NSE Algo Scam: Is SEBI’s Shoddy Investigation Designed To Hide Its Own Incompetence?
A growing clamour and pressure from influential quarters for the capital market regulator to wind up the algo-trading scandal at the National Stock Exchange (NSE) may have been put on pause by a timely public interest litigation (PIL) filed in the Madras High Court. 
 
This PIL asks for very specific action against NSE’s entrenched top management, which had, over two decades of absolute control, converted the Exchange into a private club that ran roughshod over competition and retained its near-monopoly through the regulatory capture of SEBI (Securities and Exchange Board of India) and the finance ministry.
 
The PIL, and the investigation launched by the Central investigation agencies, are the only developments that seem to stand in the way of SEBI burying the issue with a consent order and continuing to allow the Exchange to function without forcing better transparency or accountability. 
 
Is it possible that SEBI is in a hurry to close the matter because digging deeper would expose its own inaction over the years that led to NSE’s extraordinary arrogance? 
 
Two weeks ago, I wrote that SEBI’s 1500-page show-cause notice (only the 2nd set) shows poor investigation skills, inability to join the dots and come to specific conclusions. This time, let’s look at just a part of one testimony—that of Chitra Ramkrishna, NSE’s former managing director (MD), and how it was handled. 
 
Others Are Responsible, Not Me  
SEBI asks Ms Ramkrishna who was responsible for the decision to implement tick-by-tick (TBT) architecture, using TCP/IP (transmission control protocol/internet protocol) protocol. This had allowed certain brokers to log in earlier, or to less busy secondary servers, and obtain a considerable advantage. NSE multicast the TBT system since 2014, after complaints mounted about its faulty system. 
 
Ms Ramkrishna’s answer—to the best of her recollection, she claims—fobs off responsibility for all issues to the technology teams. She claims that she was responsible only for the policy, that too jointly with NSE’s board members, advisers, consultants and the board of directors of NSE’s subsidiary companies. 
 
A simple Google search will reveal how she and Ravi Narain (former vice-chairman) claimed credit for being part of the founding team and have been part of the top management team for over 23 years! Those from SEBI dealing with NSE know that its management was entirely led by the founding team.
 
Ms Ramkrishna also claims she does not recall how responsibility was divided between the three technology heads. There are no details provided on the role of NSE Tech (the NSE subsidiary company and not NSE’s tech team) in this crucial decision, which took NSE’s trading to the next level and caused trading volumes to soar dramatically to over Rs1 lakh crore a day.  
 
Transcripts of Ms Ramkrishna’s testimony show that SEBI had no follow-up questions that would nail attempts to deflect responsibility or claim ignorance about specific decisions. 
 
But what about SEBI’s own records and inspection reports of that period? The regulator conducts annual inspections of stock exchanges. Isn’t it SEBI’s job to check its records for permissions sought by the NSE and granted? Did its inspection reports have any adverse comments at all? 
 
This is important because the NSE was at its most arrogant those days. Among other things, it brazenly blocked smart order routing (SORs) by firms that used its co-location facilities from using algorithms that would route trades to the Bombay Stock Exchange (BSE), if it offered a better price. This led to open outrage that was documented by the media.
 
Alice in Wonderland Regulation
The NSE had also outraged market participants and coders by demading source codes and competitive details of their algos, while it had invested in a private firm writing algos and offering order management systems to brokers as well as frontend software (called NOW).  
 
The BSE had not taken this lying down. Speaking at a technology seminar in November 2009, Jim Saphiro, BSE’s head of market development, had lashed out at the unfairness of the system (and the silence of the regulator) saying he felt as though he had landed in a regulatory Alice in Wonderland.
 
He also talked about how regulation in India did not see the encouragement of competition as a central part of its mandate. This probably embarrassed SEBI into initiating corrective action in 2010 after BSE’s stand was openly supported by leading market participants. 
 
It is, indeed, an Alice in Wonderland regulatory system when SEBI will not look into its own record of failures, while trying to nail a market participant for flouting rules or trampling over competition. 
 
Coming back to Ms Ramkrishna’s testimony, SEBI asks her about steps taken to ensure ‘equal and fair’ access to all. The response is breath-taking in its deflection. She evades responsibility saying, “I do not recollect any specific exceptions flagged off nor a report of positive confirmation on the same.” 
 
