NSE Algo Scam: SEBI Says Ajay Shah, Suprabhat Lala & Their Wives ‘Commercially Exploited’ Confidential Data
Moneylife Digital Team 03 May 2019
In two separate orders in the Algo-scandal investigation, the Securities and Exchange Board of India (SEBI) has indicted well-known market economist Ajay Shah and Suprabhat Lala, a senior official of the National Stock Exchange (NSE).
The order says a private firm of Sunita Thomas (Mr Lala’s wife and sister-in-law of Ajay Shah), 'commercially exploited' confidential data obtained from the NSE for writing algo trading software. 
SEBI has directed NSE to take legal action against Mr Shah, Ms Sunita Thomas, her firm Infotech Financial Services Pvt Ltd, and Krishna Dagli,  director of the company.
One of the orders indicts, Ravi Narain and Chitra Ramakrishna, both former managing directors (MD) of NSE overlooking conflict of interest in awarding contract to Infotech Financial. The orders bring out in great detail the close relationship that Dr Shah enjoyed with the NSE group. Dr Shah has worked with the finance ministry and been associated with high level policy committees. 
The order by SK Mohanty, whole time member of SEBI, said, “Ajay Shah and other noticees have collusively worked to fulfil their commercial goals by fraudulently using the data that was obtained by them from NSE to develop algo trading software. Keeping in line with the regular business of Infotech Financials Pvt Ltd, i.e. providing algo trading software to traders in securities, the algorithmic trading software so developed from liquidity index (LIX) data was meant to be sold to the traders or brokers in the market to induce them to trade in securities with better trading results, on the strength of capability of such algo trading software prepared out of such exclusive data not ordinarily available to other market participants.” 
“Further, Suprabhat Lala being a senior official of NSE ought to have displayed professional integrity by disclosing to the senior management his connection with Infotech Financials through his wife i.e. Sunita Thomas, which had a strong cause to give rise to a conflict of interest to him as well as to Ajay Shah. Moreover, by sharing internal information and data about NSE and the minutes of technical advisory committee (TAC) with his wife (Sunita Thomas) who was a beneficiary party of the LIX project, Suprabhat Lala has committed breach of his duties to collude with other noticees for the aforesaid fraudulent acts,” the order says.
A separate order, also passed by Mr Mohanty, says Mr Shah, Infotech Financial and the company’s two directors worked on a pre-planned scheme to obtain data from NSE for using to develop a software for algo trading. 
“...the LIX project was itself conceived by Mr Shah to which NSE and its senior officials agreed because of the implicit advantages of having a LIX on the exchange platform. Similarly, it was Mr Shah, who was instrumental in getting the LIX project awarded to Infotech. As far as Mr Shah, Mr Narain and Ms Ramakrishna are concerned, there is no evidence found from the records to suggest that they were aware about the hidden agenda of Mr Shah and his intentions behind the LIX project although all the three noticees are certainly liable for not taking any precaution or checking the antecedents of Infotech, as algo software vendor in the securities market and thereby have not ensured any fairness and transparency nor have they looked at the possible conflict of interest at the time of awarding the contract," the order says.
In fact, the order mentions about an email sent by Mr Shah to Sunita Thomas that revealed how the trading data obtained from NSE was being used for developing algorithm trading product for the securities market. 
The SEBI order mentions, “Mr Shah held a position of high esteem and influence in the minds of the senior management of NSE, as evident from the statement of Ravi Narain, former MD and CEO of NSE. Mr Shah was capable of influencing the decision making of NSE management, which is exemplified by the fact that he and his wife suggested to NSE and NSE undertook the LIX project for which the Infotech Financials was awarded the contract.” 
Mr Shah is married to Susan Thomas, the sister of Sunita Thomas, who is director of Infotech Financial. However, in what could have been a criminal conspiracy worthy of celluloid screen, Mr Shah along with some of his immediate family members created a virtual family enterprise and used their connections with NSE officials to gain a computing contract for LIX. Mr Lala, who is married to Sunita Thomas, had at various times headed NSE’s vigilance, compliance, trading and customer relations.
“In my view,” Mr Mohanty from SEBI says, “there is no difficulty in sharing of data by Mr Shah with an outside entity for commercial purpose as long as the agreement spells out clearly its objectives and provides for the commercial terms and conditions in the agreement in compliance with the stated data sharing policy of the exchange. However, when a data sharing agreement purely meant for research purposes assumes the colour of a commercial agreement thereby providing privileged access to confidential and exclusive trade data of the exchange to a select few persons who, clandestinely exploit the said data for their commercial gains, it leads to serious issues leading to compromise on market integrity.”
Mr Shah has been long associated and actively engaged with NSE and several subsidiaries of the Exchange. In fact, Mr Shah and his wife Susan were the only two academicians 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). 
In his sworn testimony, Mr Shah had admitted that IGIDR often sub-contracted work to Infotech Financials, recommended its services and also shared data with it. 
Further, SEBI says, “evidently Mr Lala from the NSE has committed professional compromise by sharing internal data or information with Ms Thomas through the emails referred to at Para-16 of the SCNs and also by accepting invitation from Mr Shah to discuss high-frequency trading (HFT) at NSE at an outside venue in the presence of other Noticees. This leads one to believe that Mr Lala was actively associated with Mr Shah and Ms Thomas and her company, Infotech Financials in their professional activities.”
After examining relevant provisions of the Professional Service Agreement, at para no. 47, signed by Infotech Financials with NSE, the market regulator found that the data received by the company from NSE was confidential and exclusive in nature, which was made available only to the Mr Shah and two directors, Ms Thomas and Krishna Dagli.
Infotech Financials and its two directors have been in the active business of providing trading solutions to the market participants on algorithmic trade through various products. 
SEBI says, “The convergence of interests of all the noticees in receiving the data, which was confidential and exclusive in nature, is borne out from the fact that Mr Shah in his own emails has acknowledged its confidential nature and also the fact that he along with other noticees was involved in using the said confidential data for developing algo trading software for sale to traders in the securities market”. 
“This is certainly not a desirable situation as it leads to violation of principles of transparency, equity and fairness in dealing with market participants by the Exchange, which is not permissible under the regulations. Under the circumstances, the acts attributable to the noticees for the reasons recorded and observations made in the foregoing paragraphs of this order, are clearly violative of the various legal provisions, as alleged in the SCNs and the noticees are liable to be held accountable for the acts and the breach of law committed by them,” the order passed by Mr Mohanty says.
SEBI has barred Mr Shah for two years from holding any position with any market participant entity. It also restrained Infotech Financials and its two directors, Ms Thomas and Mr Dagli from providing any service or be associated with any market players over the next two years. 
Mr Lala from NSE is also barred from holding any position with any market infrastructure intermediaries for two years.
Mr Mohanty, in his separate order, also directed NSE to review all its third party agreements having a data sharing component, to prepare a detailed documented policy and data usage and sharing and get it approved from the board of the Exchange.
Mr Narain and Ms Ramakrishna, are barred from holding a position for two years with any market intermediaries.  
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