Regulations
NSE: The Real Clean-up that We Need
Under the late Dr RH Patil’s leadership, the National Stock Exchange (NSE) bucked all predictions of failure and became India’s showpiece Exchange with a near monopoly over trading and a reputation for meticulous fair play. But transparency was always an issue with the NSE. My first experience with the lack of it was when its top brass, otherwise extremely friendly and appreciative of the unstinted support that I gave the Exchange when it was the David to the Bombay Stock Exchange’s (BSE) Goliath, refused to part with its annual report. It required some arm-twisting before I got the annual report from a public institution. What was it hiding? Nothing. It had not sunk to its current levels. It did not want brokers to know how profitable it was, for fear that they would lobby to reduce is high transaction charges. 
 
Over the past two decades, the Exchange has remained highly successful and extraordinarily profitable, partly because the broker-led BSE failed to anticipate the winds of change; but mainly because successive chairmen at the Securities and Exchange Board of India (SEBI) allowed the NSE’s founding team to dictate market policy and destroy competition through fair means or foul. 
 
Today, a variation of Lord Acton’s quote, “Power tends to corrupt, and absolute power corrupts absolutely” applies aptly to it. Although the NSE was conceived as a ‘professional’ Exchange, for 25 years the founding team has passed the baton from one to another without allowing any outsider into the top management. Cronies were brought in as consultants and, since it was structured as a private company, there was almost no disclosure or oversight. As the NSE grew in size to a near-monopoly and turned obscenely profitable, its clout and power increased exponentially. The Exchange was bigger than the market regulator, SEBI, and the past two SEBI chairmen did nothing to rein in the Exchange. Its top management selected its board; its public interest directors and its non-executive chairmen were all mere puppets. SEBI rubber-stamped all decisions.
 
Naturally, the management wanted the NSE to remain an unlisted private company, enjoying exceptional clout and no accountability. Its ability to get SEBI to set up multiple committees to discuss listing rules for stock exchanges, only to reject all suggestions, was well known in capital market circles. This only enhanced fear and awe of the Exchange. We gather that UK Sinha even gave a severe dressing-down to the BSE for ‘instigating’ its investors to press for listing.
 
By now, NSE was Goliath. It took a slingshot from tiny Moneylife to trigger a chain of events. In June 2015, we published a whistle-blower’s letter about unfair trading practices in NSE’s high frequency trading (HFT) and co-location. The NSE dragged us to the Bombay High Court’s with a Rs100 crore suit. The Court said that the NSE couldn’t decline to give a clarification despite repeated requests, and then claim defamation; it even slapped a fine of Rs50 lakh on the Exchange (NSE’s appeal is pending). A year later, NSE’s managing director and CEO, Chitra Ramakrishna, found the going too hot and quit.
 
Investigation and subtle pressure by government agencies and RTI (Right to Information Act) filings by us, finally, escalated into a serious investigation by SEBI’s technical advisory committee (TAC). More whistle-blowing by insiders exposed the rot in senior appointments and its ineffectual board. All this culminated in a show-cause notice being issued, at the end of May, to 14 top officials of the bourse, including the two remaining members of the core founding team—Ravi Narain (non-executive vice-chairman) and Chitra Ramakrishna. 
 
Where does the Exchange go from here? Clearly, it is in India’s interest to ensure that the NSE remains a strong and a globally reputed bourse. It is equally in the national interest that the NSE is subject to discipline, is prevented from dictating policy, and its senior appointments as well as operations are transparent. In fact, NSE’s institutional investors, who were threatening litigation to press for listing, should be pressing for this, since there is no evidence, so far, of a serious overhaul of management to weed out the cronies. 
 
What do we want in terms of a clean-up? Here are a few issues that need to be addressed. 
 
1) For starters, SEBI chairman Ajay Tyagi should investigate the revelations in an email by Jamie Jones, an ex-employee turned whistle-blower. Asking for a 360-degree probe, he says the probe should begin with how the NSE was allowed to start HFT and co-location without SEBI framing rules, putting out a discussion paper and issuing regulations. The NSE has claimed in court papers that HFT was permitted in 2008 and the bourse started it in 2010. 
 
2) SEBI’s show-cause notice reminds the top brass that NSE is a ‘first level regulator’ and “duty bound to promote and practice fairness and transparency in its operations.” In that case, the NSE must be asked to submit to the Right to Information (RTI) Act, as ordered by the central information commission (CIC) and the Delhi High Court. It should withdraw the appeal pending before the division bench. SEBI must also frame rules that ensure more transparency, as part of the listing conditions. 
 