Again, SEBI does not confront her with the stack of emails complaining about unfair access to certain brokers that are a part of the show-cause notice. It is amazing how a founding member of the NSE, who has been among the top three officials, can deflect all responsibility and claim no recollection of crucial decisions. 
 
Among the various flaws of NSE’s system that Ms Ramkrishna did not remember were failure to use randomisers, select brokers gaining an advantage by logging on to faster secondary servers, despite being told not to do so, responsibility for circulars, empanelment of telecom service-providers and whether the NSE provided incentives for using Omnesys, where it had investments, as an algo-generating firm. 
 
Top Appointments Without Due Process
SEBI’s questions on Ms Ramkrishna’s appointment of Anand Subramanian as group operation officer (GOO) without following an appointment process—giving an advertisement and without any qualifications appropriate to his power and salary—are extraordinarily vague. She passes the blame on the human resources (HR) department, whose chief has been sacked for following her diktat. 
 
Remember this is the world’s third largest exchange and a highly sensitive organisation which probably ought to seek security clearances for top appointments. 
 
 
The absence of any procedure and a one-line circular issued by Ms Ramkrishna are available with me through anonymous whistleblowers and were also marked to SEBI.  How difficult is it for SEBI to check NSE's files and arrive at facts?
 
Instead, it allows the MD to claim that she had no role in deciding who is reported as key management personnel or how Anand Subramanian was left out, although the entire Exchange, including the tech departments, were made to report to him. 
 
In the entire investigation so far, there is no mention of the role of J Ravichandran who has headed NSE’s secretarial and legal department for decades and has long been one of NSE’s highest paid employees, along with the founding team. Did he have no responsibility for ensuring due process or even reporting key management personnel (KMP) to SEBI?
 
What about SEBI’s own role in allowing consultants to head so many key departments at the NSE putting their jobs at the mercy of senior management? Was there ever a discussion at the board level? Was the HR committee of the board aware of this strange practice? And did SEBI’s annual inspection reports on the NSE either notice, or raise, this issue? 
 
The Strange Case of Omnesys
On the issue of Omnesys being promoted unfairly by the NSE, there are detailed court documents from a litigation filed in the Bombay High Court and the Competition Commission of India (CCI). This became necessary since SEBI has abdicated all responsibility for ensuring fair competition or to check the NSE.
 
It is also important to mention that this arbitrariness was possible only because it has the full backing ofthe finance ministry and its joint secretary capital markets (KP Krishnan) who was a member of the SEBI board. Yet, SEBI’s lobs soft balls at Ms Ramkrishna and Mr Narain on this issue in their examination.
 
Two other issues need a detailed discussion. First is NSE’s acquisition of a 26% stake in Omnesys Technologies Pvt Ltd (through its wholly-owned subsidiary, Dotex International) in 2008, just two months before it launched currency derivatives. 
 
Ms Ramkrishna appointed herself as a director of Omnesys and led a massive effort to force brokers to switch to its front-end software. The highly profitable Omnesys was suddenly and abruptly sold in August 2013 to Thomson-Reuters. 
 
We learn that Omnesys stopped being profitable soon after and was eventually shut down. SEBI, as an investigator, could easily call for records and board minutes of Omnesys of the relevant period to arrive at a conclusion about how its role in NSE’s clearing trading algorithms of market participants and whether there were incentives for dealing with it. Market participants have plenty of stories about this; but is SEBI asking questions and trying to get corroborative evidence at all? 
 
Cosy Cabal of Academics and Relatives
The investigation into Ajay Shah’s role is similarly superficial. In response to a question in the Lok Sabha conveys that SEBI has started enforcement proceedings against Professor Shah and the NSE for granting ‘special treatment’ to him. 
 
The minister’s reply says Mr Shah “had employed a device/ scheme/ artifice, wherein the confidential and sensitive data provided by NSE was misused in fraudulent manner, which resulted in compromising the integrity of the securities market.”
 
In fact, the issue of privileged access, multiple relationships and the resultant conflict of interest seems like an entire can of worms. Testimony shows that the NSE also gave generous grants to the Indira Gandhi Institute of Development Research (IGIDR). Ajay Shah and his wife Susan Thomas were employees of IGIDR and had ‘full discretion’ on the use of these funds.
 
