December 29, 2016 / 4:55 PM / 8 months ago

Indian exchange's IPO under cloud, but unlikely to be derailed

Buildings are reflected on the glass windows of the NSE (National Stock Exchange) building in Mumbai, India, December 27, 2016.Shailesh Andrade

MUMBAI (Reuters) - The disclosure by the National Stock Exchange that some high-frequency trading brokers may have been provided unfair access to its servers is unlikely to derail the Indian bourse operator's IPO plans, a senior regulatory source and investors said on Thursday.

In its draft initial public offering prospectus, India's biggest exchange said an external panel had found potential instances of some traders having preferential access to its network through co-location facilities - where private servers are placed at exchanges to speed up algorithmic trading.

The NSE said the agency found certain employees may have been involved in providing that access, though it could not determine whether there was any collusion.

The Securities Exchange Board of India (SEBI) is studying the potential violations, but an official at the capital market regulator said, for now, it would be hard to justify steep penalties against the NSE.

"The IPO is totally a disclosure based regime. The NSE has already made adequate disclosures, and they can go ahead," the SEBI official said, asking not to be named as he was not authorized to talk to the media - though he added that no final decision had been made.

The NSE's IPO could raise as much as $1 billion next year, bankers have estimated, making it India's largest in six years.

An NSE spokesman said the disclosure in the IPO prospectus pertained to "legacy issues", adding the exchange operator had submitted the full report to the SEBI.

One NSE shareholder, who is among the 27 investors planning to sell shares during the IPO, said the company will have to fix its problems and make sure they don't recur.

A senior NSE official said the exchange was reviewing its trading systems, and looking to standardize procedures.

TOUGHER HFT RULES?

The suspected trading violations have been a concern for the SEBI for some months, and come as the NSE has grappled with governance issues.

Earlier this year, the exchange operator appointed Ashok Chawla, a former anti-competition commissioner, as chairman, and reconstituted its board. Several people said then that he had been brought in to help shore up the company's corporate governance standards.

The NSE is also scouting for a new CEO after Chitra Ramkrishna resigned last month, citing personal reasons.

The SEBI had ordered the NSE to appoint an external agency probe after a committee appointed by the regulator found sufficient grounds for further investigation.

The issue could also spur the SEBI to tighten rules on brokers' access to increasingly prevalent algorithmic and high-frequency trading.

The NSE said on Wednesday it had set aside all revenue generated by co-location facilities over the past two and a half years. That came to 13.1 billion rupees ($192.5 million), or close to 30 percent of its revenue during that period.

The SEBI official said the regulator was unlikely to force the NSE to give up that revenue unless it could prove the potential trading violations cited in the report.

Reporting by Abhirup Roy and Rafael Nam; Editing by Ian Geoghegan

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