Just over a week ago, when the National Stock Exchange (NSE) celebrated 25 years of its existence, Vikram Limaye, the current managing director (MD) and CEO, was confident that the bourse would soon put the algo trading controversy behind it by filing a revised consent application with the Securities and Exchange Board of India (SEBI).
It may be just a happy coincidence, but a flurry of actions happened just before Mr Limaye’s statement. SEBI sent out a fresh set of show-cause notices (SCNs) that appear to have concluded the 2.5-year investigation into what is popularly known as the algo trading scam first exposed by Moneylife
. Technically, the consent application can be filed only after an investigation is complete and sources say that Mr Limaye probably had an informal assurance that the Exchange could go ahead and file a consent application.
Soon after, on 13 August 2018, SEBI put out for public comment the report of a high-level committee to review its enforcement and settlement process, which may give it more leeway to tweak the consent rules.
The show-cause notice itself is a massive set of 1,500 pages of documents that seem unable to come up with very specific evidence of wrongdoing, even after piecing together a wealth of evidence, three detailed investigation reports, as well as a mass of emails and testimony on oath from all the major players. The three investigations were done by SEBI’s technical advisory committee
(TAC), Deloitte Touche Tohmatsu
and Ernst & Young
(which did a forensic audit).
What should be a matter of real concern is that this only establishes a complete absence of investigating skills. SEBI does not have a single officer with a police background who could lead and guide investigation. There was a time when the executive director in charge of compliance and investigation used to be a former police officer; but not anymore. Consequently, the mountain of evidence clearly identifies wrongdoing, but cannot pin responsibility.
Instead, the show-cause notice, while clearly stating that brokers, such as OPG Securities, got preferential access and could consistently log in earlier, does not come up with hard evidence on who was responsible for things going wrong. The reason for this is obvious. The NSE has taken on the responsibility of providing legal help for all the employees who are targets of SCN and the entire push is towards a consent order that will allow everybody to get away with, at best, a rap on the knuckles.
Consider this. SEBI says OPG Securities gained preferential access day after day on select servers, which indicates “complete laxity and dereliction of duty on the part of” Ravi Narain (former MD and vice-chairman) Chitra Ramakrishna (who quit as MD in December 2016) and Subramanian Anand (group operating officer who quit in October 2016). Starting with the top three, it goes on to sprinkle vague allegations on four levels of officials with words such as failure to take “preventive as well as curative measures proactively,” or failure to “perform their role in establishing adequate systems,” leading to some brokers gaining fair and equitable access and so on.
The words ‘consistent unfair access’ and ‘preferential access’ to OPG Securities prefacing so many paragraphs of the show-cause notice only make it embarrassing. When SEBI is clear that there was “consistent unfair access to OPG,” why isn’t it established with evidence or masses of emails attached to the notice?
The documents show that things moved super fast for OPG Securities. It got quick appointments with NSE’s top brass and requests for an additional rack, as the MD asked for—‘ASAP (as soon as possible) action’. The same is true of Ways2Wealth and GKN Securities who were allowed to set up a dark fibre connectivity between the NSE and the BSE (Bombay Stock Exchange) by Sampark Infotainment which did not even have an ISP (Internet service-provider) licence.
In contrast, an angry email from KK Daga of Millennium Securities to Ravi Varanasi (chief of business development) titled “My Grievance” documents the run-around he got when he applied for a similar dark fibre link between the NSE and the BSE, confirming the allegations by the whistleblower.
Mr Daga insisted that the NSE must bring ‘all members on par’ and was told that they were. He pointedly asked: “When you say at par, does this mean no other member is on Sampark circuit as on date?” knowing full well that Ways2Wealth and GKN Securities were, indeed, preferred.
Email data also shows a flurry of activity to get Sampark’s network to be speedily acquired by Reliance Communications after the discovery that it did not have an ISP licence and too many members were demanding parity with the preferred two.
On questioning by SEBI, NSE’s officials have claimed on oath that, although Airtel, TCL, Tata Tele and MTNL were potential service-providers, none of them responded. SEBI’s officials have not converted all this information into specific charges by better compilation and investigation.
This is the second set of show-cause notices (although not as weak as the first set last year) which dutifully note a series of bland and evasive answers by Ravi Narain and Chitra Ramakrishna who were part of NSE’s top management for over 22 years since it was founded.
