NSE Algo Scam: With Draconian Powers at Its Command, SEBI Finally Did a Desktop Investigation
Has the Securities and Exchange Board of India (SEBI) let off the National Stock Exchange (NSE) rather lightly for its series of reckless behaviour in what is called the algorithm (algo) scam? Or is the Rs1,100-crore penalty (including interest for five years) imposed on India’s leading Exchange harsh? Opinion on the issue is divided; but most people believe that the Exchange has got away lightly. After all, SEBI’s order on the algo scam starts its conclusions saying:  “To sum up, even though sufficient evidence is not available before me to conclude that the Noticee No.1, NSE has committed a fraudulent and unfair trade practice as contemplated under the SEBI Regulations…”
 
Yes, after as many as seven investigations, including forensic audits and five separate orders into the algo scandal, SEBI has not been able to prove fraud, collusion or quantify illegal gains. In fact, after reading the orders, which detail the charges and the defence of each of the noticees, before recording its conclusions, one gets the feeling that SEBI has simply not done enough to use its draconian powers to investigate and establish wrongdoing or illegal gains by those who manipulated the system. 
 
Desktop Investigation
In July 2013, the Securities &Exchange Board of India (SEBI) Act and two others Acts that define its operations, were amended to give it extensive powers of search & seizure, attachment of properties, arrest and detention of defaulters and pass disgorgement directions to recover the wrongful gains made in contravention of laws. It also got powers to seek information from other regulators in India and abroad and, finally, to settle complaints. 
 
And, yet, in the biggest investigations that it has conducted, against the largest market infrastructure institution (MII) and first-line regulator under its watch, it did not use any of these extensive powers of search, seizure, attachment, detention, etc. 
 
Instead, SEBI opted for what is called a ‘desktop’ investigation, which was limited to examining email records and ordering the NSE itself to commission investigations without even tackling the various conflicts of interest that were evident to everybody right then. It is almost as though SEBI has got so used to regulatory capture by the NSE, that its officials feel too diffident to adopt a tough line.  
 
Of course, SEBI insiders would counter this strongly by pointing to the fact that there is a brand new board and a new managing director (MD) and chief executive officer (CEO) at the NSE, and, despite the failure to establish fraud, culpability or ill-gotten gains, it has nailed the Exchange on lack of due diligence, unfair access, permitting asymmetry in information, allowing unfair trading access and preferential treatment to some, lack of operating procedures, etc.
 
In a separate order on the dark fibre episode, it talks of mismanagement of the co-location facility (that allowed faster access to large traders by locating their servers in the Exchange), working in connivance with unauthorised service-providers and unfair dealing. If you look closely at the orders, all the allegations made by the whistleblower, which Moneylife first published in 2015 (and the three subsequent ones), have been established; but SEBI’s investigation hasn’t managed to go beyond that, to unearth wrongful gains. One saving grace is that SEBI has honourably let off several present and past executives who had been needlessly dragged into the proceedings. 
 
In all the five orders, SEBI hasn’t even attempted to establish NSE’s non-cooperation and refusal to provide information, which we have been told time and again by various insiders and was part of every investigation report. 
 
SEBI’s orders made headlines, mainly because of the Rs1,100-crore penalty (Rs624.89 crore at 12% interest) imposed on the Exchange seems large by Indian standards and its indictment of two former MDs, viz., Ravi Narain and Chitra Ramakrishna, who were part of the Exchange’s founding team and ruled the capital market for over 25 years. SEBI has barred them from the capital market for five years and asked them to disgorge a part of their salaries for the relevant period. 
 
While the penalty is considered huge and unreasonable by some commentators, the NSE and the brokers have got off lightly. In fact, I would argue that this may be even better than a settlement by consent, which had apparently been proposed by the NSE but was rejected just a few hours before SEBI issued its orders. NSE’s foreign investors, keen to get the stock listed, are correct in suggesting that the Exchange should pay up and put the problem behind it. 
 
Consider the options before it.
  • Already, over 40% of NSE’s earnings from the colo facility are being impounded under SEBI’s orders and placed in an escrow account since December 2016. If it challenges the order, this situation will continue for at least four to six years, before a final judgement from the securities appellate tribunal (SAT) and the Supreme Court. Then, too, it may only be a partial victory, since it is hard to believe any regulator will give it a clean chit, given that multiple reports have established widespread negligence on the part of the Exchange.
     
  • The NSE can pay up and move on. If not, the only winners will be the multiple, expensive law firms that it will employ to fight its case. In fact, the more the adjournments and delays, the more the firms will earn.
     
