The Securities and Exchange Board of India is set to order an audit of the National Stock Exchange to see if its systems and procedures are firmly in place.

The Sebi action follows the exchange's failure to adjust the market capitalisation of Reliance Industries [Get Quote] appropriately for calculation of the Nifty on January 19, when the stock commenced trading as a de-merged entity.

A Sebi official said this was the first time the regulator would be ordering a full-scale systems audit of an exchange. The audit will be conducted by a third party. Penal action can be taken against the exchange depending on the audit report.

A Sebi team had visited the exchange on January 19. Since then, the exchange is understood to have effected some internal restructuring, including replacing its head of surveillance. NSE managing director and CEO Ravi Narain was not available for comment.

Due to some error, the Nifty spot price showed an exaggerated fall of nearly 100 points when the regular trading session started on January 19, about an hour after the special trading session for price discovery in Reliance Industries ended that morning. The exchange admitted the error and corrected it about a couple of hours later.

The regulator, as also market participants, feel that the whole purpose of conducting a special trading session is defeated by the error.

The special trading session for Reliance Industries was seen as necessary ahead of the de-merger because the stock has substantial weight in the benchmark indices.

It was particularly important for the Nifty because derivatives contracts are based on the index and a correct indication of the spot price is necessary to gauge the corresponding value of the futures contract.

Despite the failure on the part of the NSE to reflect the correct value of the Nifty, not too many traders may have lost money. Even when the spot Nifty price was incorrect, the future contract continued to trade at a substantial premium to the spot price, pretty much reflecting the true value.