IGIDR sub-contracted work to Infotech Financials (one of the two firms offering trading algorithms founded by Sunita Thomas (Susan’s sister), who married to Suprabhat Lala, head of compliance and market operations at the NSE. Ajay Shah and Susan Thomas as leading market academics have been a part of almost all key policy-making committees set up by the finance ministry. Yet, Ms Ramkrishna tells SEBI that she was unaware of any conflict of interest because “she does not recall such a disclosure” being flagged off to her! 
 
A Cover Up—By the Top Management
In fact, investigation officials who have worked at SEBI for over a decade acknowledge that the NSE was openly favoured under chairman CB Bhave and other bourses discriminated against. So much so that competitors were forced to file complaints against the NSE with the Bombay High Court and the CCI, rather than the market regulator.
 
Writing in The Mint recently, Mark Mobius correctly points out that NSE’s top management not only denied any wrongdoing in the algo-scam “but even dragged Moneylife to court with a defamation suit.” He goes on to say that “the attempt by the Exchange to cover up was far worse than the crime itself. This is simply because a cover-up always involves top officials, while the latter could just be the doing of a few bad elements in an organisation.”
 
Do we need proof that the NSE cover-up was sanctioned and aggressively pursued at the very top? And, yet, Ms Ramkrishna has walked away from the NSE with a golden handshake of Rs23 crore (total remuneration) for her last eight controversial months in office and Rs44 crore over three years!
 
Would SEBI care to explain how this Exchange was functioning and what was its own role as a regulator, before it dares to consider a consent application?
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COMMENTS

jaideep shirali

3 months ago

Whether SEBI or NSE, it seems that top executives have all the power to feather their own nests, but no accountability. For a start, the entire Board of SEBI and NSE should be disqualified permanently from being Directors of any public entity. This may sound harsh, because some of them have excellent records otherwise, but they have been silent abettors to the crime on society and capital market participants in particular. I see SEBI for example, hairsplitting in the mutual fund industry, but comatose about the retail debt markets, the delisting of thousands of small listed companies and rampant penny stock manipulation. NSE is noted for its arrogance towards capital market players and investors, an attitude that permeated downwards from its top. Maybe it is time that we stripped the NSE of some of its trading segments and revived some other stock exchanges, then NSE may start behaving itself. And nobody is too big to be punished, in fact the severest punishment is what these people deserve. One can read "Den of Thieves", to understand how the culprits behind the US junk bond manipulations were punished, with fines and jail terms.

A. Pereira

3 months ago

Corruption is ingrained in the blood of all these rogues, from political leaders, babus and these top officials. They have no limit to their greed. They are encouraged by the sloppy judicial infrastructure in the country that wont decide cases for decades (remember Sucheta's fight against Harshad Mehta?), and even at that time, if the rogue is still alive, he will be helped by some influential political master for a share in the loot. People elect reps, who forget the vote the moment they enter legislatures, and then on, people continue to suffer through thier enormous number of laws, which show no teeth to bite this VIP rogues. The so called autonomous bodies and regulators are controlled by the govts all through the years, and they serve only those have money n influence. Occasionally, the Supreme Court comes to the rescue, but even there, there is delay even where there is urgency of governance issue affecting the public (see how long it is taking to get a hearing in the Delhi Govt vs LG power control over Services case, whereas it had time to decide on Priya's winking eye case!)
Fight by institutions of integrity like Moneylife continues in the meantime. All that we can do is to support them morally and financially to take up the fight on behalf of the common man. Please continue your good work, MoneyLife, Ms Dalal, Mr Basu & team. Kudos to you all.

Dayananda Kamath

3 months ago

Sebi also should be made as accused in this PIL. SEBI has failed in its duty.
I have a simple case aditya birla money is still showing varun shipping as my holdings instead of demerged varun resources and varun global where as in my other demat account the change is reflected. Broker, depository, CDSL, as well as Sebi are least bothered to look into it inspire of reporting to them so many times. If your account can not show the true picture how can you trust all these authorities and regulator and their standards.