  • If the NSE decides to fight the order, it will raise some intriguing questions about SEBI’s boast that it has already effected a complete clean-up of the top management by changing the entire board as well as the MD and CEO.
      
  • Interestingly, ever since Vikram Limaye, the present MD and CEO, took over, he has been at pains to make a break from the past and has been at pains to mend equations with all stakeholders (which he admits were shattered). If the NSE chooses to contest SEBI’s order, this would signal that the Exchange wants to continue with the hubris that led to its downfall.
     
  • On the other hand, if it accepts the order, the amount that will be paid is less than the sum that is already impounded. Moreover, given that the business of the Exchange itself is unaffected, it can use the six-month period when it is barred from the market to work on its initial public offering (IPO) which will still attract a lot of support. The NSE is not the first major exchange in the world that has suffered such a setback and grown past it. Both, NASDAQ and New York Stock Exchange (NYSE) have had their share of scandals, but have dealt with them and moved on.
     
  • The same goes for the three brokerage firms that have already rushed to the SAT seeking a stay on SEBI’s orders. These are large firms who access expensive co-location facilities because of the sheer size of their trades. The penalties imposed on them are not very significant. They could not possibly have expected to get away easier in a consent proceeding where they would pay up without admitting or denying guilt. 
 
To my mind, this timid investigation by the regulator is a big worry. For a decade or more, since CB Bhave became the SEBI chairman, the NSE has had the regulator in its grip and was allowed to ride roughshod over competition, intermediaries, investors and even the media. It has, often, defied even the regulator, refused to provide information and dictated terms. Even when there was an investigation, SEBI’s orders against the big bourse have not gone beyond issuing a warning. 
 
SEBI has two orders on the Ajay Shah episode, where he and his sister-in-law, Sunita Thomas (whose husband Suprabhat Lala headed NSE’s market operations at one time), have been indicted along with a few others. The entire episode underlines how Ravi Narain and Chitra Ramakrishna, who were close friends of this group of academics and intermediaries, ran the Exchange like a private club. Their relationship was common knowledge, within the Exchange and at the regulator; and, yet, no question on conflict was raised until the algo scandal broke out and all these relationships came in for scrutiny due to a specific complaint. 
 
When SEBI ordered a clean-up of the Exchange leading to the exit of Ravi Narain, Chitra Ramakrishna and her confidant Anand Subramaniam (who had parachuted into the number two position at the bourse without appropriate qualifications or appointment processes being followed), it seemed as if the regulator was, finally, calling the shots. 
 
The biggest irony is that the NSE was set up to cut the Bombay Stock Exchange (BSE) to size, because it was operating like an unruly brokers’ club. The ‘professionally’-run NSE, which was initially a shining contrast, was allowed to turn into a bigger monster, with powerful political and bureaucratic support and just two people calling the shots and controlling its own board as well as the market regulator. Will this order against the NSE, finally, change the equation between the regulator and intermediary? The real test of the efficacy of this order will be if SEBI emerges free from regulatory capture. 
 
-----------------------------------------------------------------------------------------------------------------------------
 
Main points of SEBI’s order against the NSE
1. SEBI issues five separate orders in the algo trading or Colo scam on 30th April. 
 
2. NSE to deposit Rs624.89 crore at 12% interest, plus Rs62.5 crore in dark fibre case (totalling around Rs1,100 crore) in SEBI’s investor education and protection fund and barred from accessing capital markets for six months in two separate indictments. 
 
3. Two former MDs Ravi Narain and Chitra Ramakrishna indicted, barred from being associated with any market intermediary or market infrastructure institution for five years; ordered to disgorge portion of their salary for relevant period and credit it to the investor fund.
 
4. OPG Securities Pvt Ltd barred from accessing capital markets for five years and fined Rs15.57 crore for securing unfair access to NSE’s systems.
 
5. Economist Ajay Shah, his sister-in-law Sunita Thomas and her firm Infotech Financial Services Pvt. Ltd and director Krishna Dagli accused of conflict of interest and misuse of confidential trading data for writing algorithm-based software. The NSE asked to initiate action against them. Mr Shah also barred from holding a management position or associating with any exchange, clearing corporation and brokerage firms for two years. Sunita Thomas and Infotech cannot provide services to any SEBI-registered firm for a period of two years.
 
6. Suprabhat Lala, associate vice-president of NSE and husband of Sunita Thomas, barred from positions at MIIs (market infrastructure intermediarieis) for two years.
 
7. Ravi Varanasi, NSE’s chief of business development, barred from holding positions in MIIs and associating with listed companies for a period of three years in dark fibre case. 
 