3) SEBI must ensure full transparency and disclosure with regard to several aspects of NSE’s operations. This includes payouts from the NSE Employee Welfare Trust over the past 10 years and all royalty payments for construction of various indices. Payments to various consultants and their multiple appointments with the NSE and its many subsidiaries. There is a lot of dirt in these places.
 
4) SEBI must put in place rules to eliminate conflict of interest in the appointment of consultants by mandating the same disclosures that independent directors of listed companies are required to make about their other directorships and relationships. Mr Tyagi has a whistle-blower’s letter providing specific information on several shadowy deals that must be unravelled, cancelled and cleaned up before the NSE goes public. 
 
5) The sacking of NSE’s human resources (HR) chief (officially, he quit for ‘personal reasons’) needs inquiry. Informed sources say that he was held responsible for failing to follow procedure in the appointment of Anand Subramanian, who resigned in October 2016 after anonymous letters exposed details about his appointment, pay and perquisites. The buck for this controversial, high-profile appointment, without an interview process or relevant experience cannot be passed on to a mere HR chief. Mr Tyagi needs to investigate the facts provided by Jamie Jones. He says one person who should have objected to this highly irregular appointment was vice-chairman Ravi Narain. He was on the NSE board when Mr Subramanian was given huge powers, elevated to group operating officer, nominated to the boards of NSE IT, DotEx and ILSS. He surely knew about NSE’s failure to list him as a key management person to SEBI. 
 
6) The NSE has apparently appointed a two-member committee to look into the issue of collusion between its officials and brokers, detailed in the forensic audit by Deloitte and SEBI’s TAC. Strangely, this has been omitted from its recent show-cause notice. Will this action make scapegoats of a few employees? Ideally, SEBI should have appointed an independent person to do the job. Asking a felon to investigate himself is rather strange.
 
7) SEBI, reportedly, plans action against a few brokerage firms to get them to disgorge profits earned. There is no indication from the two investigation reports (TAC report and Deloitte) of any attempt to quantify the unfair gains. In any case, this will, most likely, end up in messy litigation and throw up more dirt about NSE’s dealings, especially with OPG Securities. 
 
8) Finally, SEBI must put in place a mechanism to ensure that no Exchange is ever allowed to become so powerful that it dominates the regulator and the government or is able to crush all competition. This is extremely dangerous for the capital market. 

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COMMENTS

B. Yerram Raju

2 weeks ago

SEBI investigate on the lines suggested by the author. Second, investigations shall be time bound and fast. The Inquiry Report shall be followed up by tangible actions that would promote investor confidence in this highly important institution in the stock market. The whole process should be completed in no more than 3 months.

Mahadevan Kv

2 weeks ago

If one goes into the historical facts of how SEBI and NSE were formed and grew into what they are today the monopolistic tendencies will be very evident. It is the same team that dominated the NSE that created and formed the SEBI albeit under the aegis of IDBI.
But then the urge to innovate also has the side effects of exploiting the loopholes to the advantage of the powers that be .
It is symptomatic of the political scenario of our law makers being the law breakers with impunity.

PRAKASH D N

2 weeks ago

SEBI is created to function as an independent regulator. It should go into the wrong doing and take necessary action to ensure that NSE becomes a listed public ltd. Co. . It is high time to restore the reputation of NSE and bring transparency in its operations.

Simple Indian

3 weeks ago

It is strange that companies in which investors transact through Stock Exchanges like NSE / BSE are listed and answerable to the public, but these Exchanges themselves aren't listed and remain private entities, and hence outside the purview of public scrutiny. Perhaps this is a loophole in our laws which enable an unlisted Stock Exchange to operate like NSE has been doing. SEBI, like RBI, is a statutory body vested with enough powers to reign in delinquent entities they are supposed to oversee, NSE in this case. Yet, like RBI ignores excesses by PSU Banks regularly, SEBI seems unconcerned about clean transparent dealings in the stock market.

anonymous trader

3 weeks ago

When CTT was introduced it was introduced on Non Agri Commodities, where as Agri Commodities there was not CTT. NSE has a stake in NCDEX who have the bulk share in Agri commodities. Clearly it smells that it was done to cripple non agri commodities which was competition to NSE and that is exactly what happened. With options not allowed in commodities all benefits were reaped by NSE as volumes moved to NSE . After reading this article things are becoming more clear . Commodities markets specially non agri was not allowed to grow as was a competition. Very good points made in the article. With new SEBI Chairman in place really wish and hope good steps would continue to be taken finally as he is doing.

