Is SEBI Winding Up NSE Colo Scam with Some Tepid Action?
On Monday, the Securities Appellate Tribunal (SAT) caused quite a buzz by allowing the National Stock Exchange’s (NSE) demand to release Rs6,085 crore of revenue earned from its algo trading and co-location (Colo) services.
Asking the Exchange to block this sum in an escrow account was one of the punitive actions initiated by the Securities and Exchange Board of India (SEBI) following the algo scam investigation that started in 2015. 
The order is an embarrassing indictment of the market regulator, which has been conducting a meandering investigation and issued multiple orders over the past six years that are nothing more than a slap on the wrist of the Exchange. Meanwhile, SEBI’s initial investigation and orders have already weakened the case against the Exchange by failing to fix individual responsibility for repeated violations of rules, failing to quantify illegal gains made by brokers and, worse, failing to comprehend the enormity of profiteering that was possible by certain brokers logging in early. 
The only challenges to the regulator’s hurry to dilute and wind up the investigation is probably a petition in the Madras High Court and an investigation initiated by the Central Bureau of Investigation (CBI), both of which have lost momentum during the COVID pandemic. NSE, India’s dominant exchange, appears to have taken advantage of the situation by moving the appellate tribunal to have its funds released, even when the scores of broker defaults ought to have raised fresh questions about NSE’s weak oversight. 
Moneylife exposed the Colo scam in June 2015 when we published a whistle-blower’s letter, copied to me, describing in detail how NSE officials deliberately allowed select brokers, primarily OPG Securities, to profit enormously through an early log-in to select servers with lower loads. 
Here’s how Colo works. Large investors with deep pockets hire computer servers located within the Exchange (called a Colo farm/facility) to be able to log into NSE’s trading servers very quickly and execute very rapid trades using computer-generated algorithms. Millions of trades are executed rapidly, some in milli or micro seconds (one millisecond is 1/1,000th of a second; a micro second is 1/100,000th  of a second), by these traders. The ability to match the trades the fastest is key to bumper profits. 
In NSE’s tick-by-tick (TBT) system operational at that time, brokers who logged in to NSE’s server first, received price data faster and made more money. This prepared the ground for a scam and collusion between NSE officials and brokers to get access to faster servers or, shockingly enough, log on to back-up servers. The investigations ordered by SEBI and its technical advisory committee (TAC) verified most of the whistle-blower’s allegations. 
And, yet, SEBI’s failed to establish fraud, collusion or even to quantify illegal profiteering. Instead, in September 2016, it asked for all of NSE’s revenues from algo trading to be impounded in an escrow account. SEBI later imposed a penalty and ordered disgorgement whereby NSE was asked to pay over Rs1,000 crore, apart from small individual penalties against senior officials. 
The initial orders have all been contested, but the regulator has continued to issue further show-cause notices and order investigation with no end in sight.
Since all orders will be appealed before SAT and go to the Supreme Court, it will probably be decades before the algo scam is buried, much like the recent order on Reliance’s in a case that dates back to 2000.
NSE’s move to have its funds released exposes more than SEBI’s inept investigation. Sources present at the SAT hearing say that the regulator put up a half-hearted defence perhaps signalling that it that it is okay with the release of funds (except for Rs420 crore that would remain deposited in an interest-bearing account) and absolving itself of responsibility for the decision. The SAT order was still to be uploaded at the time of writing this article and SEBI has made no comment on the matter. 
A quick look at how SEBI’s strange orders suggest that NSE is, once again, going to be let off without much damage. 
In April 2019, SEBI issued its first set of weak orders seeking disgorgement of Rs624 crore plus interest and a small penalty.  But it failed to quantify illegal gains by brokers or fix individual responsibility for deliberate lapses and the strange absence of standard protocols to prevent manipulation and collusion. This order was immediately challenged.
Since then, SEBI has issued further orders that only weakened the case against NSE. For instance, although it is evident that brokers went to great lengths to log-in first to profit from it, a SEBI whole–time member, G Mahalingam, gave a clean chit on the issue of priority access. 
While SEBI commissioned multiple investigations and audits, the one that continues to fly below the radar is being conducted by ISB Hyderabad which was asked to quantify illegal gains. ISB’s expertise in the matter is unclear and its report, if submitted, remains buried and illegal gains have never been quantified, although all trading data is easily available to the regulator. ISB Hyderabad, was a recipient of generous funding from NSE raising questions of conflict of interest.
As recently as February 2021, SEBI ordered a fresh investigation into an old complaint by Universal Stock Brokers of Delhi about a consultant who was allegedly offering a service that would allow brokers to profit and gain a trading advantage by bypassing a crucial part of NSE’s system. NSE has appointed Arvind Sawant, retired chief justice of the Kerala High Court, to inquire into the matter. 
Even today, NSE has never been punished for refusing to cooperate with every single investigation team (SEBI’s TAC, Deloitte and Ernst & Young) and the arrogant refusal by its officials to share emails and data. On the contrary, after the then managing director (MD) Chitra Ramkrishna and former vice-chairman Ravi Narain resigned (they were part of the original founding team of the Exchange), SEBI appears to have ignored lapses by all others. In fact, many of those in the close cohort of Ravi Narain and Chitra Ramkrishna remain in sensitive management positions, barring only Anand Subramanian, whose shocking appointment and promotion had led to a separate show-cause notice. Here, again, the regulator has yet to issue any order. Sources in the legal community say that the regulator has found official matters as well as highly personal emails exchanged with a top NSE official which ought to lead to severe indictment, instead there is silence. 
In October 2020, SEBI issued an adjudication order levying a Rs6 crore penalty on NSE for investing in six companies–CAMS, NSEIT, NSDL E-Governance Infrastructure, Market Simplified India and Receivables Exchange of India–without regulatory approval. NSE had acquired stake in CAMS in 2013 and SEBI’s investigation into the purchase without approval began in 2017. As Debashis Basu wrote in Business Standard, this amounted to a penalty of Rs1 crore for each of these investments. He pointed out that, five days after NSE’s order, CAMS was listed on the market at a price of Rs1,230 post a successful IPO. The share has risen substantially since then (Rs2,300 on 19 May 2021). Since NSE bought the shares at Rs187.86, the profit on CAMS alone is around Rs4,000 crore. 
On 10 February 2021, SEBI issued another adjudication order against NSE levying a penalty of Rs1 crore on the Exchange and Rs25 lakh each on the two former MDs, Ravi and Chitra.
• On 11 February 2021, it issued another adjudication order levying a penalty of over Rs5 crore on OPG Securities and its three directors Sanjay Gupta, Sangeeta Gupta and Om Prakash Gupta. These repeated orders and tiny penalties have only evoked contempt about the regulator’s processes.
The slow and half-hearted investigation clearly shows that for NSE, gaming the system, defying the regulator and not bothering with permissions, even to start algo trading in 2010, have paid off handsomely. Over time, the investigations will be quietly wound up and mothballed, unless there is another lapse to embarrass the regulator and force fresh action. 
Here is the order issued by SAT on 17 May 2021...