8. OPG Securities fined and its directors Sanjay Gupta and Sangeeta Gupta barred from accessing the securities market for five years. 
 
9. W2W’s CEO MR Shashibhushan, and directors CK Nithyanand and BG Srinath, GKN Securities’ partners Sonali Gupta, Om Prakash Gupta and Rahul Gupta and Prashanth D’souza, CEO of Sampark are also barred from holding any position with a market participant or entity for the next two years.
 
10. W2W and GKN were directed to pay Rs15.34 crore and Rs4.9 crore with an interest of 12%, respectively. Both the brokerages are also barred from taking any new client for the next one year and are not to undertake any trade for two years. 

 

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COMMENTS

kiran

3 months ago

It is a foregone conclusion that NSE, its officials,its high profile economist consultants & the brokers, all of them have got away lightly for the unfair trading practices and fraud. This was gleefully admitted in no uncertain words by the current incumbent CEO/MD in a public interview as well.

NSE Dark Fibre Scam: SEBI Alleges Manipulation, Irregular Acts, Poor Due Diligence, Fraud, Misrepresentation and False Statements
Following its investigation of a whistleblower’s complaint, market regulator Securities and Exchange Board of India (SEBI) has established the nexus between senior officials of the National Stock Exchange of India Ltd (NSE) and Sampark Infotainment Pvt Ltd, which was allowed to provide brokers connectivity to co-location (Colo) without any valid license. NSE has been directed to deposit Rs62.58 crore to SEBI’s Investor Protection and Education Fund (IEPF), as a punitive action against this negligence. 
 
The SEBI order alleges mismanagement, manipulation “irregular acts, absence of due diligence, misrepresentation and false statements” in the whole “dark fibre” episode.
 
"...the way the Colo facility has been mis-managed and manipulated by certain trading members with the active connivance of an unauthorised service provider and the officials of NSE, as evident from the discussions and observations made by me in the earlier paragraphs of this order, shows NSE's apathy towards the principle of transparency, fairness and equity mandated by SEBI on them. Under the circumstances, the irregular acts, absence of due diligence, misrepresentation and false statements that have come to notice in this entire narrative of point-to-point (P2P) connectivity involving Sampark, have put a question mark on the corporate ethos and credibility of the exchange trading system...The roles played by all the noticees as highlighted above have cumulatively resulted into not only a fraud on the trading platform of a recognised leading stock exchange but also have upset the very foundation of a securities market institution that is built upon faith and confidence of the investing public at large," says SK Mohanty, whole time member of SEBI in his 202-page order.
 
A dark fibre or unlit fibre, with respect to network connectivity, refers to an already laid but unused or passive optical fibre, which is not connected to such active electronics or equipments which do not have other data flowing through them and are available for use in fibre-optic communication. 
 
NSE, on 31 August 2009, had issued a circular for Colo, which allowed brokers to avail P2P connectivity since 2009. NSE Colo allows stockbrokers to take on rent specific racks designated for this purpose and co-locate their servers and systems within the exchange premises, in order to have a low latency connection to the exchange. The primary objective of co-location services is to reduce latency for connectivity to the exchange’s trading systems for direct market access (DMA), Algo trading and smart order routing (SOR).
 
However, in April-May 2015, NSE allowed Sampark Infotainment, an unauthorised service provider to give P2P connectivity to two brokers, Way2Wealth Brokers Pvt Ltd (W2W) and GKN Securities (GKN), from its Colo facility to BSE's Colo centre. 
 
SEBI says, "Sampark allegedly laid dark fibre connectivity for these brokers with the promise of more bandwidth and lower latency for their data transmission and continued the service even after it was found that Sampark did not possess the necessary license from the department of telecommunications (DoT) to provide the required P2P connectivity to the brokers of NSE."
 
The colocation or algo scam came to light in mid-2015, when Moneylife wrote about it for the first time, following multiple letters from a whistleblower. For this, NSE had filed a defamation case against us. A single-judge had penalised NSE for Rs50 lakh for having filed a case against us. After filing an appeal against the order, NSE paid up the penalty. Meanwhile, in the wake of the scam, the top brass of NSE had to resign and a new management team took charge.
 
In May 2017, SEBI issued its first set of show cause notices (SCNs) to 11 entities, even as NSE had filed for consent mechanism. In July 2018, a second set of notices was issued, after SEBI recorded statements of various NSE officials, brokers and others involved.
 
The first SCN clearly mentions roles played by NSE officials to regularise the dark fibre connectivity provided by Sampark to give it post facto legitimacy. It states, "Arrangements between Sampark and Reliance Communications Ltd (RCom) were facilitated by NSE to regularise the irregular Sampark connectivity." 
 
