The Securities and Exchange Board of India (SEBI), whose investigation on the National Stock Exchange (NSE) colocation (Colo) scam was recently snubbed by the securities appellate tribunal (SAT), has issued yet another show-cause notice (SCN) to 11 persons in connection with the Colo scam, exposed by Moneylife in 2015
The SCN dated 28 February 2023 has been issued to NSE and its two former managing directors (MDs), Chitra Ramakrishna and Vikram Limaye, along with eight others. Significantly, the SCN has left out Ravi Narain, who was the MD till early 2013.
The SCN says that the action is based on information received from the income tax (I-T) department following a search and seizure operation on Sanjay Gupta of OPG Securities Pvt Ltd in 2017. It may be recalled that OPG Securities was at the core of the letter from the whistle-blower who called himself Ken Fong, which we published in 2015.
What is interesting is that in 2018, the I-T department, which had questioned NSE, complained to the market regulator to say that 'no worthwhile action had been taken by the NSE' about information provided by the I-T department. NSE had confirmed the complaint from Universal Brokers, but typical of its attitude then, it said that the findings about employee involvement were inconclusive and it did not need to report the matter to SEBI.
SEBI then conducted its own investigation and placed the matter before its 'high-powered steering committee' for guidance in July 2018. Based on its guidance, SEBI conducted a further investigation on the possibility of bypassing TAP Architecture and Network Connectivity, which covers the system and software that connects NSE servers and manages trading systems.
Much of the 55-page SCN details actions taken by various persons on receipt of the 2013 letter from Universal Stock Brokers and various actions taken leading to an 'incident summary' which concluded that trading members had 'made an attempt to bypass the TAP software provided by NSE and execute trades on the NSE Trading System'.
SEBI contends that NSE had information that there had been serious attempts to bypass protocols to reduce latency and there were deficiencies in its reporting systems, but NSE did not take the requisite steps to fix the problem. To cut a long SCN short, SEBI asked NSE to conduct another 'surrogate analysis' in September 2020 and NSE, in turn, appointed Ernst & Young (E&Y) to do the job; the findings were submitted between July and September 2021. SEBI and NSE have been corresponding on the issue right until August 2022. The SCN mentions how E&Y's report noted that there had been "instances of breach of the Box Rate in the range of 26% -50% of the total trading seconds per day, with respect to certain TMs (trading members) which had been selected for examination by E&Y. This did not appear to be normal."
In conclusion, the SCN says that NSE had continued market connectivity through TAP right until 2020, despite knowing that TAP did not ensure fairness and equality of access, thus engaging in unfair trade practices. It also did not put in place a reporting procedure for unfair trade practices. The rest of the SCN goes on to make specific charges against each of the persons named in the notice about what the regulator perceives as their role in each case.
That SCN now includes Vikram Limaye, who completed his 5-year term in July 2022, but merely to mention that a new TAP system was released in a live environment with additional security features and encryption. It also says that he (Mr Limaye) "extended his apologies and conveyed his regret if NSE, despite its intention to deal with the issue as promptly and seriously as possible, had in any matter and inadvertently given a contrary impression." SEBI issued a caution letter to Mr Limaye in July 2020 for 'administrative lapses' in dealing with the complaint by Universal Brokers. The letter also covered the lack of encryption required by SEBI, the trading glitch at NSE NOW and the failure to bring to the attention of SCOT (Standing Committee of Technology) the findings of the surrogate analysis completed in 2018 and that discontinuation of TAP began only in 2019.
The SCN similarly goes on to detail what it believes are the failures of all other NSE officials who have been served the notice. What is evident, though, is that this is once again a general SCN, full of technical information and detailed narration of actions, meetings, and emails by various persons, without any clear investigation or finding about specific collusion, wrongdoing, or lapses by any person. It is unclear whether investigations and the issue of SCN pertaining to the event of 2015 will continue for over a decade, dragging in past and present employees of the Exchange without ever attempting to establish the wrongdoing of anybody.
Since this SCN seems to be the result of prodding by the I-T department, it would be interesting to find out whether the notice satisfies the tax authorities. It is unclear if specific communication and messages found at the OPG Securities office were fully investigated by SEBI. There is no mention of any such messages in the SCN, which seems to focus exclusively on the 2013 complaint by Universal Stock Brokers and not OPG Securities.
Moreover, it is only concerned with lapses in the role and duty of each noticee, concerning his/her duties and responsibilities.