3 years ago
@ SuchetaDalal. Appreciate your investigative journalism that bring forth the wrongdoing of those in high places. In another strange twist, the proprietors of SELMCL increased their holdings from 18% to 75% in an instant this 31 Mar without creating a ripple, or spending a penny. If such sleight of hand goes under the radar soon it will open up new avenues for other debt laden firms to follow in their footsteps. All of this cannot happen without the blessings of the top mandarin in the ministry.
Replied to ranjitseth comment 3 years ago
Promoters have increased holdings from 18.55% to 75.27% in Mar 2021 qtr.
3 years ago
SOP of Govt in matters of inquiry; cover up to exonerate, absolve and make cosmetic changes in SOP
3 years ago
I really appreciate effort you undertake to highlight misdeeds of others. But you also go wrong sometimes, as seen by your repeated twit against Franklin. My cousin has invested in franklin bond. He was really worried about his investment, if majority would have voted for “No”, which could have led to fire sale, destroying value for every bondholder. Now Franklin has already returned 75% of his money and current NAV higher than invested capital. Poor fund manager Kamath provided superior returns for a decade, and his poor judgement in providing higher returns to bondholder backfired on him due to drying of liquidity in illiquid bonds due to Covid.

Coming back to this topic on NSE. For a moment we agree that misdeed has happened in Co-Location There are more than 500 people work at NSE, they support of thousands of brokers with more than 1.9lakh terminals, source of livelihoods for lakhs of people. If few employees turned out to be of having questionable ethics, would you punish entire organisation? Suppose if it happens in your organisation would you fire your employee or Should your entire organisation to be blamed and punished?

I also doubt the scale of misdeed. Easiest way to quantify scale of misdeed is to check Financial statement of those brokers who are involved in this. They must have made superior profits and analysing their financial statement will give us some details that how much profit they have made out of this arrangement and what is scale of misdeed if any.

I am no fan of NSE, but you are old timer and are well aware how things were bad for investors when small coterie of stockbrokers used to run BSE. How much broking margin (Galio – in Gujarati, Big % of buy/sell value) they used to make in their trade. NSE democratised entire financial markets with broking margin falling to few bips. NSE needs to be equally credited for growth of financialisation of savings and growth in equity market.

Replied to bvyas80 comment 3 years ago
Also, looks like you are a distributor of Franklin, deliberately spreading misinformation here.
Replied to bvyas80 comment 3 years ago
Because BSE was run badly 25 years ago, NSE is allowed to get away with anything forever. Very logical
3 years ago
Imagine the uproar in the press, in social media, in Legislative Assemblies and in the Parliament had Chhota Rajan, Kasab, Abu Salem and Arun Gawli (to name just a few) been rapped on the knuckles and allowed to roam freely. However, when it comes to dealing with financial terrorists – Chitra Ramkrishna, Ravi Narain, Anand Subramanian, Ravi Parthasarathy, Rana Kapoor, Rakesh Wadhawan, the Sandesara brothers (the list can go on and on) – barring Moneylife, nobody is bothered; the least bothered are banks, RBI and SEBI. With ~Rs1.5 lakh crores gobbled up by willful defaulters whose names were literally forced out from banks under RTI, the collective harm done to the country by these financial terrorists is many times more than that done by the likes of Dawood Ibrahim and Hafiz Saeed.
3 years ago
Mam, there are many factual errors in your article. NSE CAM pre tax gain is 1729cr and not 4000cr as claimed in the article. And what is wrong with this investment, they have helped in building one of the finest institution. World over exchanges builts business in associated areas. That's how developed mkt exchanges have flourished . Co-location of servers at exchange is followed by many exchanges world over. Even BSE offers colocation facilities. Colocation revenue is 43%of total revenue for NSE. If that amount is withheld in separate account how exchanges can run its business.
Replied to pritesh comment 3 years ago
I don't think you have even understood the article. Or the Colocation scam. To say BSE also offers colocation is absurd. You need to read a lot more before rushing to sit in judgement... since you are deliberately ignoring WHY it was held in escrow... one can only guess why you seem so agitated is support of what is wrong!
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