SEBI’s SCNs were backed by three detailed reports: SEBI’s technical advisory committee (TAC), NSE-appointed forensic auditor, Deloitte Touche Tohmatsu India LLP (Deloitte) and, finally, an independent audit by Ernst & Young. Significantly all three investigations established wrongdoing. 
 
The reports said Delhi-based OPG Securities was consistently able to connect to NSE’s trading system ahead of other trading members, as alleged by the whistleblower’s letter. The TAC also found that the architecture of NSE with respect to dissemination of TBT through TCP/IP was prone to manipulation or abuse. (Read: TAC Report Proves Systemic Lapses at the NSE)
 
The second set of SCNs alleges that NSE has undergone practices of denial of services to certain stockbrokers resulting in discrimination and non-adherence to principle of fairness and equal opportunity. 
 
In June 2015, two brokers Mansukh Securities and Finance Ltd and Millennium Stock Broking Pvt Ltd, had applied for connectivity between NSE and BSE through Sampark. However, stating that Sampark did not have the license to place a multiplexer (MUX) in meet-by-room (MMR) of NSE, Millennium’s request was rejected. 
 
Mr Mohanty from SEBI, in his order, says, "I find that rather than addressing the issue of preferential treatment given to some stock brokers, NSE has made contradictory submissions. If NSE really did not have any say over the P2P connectivity so long as the connectivity terminated directly at the Colo rack, then it did not have any right to deny some stockbrokers to avail the P2P connectivity to their racks while allowing the same to a few others. Therefore, NSE cannot escape from the responsibility of providing fair and equitable access to the exchange infrastructure by taking the plea that the P2P connections taken directly to the racks of brokers are not within their jurisdiction. It becomes also pertinent to note that the other two stock brokers of NSE were denied the P2P connectivity through Sampark, inter-alia, on the ground that Sampark did not have the requisite license and the said facts came to the notice on 22 and 23  June 2015. However, the facility to W2W and GKN were continued and Sampark was allowed to continue to provide services to W2W and GKN."
 
"...while W2W and GKN got their connectivity from Sampark without any hassle and delay, Millennium had to continuously chase r NSE for Sampark connectivity till it was given connectivity by RCom on 5 September 2015, after  Sampark sold its infrastructure to RCom," the SEBI whole time member added. 
 
Millennium Stock Broking and Mansukh Securities, subsequently, availed connectivity from RCom on 22 August 2015 and 9 October 2015, respectively. 
 
In its submission, NSE demanded action against BSE, while pointing out that by refusing to empanel Sampark, the BSE had allowed W2W and GKN to establish connectivity into the MMR of BSE Colo centre managed by Netmagic. 
 
Mr Mohanty says, "I find that during the relevant period of time BSE had outsourced its Colo centre to Netmagic, a third party vendor, which was managing and renting out rack spaces to stock brokers in Colo centre. Unlike the Noticee (NSE), which had consciously adopted a policy of not permitting its registered stock brokers to establish direct connectivity from its Colo facility to their racks in BSE Colo centre as a matter of their own regulatory reasons, BSE did not have any such policy."
 
"...there were numerous instances of concerns regarding preferential treatment with regard to access to NSE Colo, discriminatory treatment with regard to site visit for some brokers and not for others, rejecting the application of Microscan Computers Pvt Ltd to provide service to Shaastra Securities Pvt Ltd, while at the same time allowing Sampark to provide connectivity to W2W and GKN, arranging the cabling within its Colo facility to provide unfair advantage to W2W, indicating fraudulent conduct on the part of NSE and its officials. I do not find any such concerns found in the investigation with respect to BSE Colo centre. Therefore, it will be erroneous to suggest that the facts in the case of NSE's Colo facility and the facts pertaining to BSE Colo centre are comparable," he added. 
 
"...considering the gravity of the allegations that have been established against the NSE, additional exemplary directives need to be issued to the NSE, which could pose an effective deterrence and dis-incentive to the NSE to perpetrate such kind of violations in future so far as administration and governance of its Colo facility is concerned. In this regard, to meet the ends of justice and in the fitness of things, I deem it proper to direct NSE to deposit a reasonable portion of revenue earned by the NSE through its Colo facility during the period from 8 May 2015 to 10 September 2015 (i.e. the period during which Sampark was permitted to provide P2P connectivity to the two brokers) to the Investor Protection and Education Fund (IPEF) of SEBI, which would be utilised for the objectives of the IPEF." 
 
