What began as an investigation into allegations that India’s top stock exchange favoured some of its clients giving them preferential access to trading information is turning out to be a farcical drama. One in which a regulator may bag a juicy bounty despite slapdash investigations and the exchange that had hoped for a bumper equity issue may end up with nothing but a tattered reputation.The initial public offer of the National Stock Exchange ( NSE ) has gone into an indefinite limbo following orders from markets regulator the Securities and Exchange Board of India ( SEBI ) even as the exchange and the regulator negotiate a massive consent order of between Rs 250 crore and Rs 500 crore.The regulator in a letter of May 31 asked the exchange to stop the issue "as certain regulatory/policy issues are under examination".SEBI chairman Ajay Tyagi had in late April said that the IPO was not happening immediately and could take a few months. The SEBI letter came eight days after it issued show cause notices to the exchange as well as 14 individuals, including former managing directors Chitra Ramakrishna and Ravi Narain. While Chitra had resigned from the exchange in December 2016, Narain, who was the vice-chairman, quit on June 2.ET was the first to report in detail about the flagrant violation of corporate governance norms, dodgy appointment processes and conflicts of interest of the two former top managers and subsequently about conflicts of interests of other managers and former board members as well.For more than two years NSE has been battling allegations that it gave some of its clients preferential access to servers at its colocation centre between 2010 and 2014.ET has had extensive conversations with several people at NSE, including on the board, as well as others connected with the exchange’s affairs. The emerging story is a strange mixture of hubris and lack of governance processes at the exchange and a determined regulator failing to find anything beneath the rocks it’s turning over.The notices and the uncertainty over the IPO appear to have rattled the exchange into parleying with the regulator for a consent order, even though many at the exchange believe that it has a strong case to defend; if nothing, for lack of evidence. A top NSE official said it has engaged top lawyers Zia Mody and Somasekhar Sundaresan to help arrive at a consensus with SEBI.A board member as well as other top officials had earlier told ET that the exchange had gone through a lot in the past few months and it would be better if they could put everything behind and focus on the IPO.Another director said this board was a new one and need not carry the burden of what may or may not have happened in the past."You can look at it in various ways. If all of this can be put behind by just paying a penalty, isn’t it a good option?’’ the director asked, adding that numbers are still being worked out. The idea was first proposed at a meeting NSE chairman Ashok Chawla had with SEBI chief Ajay Tyagi.Yet SEBI chose to communicate in writing to NSE that it should stop preparations for the IPO even though the exchange could not have gone ahead unless the regulator cleared its draft prospectus. SEBI also has begun issuing summons to individuals to appear before it.So far, an internal investigation by the NSE, another by a SEBI expert team and one by forensic auditor Deloitte have failed to nail culpability on anyone though external auditors have said the exchange’s systems were vulnerable. Under instructions from SEBI, the exchange considered filing criminal proceedings against several of its former and current employees and has been engaging with high-profile criminal lawyer Amit Desai for the past couple of months. However, he too has not been able to find grounds to file first information reports, according to multiple sources at the exchange.The board then sought a legal opinion from former Supreme Court Justice SN Variava. The opinion, which was placed before directors on June 7, categorically said there was no scope for civil or criminal action. A presentation at the board meeting seemed to indicate that an ongoing forensic audit by auditor EY has also failed to turn up any evidence. EY is said to have found that connecting first to the servers doesn’t give any advantage.ET has reviewed the reports which reveal a culture of lax corporate governance practices and hints at the possibility of gaming the system. But they present no evidence of wrongdoing or malpractice and the investigators absolved themselves citing lack of information. The enquiry was narrowly focussed and conclusions were based only on readily available information at NSE.“Due to the absence of protocols related to data retention, email and other information for certain former key team members of NSE’s COLO (collocation) operations was not available,” Deloitte said in its report.A former top manager at NSE had told ET that he was once shocked to find that it did not have a risk register. “There was a complete lack of corporate governance there. Often the top two people made decisions and key people whom the decisions affected were not kept in the loop," he had told ET on condition of anonymity.Meanwhile, managing director-designate Vikram Limaye taking charge at NSE was delayed because of his concurrent job as a Supreme Court-appointed administrator at the Board for Control of Cricket in India (BCCI). The headless exchange finally proposed that SEBI approve the appointment on the condition that Limaye resign from BCCI. SEBI signed its approval in the second week of June.Investigations into the exchange began after a whistleblower wrote to Sebi and financial journalist and editor of MoneyLife magazine Sucheta Dalal in January 2015 describing how NSE was giving preferential treatment to some traders by helping them connect to its servers ahead of others.Since then, allegations have flown thick and fast. Over the last couple of weeks, ET has been copied on two more anonymous emails (along with Sucheta Dalal and the SEBI chief), one that includes a copy of the Deloitte report as well. The writer, however, fails to give any proof of multiple allegations made in the emails.SEBI, however, is determined to get to the bottom of it. In a letter to MP Kirit Somaiya on June 14, Chairman Tyagi said the regulator was in the process of appointing a forensic auditor; this time to determine the illegal profits brokers and software service providers may have minted from preferential access. Incidentally, that was the subject of the last anonymous email.