Nitin

3 months ago

Sebi is more interested in making life of traders/investors difficult through ridiculous policies like increasing derivatives lot sizes , networth based investing exposure and caps on mutual fund fees. The big fish like NSE and the Vakrangees go scot free

Ranjith Mp

3 months ago

Lobbying has increased in country, I don't want to be a lobbyist

Ranjith Mp

3 months ago

Dear moneylife team, I ran a franchise of stock brokerage firm in past(2008-2017)company merged with a foreign bank, politics become severe in company, they wanted me to do dirty work for them so i wind up firm, I got no assistance from sebi, & nse assistance was given by my lawyer, these agencies are all paper tags, if we want to improve in ease of doing biz index we must chop of hands of corrupt people like in gulf countries (my personal opinion)

Algo Scam: NSE Gave 'Special Treatment' to Ajay Shah While Providing Confidential and Sensitive Data, Reveals Lok Sabha Reply Based on SEBI Inputs
Ajay Shah of the National Institute of Public Finance and Policy (NIPFP) was given 'special treatment' by the National Stock Exchange (NSE) in gaining access to confidential and sensitive data without a formal agreement and data use contract, reveals a reply in the Lok Sabha which is based on inputs from the market regulator.
 
Pon Radhakrishnan, the minister of state for finance said this in response to a question by Dr Kirit Somaiya. He said, "Securities & Exchange Board of India (SEBI) examination, inter alia, observed that the professor had employed a device/ scheme/ artifice, wherein the confidential and sensitive data provided by NSE was misused in fraudulent manner, which resulted in compromising the integrity of the securities market."
 
 
After completing its investigation, the market regulator had initiated enforcement proceedings against various entities and persons including Mr Shah, the reply says. Ironically, the finance ministry has been working closely with Prof Shah and the NIPFP. 
 
He has also been involved with several key committees to frame market regulation including Financial Legislative Reforms Commission (FSLRC). He was also member of the internal working group of ministry of finance on internal debt management, task force on implementation of Goods and Service Tax of the 13th Finance Commission. Between 2001 and 2005, he was consultant in the department of economic affairs in the finance ministry. 
 
Mr Shah was also member or SEBI' risk management group, secondary markets advisory committee and LC Gupta committee on policy for derivatives. During the past decade, he was extensively involved in the policy process in the reforms of the equity market and the New Pension System (NPS).
 
The minister, however, refused to divulge information on action taken by income tax department against all persons involved in the scam.  
 
Mr Shah and his wife Susan Thomas 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 Indira Gandhi Institute of Development Research (IGIDR). 
 
IGIDR also obtained substantial funding from the NSE. Mr Shah’s testimony reveals that he and Ms Thomas had full discretion on the use of funds (although they did not receive direct payment). 
 
Mr 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. 
 
The technical advisory committee (TAC) appointed by SEBI had also nailed wrongdoing in the NSE, which were mentioned by Ernst & Young (E&Y) in its revised report. The Committee also rapped E&Y for the forensic firm’s failure to draw conclusions from its obvious findings. 
 
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Was the Minister given Incomplete Information Relating to PwC?
Recently the Punjab and Haryana High Court has issued a notice to a retired state information commissioner who allegedly sat over a judgement for more than three years. The matter pertained to an appeal seeking information under the Right to Information Act (RTI Act) from Chaudhary Devi Lal University at Sirsa.
 
This is not a one-off case. Information sought under the RTI Act is invariably delayed on one pretext or the other, often, in blatant violation of the RTI Act. 
 
Sometimes, a denial could expose something far more critical: that the information provided even to the highest functionaries in the government is not thoroughly scrutinised.
 
Proceedings in the Lok Sabha
 
Poonam Mahajan and Tej Pratap Singh Yadav, members of Parliament (MP) had in 2017, raised certain questions in the Lok Sabha. One specific query of the MPs was “whether the Government has taken cognizance of several instances of violations by auditors PricewaterhouseCoopers (PwC) and its partner firms over the last ten years that pose serious threats to public interest and national security.”
 
Arjun Meghwal, minister of state, ministry of corporate affairs (MCA), answered the question in the Lok Sabha on 11 August 2017 and stated “Prosecutions under the provisions of the Companies Act, 1956, have been filed against the partners of PricewaterhouseCoopers (PwC) in nine companies.”
 