J Thomas

3 weeks ago

NSE should be listed.

Sunil

3 weeks ago

Wow SEBI should consider a name change to National Crony exchange , if they do not want to do a full clean up.... that will atleast warn investors / brokers .

CBI raids on residence of NDTV's Prannoy Roy, registers case for causing loss to a bank
The Central Bureau of Investigation (CBI) on Monday raided residence of Prannoy Roy, Co-founder and Executive Co-Chairperson of New Delhi Television Ltd (NDTV). The CBI is conducting searches across four places including Delhi and Dehradun and has registered a case against Mr Roy, his wife Radhika Roy, a private company and others for causing alleged loss to a bank.
 
The CBI has posted copy of the first information report (FIR) it filed against, Mr & Mrs Roy, and Radhika Roy Prannoy Roy Holding Pvt Ltd (RRPR) under Sections 120-B r/w 420 of the Indian Penal Code (IPC).
 
Following the raids, NDTV has put out a statement saying, "NDTV and its promoters will fight tirelessly against this witch-hunt by multiple agencies. We will not succumb to these attempts to blatantly undermine democracy and free speech in India."
 
Earlier, in March, the Delhi High Court vacated a stay granted by the Income Tax Appellate Tribunal (ITAT) on the Rs525 crore penalty on (NDTV), saying that the Tribunal does not have any powers in this matter, which was perceived as a big setback to the Prannoy Roy-controlled NDTV within that month.
 
During the same month, the Reserve Bank of India (RBI) rejected NDTV's application to compound from the Rs2,030 crore notice issued by the Enforcement Directorate (ED) under the Foreign Exchange Management Act (FEMA). However, according to Mr Narayan Rao, the RBI has not rejected NDTV's application for settlement under FEMA provisions. “The RBI has asked NDTV to approach a particular division of the RBI called the Foreign Investment Division of RBI's Central Office,” he had said. (Read: Delhi HC vacates ITAT stay on Rs525 crore penalty on NDTV)
 
Earlier in November 2015, the ED had slapped a Rs2,030 crore notice on NDTV for allegedly violating FEMA provisions for routing huge funds through the channel’s foreign units. The notice served to promoters Prannoy Roy, his wife Radhika Roy and senior executive KVL Narayan Rao stated that NDTV had violated RBI provisions on fund transfers. 
 
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Nifty, Sensex continue to head higher – Weekly closing report

We had mentioned in last week’s closing report that Nifty, Sensex were in a rally mode again. The major indices of the Indian stock markets were range-bound during the week and closed with small weekly gains over last Friday’s close. The trends of the major indices in the course of the week’s trading are given in the table below:

On Monday, Indian equity markets traded on a flat-to-positive note during the mid-afternoon trade session on Monday as healthy buying was witnessed in consumer durables and FMCG (fast moving consumer goods) stocks. The key indices touched new intra-day highs, with the NSE Nifty scaling 9,637.75 points and the BSE Sensex 31,214.39 points. However, the indices receded from their highs as investors booked profits and healthcare, banking and IT (information technology) sectors continued to extend losses.
 
On Monday, Sun Pharmaceuticals Industries shares fell 10% after the company reported a 13.6% year-on-year drop in its consolidated net profit to Rs1,223.71 crore in the quarter ended March. Banking stocks currently pressurised the market sentiments, led by Bank of India, PNB (Punjab National Bank) and Federal bank with more than 2% intra-day downside.
 
On Tuesday, the Indian equity markets traded on a flat-to-positive note during the early morning trade session on Tuesday, as gains were capped by broadly negative Asian markets, along with a weak rupee. The key Indian equity indices closed at new highs on Tuesday aided by buying in healthcare, banking and automobile stocks. The 30-scrip Sensitive Index (Sensex) of the BSE closed at 31,159.40 points -- a new closing high -- up 50.12 points or 0.16%, after scaling a new intra-day high of 31,220.38 points. The wider 51-scrip NSE Nifty closed at a new high of 9,624.55 points -- up 19.65 points or 0.20%. On the NSE, there were 666 advances, 808 declines and 54 unchanged. The BSE market breadth, however, was bearish -- with 1,454 declines and 1,224 advances.
 
