a team headed by professors of the Indian Institute of Technology, Bombay, to examine these complaints. The report of this team was sent to the NSE nine months ago. The NSE, in turn, submitted a response disputing these findings.

Four months ago, Sebi sent an Observation Letter to the NSE stating that “the architecture of [NSE] with respect to dissemination of TBT (tickby-tick) data ... was prone to manipulation and market abuse” and advised the NSE to appoint an independent agency to conduct an examination of all the concerns highlighted in the IIT Interim report. The report of the Independent Agency was filed with Sebi a fortnight ago.

Varma stated that linking disclosure by a market infrastructure institution like the NSE to listing would amount to a very narrow view.

“All this information is becoming public only as a result of the NSE filing for a public issue. SEBI seems to have taken the narrow and untenable view that the operations of a large FMI are of concern only to its shareholders and so disclosure is required only when the FMI goes public.”

Such a view would mean all other market infrastructure institutions should also go for listing to facilitate better disclosures. “It is surely absurd to claim that listed companies should be held to higher disclosure standards than key regulated entities. If this absurdity is really the regulator’s view, then it should forthwith require that all depositories, exchanges and clearing corporations become listed companies so that they conform to higher disclosure standards.”

Since some of the facts were disputed, both sides to the story should be disclosed with a clear disclaimer, Varma stated. The names of individuals and proprietary confidential information, too, could be redacted before such publication, he added.