Sebi fines NSE Rs 6 cr for activities non-incidental to exchange business

The Securities and Exchange Board of India (Sebi) on Thursday slapped a penalty of Rs 6 crore on the National Stock Exchange (NSE) for investments in 6 entities unrelated or non-incidental to the stock exchange business.

These companies include Power Exchange India (PXIL), Computer Age Management Systems (CAMS), NSEIT, NSDL E-Governance Infrastructure (NEIL), Market Simplified India (MSIL) and Receivables Exchange of India (RXIL).

Currently, NSE holds between 25 per cent and 100 per cent stakes in these entities through its arm NSE Investments.

“It is concluded that noticee (NSE) had engaged, directly or through its wholly owned subsidiary in activities that are unrelated/non-incidental to its activities as a stock exchange by way of acquisition of stake in PXIL, CAMS, NSEIT Limited, NEIL, MSIL, and RXIL without seeking approval of Sebi and thus, it has violated the provisions of regulation 38(2) of SECC (Stock Exchange and Clearing Corporation) 2018 read with regulation 41(3) of SECC 2012,” Sebi said in an order.

In its submission to Sebi, NSE had argued that most of these investments were related to the stock exchange business. However, the regulator rejected the argument.

In the case of CAMS investments, Sebi held, “The contention of NSE that activities of CAMS are related to the activities of a stock exchange was not found acceptable by Sebi as the activities of CAMS is that of a market intermediary and it provides back-end services to market participant. Activities of market intermediaries are always incidental to securities market wherein buying and selling of the securities takes places. However, it is not related to function of the stock exchange which is for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities …which is different from the activities specified for other intermediaries to the securities market.”

The exchange also argued that the investments were done by a wholly-owned subsidiary, which had no control over the investee companies. To which Sebi observed that the exchange had nominated directors on board of most of these entities.

NSE also said some of the SECC regulations were being applied with retrospective effect as investments or incorporation of the entities were done before the SECC regulations 2018 came into in existence. The regulator also rejected this line of argument stating that the SECC had commenced from June 2012.

“The four of the investment activities by noticee in NSEIT, PXIL, MSIL, and NSDL EGov, for which SCN is issued, are continuing activities and they are being carried on by the noticee.

The other two activities in CAMS and RXIL have commenced post commencement of SECC 2012 and hence there is no issue on these activities as far as retrospective application is concerned,” the regulator said.

NSE had divested its entire 37.5 per cent stake in the initial public offering (IPO) of CAMS that concluded last month. CAMS had to change its IPO structure to facilitate NSE’s exit. In February, Sebi sent a notice to NSE to divest its entire holding in CAMS within a year. Under the initial filings made by CAMS in January, NSE was to divest only 12.5 per cent in CAMS. However, the exchange’s remaining stake could have got locked in for year. It couldn’t be confirmed whether Sebi has already asked NSE to divest its other non-core holdings.

In a separate order, Sebi diposed off the show cause notices to NSE without imposing penalty for setting up a company called NSE Strategic Investment Corporation and transferring 100 per cent stake of DotEx into it. Regulator, however, said the business activity of DotEx were incidental to stock exchange business is “may be an issue of examination.”