Around 8.50 lakh retail chemists, druggists and pharmacies on Tuesday went on a daylong strike all over India in support of their various demands, said All India Organisation of Chemists and Druggists (AIOCD) President Jagannath Shinde. A total 8.50 million employees are directly involved in the retail pharmacy business, he said adding that 72,000 of the striking retailers are from Maharashtra. The strike is in protest against the government's decision to make e-portal registration for chemists-druggists mandatory, including uploading all details of medicine sales, etc, and to press for long-pending demands of the industry, Shinde said. The S & P BSE Healthcare Index closed at 13,517.81, up 2.28% on the BSE. 
 
After a negative start, the Indian equity markets on Wednesday traded at new highs during the mid-afternoon session with buying in automobile, consumer durables and capital goods stocks. Market observers opined that investors traded on a cautious note ahead of the release of India's quarterly estimates of GDP growth for the fourth quarter of 2016-17, and the index of eight core industries (ECI) figures for April 2017. On the NSE, there were 938 advances, 702 declines and 311 unchanged.
 
On Wednesday, the S & P BSE Sensex touched a new intra-day high of 31,233.68 points. The BSE market breadth was bullish -- with 1,384 advances and 1,119 declines.
 
On Wednesday, all the sectoral indices, led by realty, auto and consumer durables, traded in the positive zone with gains up to 1%. Sensex and Nifty both remained range-bound and market analysts do not expect any high volatility with consolidation on the menu for the market.
 
State-run steel manufacturer SAIL reported a net loss of Rs771.3 crore for the fourth quarter ended March, which was lower than the loss incurred in the same quarter of 2016, on the back of higher revenues during the last quarter. The company suffered a net loss of Rs1,184.64 crore in the corresponding quarter a year ago. For the entire fiscal 2016-17, SAIL has narrowed down its losses by 30% and recorded an overall improvement, including in production, sales and productivity, the company said in a stock exchange filing on Tuesday. During the quarter in consideration, the company's total income increased to Rs14,543.50 crore, as compared to Rs12,946.50 crore in the same period a year ago. "The unprecedented increase in coal prices during FY17 impacted the numbers and stunted the overall margins," SAIL said. Chairman PK Singh said in a statement that despite sharp hikes in imported and domestic coal prices, SAIL has "managed to compress the loss."  "There is an improvement in the performance on all accounts," he pointed out. The company’s share price closed at Rs57.15, down 2.22% on the BSE on Wednesday.
 
The Indian equity markets closed on a flat-to-negative note on Thursday as disappointing macroeconomic data and a weak rupee eroded investors' risk-taking appetite. On the NSE, there were 849 advances, 664 declines and 80 unchanged. 
 
India's manufacturing sector output slowed down last month due to a softer expansion in new orders and production, a key macro-economic data showed on Thursday. The Nikkei India Manufacturing Purchasing Managers' Index (PMI), which is a composite indicator of manufacturing performance stood at 51.6 from the index reading of 52.5 reported in April 2017. An index reading of above 50 indicates an overall increase in economic activity and below 50 an overall decrease. “The upturn in the Indian manufacturing sector took a step back in May, with softer demand causing lower expansions in output and the amount of new work received by firms. Moreover, there was a renewed decline in new export orders," said Pollyanna De Lima, economist at IHS Markit and the author of the report. The negative news from the macroeconomic front depressed investor sentiments further.
 
Commercial vehicles major Ashok Leyland Ltd on Thursday said its sales in May were down by 8%. In a statement here, Ashok Leyland said it sold 9,071 units last month, down from 9,875 units sold during May 2016. While the sales of medium and heavy commercial vehicles slid down 18 per cent, sales of light commercial vehicles went up by 22% in May as compared to sales numbers logged in May 2016, the company said. The company’s shares closed at Rs91.25, down 3.44% on the BSE.
 
The Indian equity markets, which closed the previous trade session on a subdued note, witnessed a gap-up opening during the early morning session to touch fresh highs following positive global cues. There was optimism about a normal monsoon, the Goods and Services Tax (GST) roll-out and buying in automobile, healthcare and consumer durables stocks. On the NSE, there were 940 advances, 707 declines and 304 unchanged. The Sensex touched a new high of 31,332.56 points intra-day. The major indices however, failed to consolidate on the intra-day highs and closed with small gains over Thursday’s close. Overall, for the week, the gains were lower than 1%.
 

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