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Why NSE's path to IPO may not be smooth

March 31, 2017 16:11 IST

Lack of closure to the algo controversy could weigh on sentiment, say experts

Defreezing of revenue and closure of the long-pending algorithmic trading case are key for the success of the proposed Initial Public Offer (IPO) of equity by the National Stock Exchange (NSE), say experts.

Although the mega offer by the country's largest stock exchange is keenly awaited, lack of closure to the algo controversy could weigh on sentiment, say investment bankers handling the issue.

"NSE is the next big story the Street is waiting for. However, the algo issue continues to be an overhang, suggests our preliminary talks with potential investors," said a banker on the IPO, requesting not to be named.

The Securities and Exchange Board of India (Sebi) has directed NSE to set aside revenues emanating from its co-location facility in an escrow account till a final decision on the algo matter..

The exchange has been accordingly setting aside Rs 55 crore a month since September 2016. The amount is likely to be under freeze till Sebi decides.

Sources in Sebi say NSE officials recently met them to request a defreeze and closure to the algo issue. The meeting was the exchange's introductory one with new Sebi chairman Ajay Tyagi.

"NSE briefed the Sebi chief on the roadmap and steps taken to beef up its systems. They requested the regulator to take the issue to its logical conclusion," said a person with knowledge of the development. NSE declined to comment on the issue.

The probe against NSE was triggered by letters sent by a whistle-blower in January 2015, August 2015 and October 2015.

The letter had stated the exchange's algo trading systems were prone to manipulation. And, that NSE allowed certain brokers to receive data ahead of others, enabling them to react on information before anybody else.

Sebi in late 2015 did a preliminary investigation and later directed NSE to get a forensic audit. In March 2016, NSE had appointed Deloitte Touche Tohmatsu India to do so.

In its report, the consultant had said NSE's system was prone to manipulation. It had also observed an absence of protocol related to data retention, e-mails and other information for certain former employees. The exchange disclosed this information in the draft prospectus it filed in January for the IPO.

Just before his tenure ended at Sebi, former chief U K Sinha had directed NSE to carry out another audit of its cash and currency derivative segments.

The objective was to check whether the systems used in these categories were also prone to manipulation. Earlier this month, NSE appointed EY to do this audit. They are expected to complete it by mid-April.

Photograph: Shailesh Andrade/Reuters

Shrimi Choudhary in Mumbai
Source: source image