It is common knowledge that NSE’s operations were under the iron-control of this duo in every aspect; and, yet, they themselves claim to be hands off. They claim to have little knowledge about Sampark Infotainment and OPG Securities, are vague about Omnesys, a broker front-end software and algo company of NSE that dominated NSE’s algo trading clearances in the initial days.
Not only did the NSE have a stake in Omnesys, but Chitra Ramakrishna was on its board of directors claiming it was a key investment. After aggressively promoting Omnesys, the NSE abruptly exited its stake. Whistleblowers have made specific allegations about this; but SEBI’s investigation is limited to a series of bland questions.
Now consider Ravi Narain’s testimony. He does not recall any meeting with OPG, is ‘not aware’ of any incentives or recommendations to use Omnesys as an algo-trading software vendor. This should be a clear yes or no answer. Asked if he was “aware of the conflict of Suprabhat Lala being related to Sunita Thomas (running an algo software developer company—Infotech Financials),” his reply is that he “was not aware of any such relationship.”
When Chitra Ramakrishna was asked the same question, she says, “I do not recall any disclosure being flagged to me.” Wouldn’t this amount to shocking negligence on the part of the NSE, if Mr Lala was directly responsible for disclosure, since he headed vigilance and compliance at various times?
For the record, Sunita Thomas is the sister of Susan Thomas who is married to Ajay Shah. Suprabhat Lala has, at various times, headed NSE’s vigilance, compliance, trading and customer relations. Is it possible that Ravi Narain did not know about the relationship, especially when Sunita Thomas was the sister of Susan Thomas?
What makes this significant is that Ajay and Susan were the only academics with deep access into the NSE. They received trading data from the NSE, first, in their personal capacity and, later, as academics associated with IGIDR (Indira Gandhi Institute of Development Research). IGIDR also obtained substantial funding from the NSE. Ajay Shah’s testimony reveals that he and Susan Thomas had full discretion on the use of funds (although they did not receive direct payment). Ajay Shah further admits, in his sworn testimony, that IGIDR often sub-contracted work to Infotech Financials, recommended its services and also shared data with it.
In fact, they were all part of the charmed friends circle of NSE’s top brass. SEBI’s notice makes no attempt to join the dots and come to specific conclusions—or probe deeper.
Chitra Ramakrishna’s other answers are similarly implausible. She was singularly responsible for the appointment of Anand Subramanian as ‘strategic advisor to the managing director and board’ despite his having no background in technology, capital markets or regulation. He was also promoted to the position of group operating officer with similar perks and benefits as those of the MD. In fact, NSE’s HR (human relations) chief was reportedly asked to leave due to this irregular appointment. SEBI’s has asked detailed questions; we need to see if it will come to hard conclusions.
Ms Ramakrishna also claims no knowledge of technology details, or even the sharing of responsibilities among three technology heads, although these functions were at the very core of NSE’s operations and existence. Questions about the failure to implement load-balancers and / or preferential access are brushed off as ‘operational’ or ‘technical’ issues about which she had no specific knowledge.
At a time when the Companies Act and SEBI’s corporate governance rules require repeated and detailed disclosures by independent directors, can an exchange, which is a virtual monopoly, have such lax systems of compliance and, disclosure of ‘related party’ information or conflicts of interest?
Appointments to top positions seem to have been on the whim of the MD with the entire board failing to raise questions and even the vice-chairman, who describes himself as ‘founder’, claiming no knowledge. How can a systemically important institution and first-line regulator have functioned like a private fief?
Lack of Transparency
Ironically, the BSE was converted ‘professionally run’ institution because it operated like a brokers’ club; but, at least, there was competition and elections to the governing board. Remember, it is SEBI that has allowed the NSE to function in this opaque manner. It watched silently as the NSE dubiously fought a central information commission (CIC) order and a Delhi High Court judgement declaring it a public authority under the Right to Information Act. An appeal is dragging before the division bench in Delhi. SEBI needs to end this gaming of the judicial system and force transparency by declaring the NSE a public authority. Will chairman Ajay Tyagi dare to do it?
All these findings clearly beg some obvious questions: Did SEBI’s investigation really want go deep into the issue of individual responsibility? Or is it on the same side as the NSE—wanting to bury the scam with a quick consent order, make a payment and move on without fundamental changes in operations?