Vikram Limaye faces a tall order as NSE CEO

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Mumbai: Vikram Limaye, 50, takes charge as managing director and chief executive officer at the National Stock Exchange of India Ltd (NSE) on Monday, five months after he was chosen to lead India’s biggest stock exchange.

He joins at a time when the founding team is no longer a part of the bourse, the management has undergone a revamp with key exits and there are questions around corporate governance and its algorithmic trading system.

In the five months between his selection and joining, the challenges at NSE have only grown. The markets regulator under new chairman Ajay Tyagi has sent show cause notices to the bourse and 14 officials over issues of unfair access.

Last week, trading at NSE halted for three hours owing to a technical glitch, which chairman Ashok Chawla described as a ‘black swan’ event.

The focus “would be first on resolving regulatory issues, improving relationship with stakeholders, strengthening the systems and processes, focusing on IPO”, said Limaye. He declined to go into specifics.

NSE has said it has already improved some processes relating to the unfair access issue, but resolving regulatory issues is important not only to restore the image of NSE, but it is also a pre-requisite before the exchange can embark on a share sale, as required by Sebi.

“The reputation of NSE has been damaged,” said Patrick L. Young, a capital market expert and chief executive officer of crowdfunding platform Hanza Trade. “However, this need not be permanent. It ought to send a strong warning to the exchange not to take its position for granted which, after all, was in many ways the position of BSE (BSE Ltd) before it was almost eaten alive by the white heat of technology at NSE 20 years ago.”

That’s not going to be easy for Limaye, a Wharton Business School and Arthur Andersen alumnus, who is also the first outsider to head NSE.

The issue has been festering since January 2015 when a whistle blower first wrote to Sebi and Moneylife magazine with these allegations. Since then, multiple panels have examined (and are still examining) the issue, at least two forensic audits have taken place, with another in the offing, and the role of some NSE officials including some who have left the exchange.

A technical committee appointed by Sebi found in March 2016 that NSE systems were indeed prone to manipulation and that some brokers got unfair access to NSE’s systems, a charge which the exchange denied at that time.

Later, an audit by Deloitte (which NSE commissioned after orders from Sebi) found its algorithmic trading platform and co-location facility were “prone to manipulation” and allowed “potential preferential access” to some brokers.

In its latest board meeting, Sebi said it was ordering another probe to find out if the officials involved in the unfair access issue made any illegitimate gains.

“The matter is between the exchange and regulator. We would not like to comment,” said an NSE spokesperson.

The repeated to and fro between NSE and Sebi has culminated in the regulator impounding its earnings from the co-location and algorithmic trading systems and keeping them in escrow. The regulator is also pursuing charges against key officials.

An important task for Limaye would be to pursue a settlement with the regulator through the so-called consent mechanism and move ahead.

“The most important aspect to focus on right now is to boost employee morale which has been hit due to Sebi investigations and to ensure credibility is restored. As a first line regulator, credibility and transparency cannot be compromised,” said J.N. Gupta, managing director and co-founder of proxy advisory firm Stakeholders Empowerment Services (SES).

Such credibility and transparency is necessary for launching a successful share sale and also resolving the exchange’s relationship with impatient stakeholders some of who are seeking an exit via the IPO.

Even before the regulator put a stop to the IPO, NSE was opposed to listing on BSE, fearing conflict of interest and pointing out the lower liquidity on the rival bourse.

Additionally, NSE wanted to list only after it restructured its business. The shareholders were miffed at NSE’s reasoning and considered these as ‘excuses’ to not list; some wrote to NSE’s board and also the finance ministry.

To be sure, there is some help at hand for Limaye from the NSE board, which has been entirely re-constituted over the past 16 months. Being an outsider could also be a blessing in disguise.

“History is full of examples where outsiders have made a big difference to businesses. In the current scenario, the exchanges are suffering as they are limiting themselves to looking inwards. This needs to change. Being an outsider, Vikram will not carry with him this big bag of bad habits that insiders carry,” said Praveen Chakravarty, financial markets economist and senior fellow at IDFC Institute. Chakravarty and Limaye have studied together at the Wharton School.

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