For the illegality and denial of fair treatment to all stockbrokers in the dark fibre connectivity issue, NSE was asked to pay Rs62.58 crore along with an interest at 12% from 11 September 2015 till the payment is made. 
 
NSE was asked to conduct an audit every six months for next three years of its network architecture and infrastructure of its Colo facility and its linkages to the trading infrastructure by an independent CISA/CISM qualified and CERT-In empanelled auditor. 
 
Within next three months, SEBI has asked NSE to prepare a comprehensive documents policy, including guidelines, standard operating procedures and protocols for Colo facility. 
 
Chitra Ramakrishna, the then managing director and chief executive (CEO) of NSE is barred from holding any position in any market player for the next three years. Similarly, Subramanian Anand, former group operating officer and ex-advisor to the MD at NSE is also barred for three years from holding any position in the stock market participant. 
 
Ravi Varanasi, head of business development at NSE is also barred from holding a position or associate with any stock exchange, clearing corporation or depository for next two years. Nagendra Kumar SRVS, head of NSE’s membership department and Deviprasad Singh, head for Colo support at the Exchange, are also barred from holding any position for the next two years. 
 
W2W’s CEO MR Shashibhushan, and directors CK Nithyanand and BG Srinath, GKN Securities’ partners Sonali Gupta, Om Prakash Gupta and Rahul Gupta and Prashanth D’souza, CEO of Sampark are also barred from holding any position with a market participant or entity for the next two years.
 
W2W and GKN was directed to pay Rs15.34 crore and Rs4.9 crore with an interest of 12%, respectively. Both the brokerages are also barred from taking any new client for the next one year and are not to undertake any trade for two years. 
 
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COMMENTS

Ravindra Shetye

3 months ago

Way2Wealth Brokers Private Ltd. is a Coffeeday Company and also operates PMS, Portfolio Management Services, PMS for investors. In view of the fine of 22 crores imposed on Way2Wealth what can be the impact on the PMS holders and their other investors?

Ramesh Poapt

3 months ago

Gafla unlimited! ML GREAT!

VASANT KULKARNI

3 months ago

SYSTEM FAILURE?

B. KRISHNAN

3 months ago

And, but for the perseverance of ML, this also would have been brushed under the carpet by our ever-pliant regulators, and Fin-Min officials can't "loose sleep" over such trivialities, as one famous FM said about Harshad Mehta scam!

B. KRISHNAN

3 months ago

Too little, too late! Rs.62.58 crore is not "punitive" but puny when you look at the scale of the scam. The beneficiaries have been allowed to keep their ill-gotten gains. No criminal breach of trust, no jail for culprits! Sad.

NSE Algo Scam: Ravi Narain Resigns From Boards of Escorts, PI Industries Following SEBI Order
Following the order from market regulator SEBI in the NSE algo scam, Ravi Narain, former managing director and chief executive (CEO) and later vice chairman of the Exchange, has resigned from the board of directors of two listed companies: automaker Escorts Ltd and agro-chemical company PI Industries Ltd.
 
In their regulatory filings, both Escorts and PI Industries said that Mr Narain, independent director has resigned from their board.
 
Mr Narain was appointed as director on the Escorts board on 12 September 2018. He became a director of PI Industries on 9 September 2016, even while he was a director of NSE.
 
Mr Narain is also director of NSDL E-governance Infrastructure Ltd since 8 September 2016, as per data from the ministry of corporate affairs (MCA). 
 
Interestingly at NSDL E-governance, Mr Narain is part of every committee of the board, including audit committee, nominations and remuneration committee, corporate social responsibility committee and risk management committee. 
 
 
Chitra Ramakrishna, former MD and CEO of NSE, who is also barred from holding any position at a market intermediary, or market infrastructure institution, is a director of Maveric Systems Ltd.
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Prakash Bhate

2 months ago

Ravi Narain and Chitra Ramakrishna are financial terrorists who have done more damage to the country than Masood Azhar. The tragedy is that they still are living the high life instead of being hunted and destroyed.

murugu selvan

3 months ago

criminals going scot free. Both Narain and Chitra are evil. look at their criminal faces. especially that smug bitch.

Krishnan Hariharan

3 months ago

Why not jail term to these unscrupulous elements in addition?

Krishnan Hariharan

3 months ago

If we are pursuing cases against Nirav Modi and Vijay Mallya why not meet out the same treatment to Ravi Narayan? If Ravi Narayan is allowed to go scot free then this will only encourage such abuses of power will continue for ever. Such unscrupulous elements should be punished severely.

B. KRISHNAN

3 months ago

Privately, this duo would be laughing at their good luck! No criminal case, and most probably full retirement benefits!

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