The minister did not name the nine companies. An RTI query, dated 17 April  2018 by this author sought, from the central public information officer (CPIO), MCA, details of the companies involved, names of the partners involved, amount of violations, Sections of Companies Act, 1956, and any other laws that were violated.
 
Expectedly, no reply was received even after the expiry of 30 days, the maximum time allowed for disposal of request under Section 7 of the RTI Act. Two e-mails, dated 30th May and 5 June 2018, sent to the under secretary, MCA, to expedite the information, failed to elicit any response.
 
The applicant (author) then filed the first appeal, on 14 June 2018, under the RTI Act. The reply dated 12 July 2018 was even more callous:
 
It directed the applicant (author) to make applications to different registrars of companies who had filed the prosecutions against PwC.
 
Section 6(3) of the RTI Act, 2005, has in such cases put the onus on the public authority to transfer, under intimation to the applicant, the application or appropriate part of it to the concerned public authority within a period of five days from the date of receipt of the application.  
 
Besides being in blatant violation of this provision, the response of the CPIO raised a more fundamental question.
 
Was the Minister Fed Insufficient Information?
 
The above-mentioned responses suggest, rather alarmingly, that the MCA and, therefore, the CPIO did not have complete, correct and relevant details when the minister gave the reply in the Lok Sabha. That too in respect of the information originating from their own ministry! This could have far-reaching consequences. It is also highly unlikely that the minister would have taken the information at face value. Searching questions must have been asked by him. 
 
This, therefore, exposes one of the worst kept secrets: Information is available, but is not provided, in blatant violation of the RTI Act. 
 
Famous Nine, Should Have Been Ten At Least
 
While complete information is still to be received, further prodding has revealed the names of the nine companies with respect to which prosecution has been launched against the partners of PricewaterhouseCoopers (PwC). These are:
 
Graphite India, Karam Chand Thapar & Bros, Kesoram Industries Ltd,  Usha Martin Ltd, Tractors and Farm Equipment Ltd, Satyam Computer Services Ltd, Global Trust Bank, Xerox India Ltd and Religare Finvest Ltd.
 
Surprisingly DSQ Software, one the first companies to be investigated by the serious frauds investigation office (SFIO) does not figure in this list!  Lovelock & Lewes, network firm of PwC, was the auditor of DSQ Software.  
 
SFIO had found DSQ guilty of manipulating share prices and falsification of accounts. The Securities Exchange Board of India (SEBI) had barred DSQ and its promoters for seven years.  Did the MCA not find enough grounds to launch prosecution against PwC in this case, despite SEBI’s and SFIO’s findings? Is this yet another case where MCA does not take SFIO seriously?
 
RTI Act in Danger
 
Multiple attempts are being made to weaken the RTI Act. The least that can be done is to ruthlessly enforce the existing provisions. The order of the Punjab & Haryana High Court referred to above has come as a shot in the arm. Delinquent officers must be taken to task and heavy monetary penalties should be imposed on them.
 
Getting information under the RTI Act is just the beginning of a meaningful exercise. Unnecessary delays can derail the whole objective.
 
(Sarvesh Mathur is a senior financial professional, who has earlier worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.
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COMMENTS

A. Pereira

3 months ago

RTI was the result of extreme hard work by activists in the first decade of this Millennium. It was perhaps reluctantly agreed to be passed as law by the then Manmohan Singh govt. As we are seeing in the later law of Lokpal, which MMS govt reluctantly passed, and the current Modi govt is showing no will to implement it (appointment of the Lokpal is pending for all these years, despite all the drama enacted by all political parties, including the congress and the BJP, in parliament, with some ministers even shedding crocodile tears for Anna Hazare). All these political parties (barring one in power in the smallest state but most important UT) have no desire to expose their sins to the public, so until the public do not wake up, the loot will continue. Till then, for the common man, once in the hot oil, once into the fire. Switching between the same parties does not solve any problems as both elements prove being two faces of the same coin.

REPLY

Manoj Kapur

In Reply to A. Pereira 3 months ago

I agree with you completely. Both parties have weekened the efforts towards transparency in every possible way. The rot is deep and requires disruption in form and substance

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