The Securities and Exchange Board of India (SEBI) seems to be more aggressive in requiring listed companies to disclose material information than it is in disclosing important regulatory information itself or requiring regulated entities to disclose it. That is the only conclusion that can be drawn from the Draft Red Herring Prospectus (DRHP) filed by the National Stock Exchange (NSE) last week. The NSE is an important Financial Market Infrastructure (FMI) and yet critical information about market integrity at this FMI is becoming available only now in the context of its listing!
The third risk factor in this DRHP discloses the following information regarding complaints about unfair access being provided to some trading members at NSE:
SEBI received these complaints nearly two years ago
In response to a directive from SEBI, NSE submitted a report on this to SEBI more than a year ago.
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 NSE nine months ago. NSE in turn submitted a response disputing these findings.
Four months ago, SEBI sent an Observation Letter to NSE stating that “the architecture of [NSE] with respect to dissemination of TBT data ... was prone to manipulation and market abuse” and advised 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.
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 Financial Market Infrastructure are of concern only to its shareholders and so disclosure is required only when the FMI goes public. 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.
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. 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:
Since some of the facts are disputed, both sides of the story should be disclosed with a clear disclaimer.
Since individuals ought not to be named without firm evidence, these names ought to be redacted before disclosing the documents.
Since some of the documents may contain proprietary confidential information, these too should be redacted before publication.