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.
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.