The co-location (Colo) issue at the National Stock Exchange (NSE) was caused due to NSE not exercising requisite due diligence while putting in place the tick-by-tick (TBT) market data feed dissemination architecture. For lapses in this regard, NSE's former managing director (MD) and chief executive officers (CEOs) have been held responsible for breaches of the relevant provisions of SEBI regulations, the Union government informed the Lok Sabha.
In a written reply, Pankaj Chaudhry, minister of state for finance, says, "Securities and Exchange Board of India (SEBI), after thorough examination initiated proceedings against NSE and other entities and consequently passed orders in the matter of NSE colocation TBT data, NSE-dark fibre and NSE corporate governance. Further, Income Tax (I-T) department has conducted investigations to unearth the evasion of tax in the case of a few individuals and entities who were alleged to be involved in the irregularities found in NSE. However, disclosure of information about specific cases is prohibited except as provided under section 138 of the Income Tax Act."
Dayanidhi Maran, Manish Tewari, Rajiv Ranjan Singh alias Lalan Singh, and S Venkatesan, all members of Parliament (MPs), have asked whether the former managing director (MD) of NSE abused the server architecture of the Exchange to provide biased and quicker access to a private company and quantum of the data illegally shared and its details, including the name of the company.
The minister of state told the lower house that, in 2015, SEBI received specific complaints alleging certain irregularities in respect of colocation facility provided by NSE. "On examination and investigation by SEBI, it was noticed that due to lack of sufficient checks in the system architecture, a few stockbrokers connected to the exchange market data feed system through secondary server and had latency advantage."
"For lapses in this regard, NSE's former MD and CEOs have been held responsible for breaches of the relevant provisions of Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012. Further, SEBI passed various order(s) against OPG Securities Pvt Ltd and initiated adjudication proceedings against various entities in the matter of preferential access to TBT data feed to certain trading members," Mr Chaudhry says.
In 2018, the Central Bureau of Investigation (CBI) registered a case in NSE Colo matter under Sections 120-B, 204 Indian Penal Code (IPC) and Sections 7, 12, 13(2) read with 13(1)(d) of Prevention of Corruption Act, 1988 and section 66 of Information Technology Act, 2000. CBI has informed that substantial progress has been made in investigating the case, the minister of state says.
The MPs have also asked if the Colo fraud was caused by the installation of a small device and if so, whether the security measures at the NSE are lax and susceptible to such and bigger threats like a cyber-attack in the future.
Mr Chaudhry says, "SEBI did not come across any instance to suggest that fraud was caused by installation of a small device. Allegations in the colocation matter are in the nature of preferential access provided to certain trading members and not of involvement of foreign exchange."
In February last year, SEBI's adjudication officer imposed a penalty of Rs1 crore on NSE for its failure to ensure a level playing field for trading members subscribing to its tick-by-tick (TBT) data feed. NSE's former MD and CEO Ravi Narain and Chitra Ramkrishna were penalised with a fine of Rs25 lakh each.
Before that in April 2019, SEBI had ordered disgorgement of profits from NSE and salaries of former MDs, Ravi Narain and Chitra Ramkrishna. The regulator has also asked the Exchange to disgorge an amount of Rs624.89 crore along with interest calculated at the rate of 12% per annum to the Investor Education and Protection Fund (IEPF).
Last week, a special CBI court in New Delhi rejected the bail plea of Anand Subramanian, former group operating officer of NSE, in the Colo case.
Mr Subramanian was arrested by CBI on 24 February 2022. CBI got his custody till 9th March, after which he was sent to judicial custody.
On 28th March, the special CBI court sent Chitra Ramkrishna, former MD & CEO of NSE, to judicial custody till 11 April 2022. She is lodged at Tihar Jail.
Ms Ramkrishna was arrested on 7th March, a day after the special court in Delhi dismissed her petition for a pre-arrest bail plea and pulled up the CBI for inaction and being 'lackadaisical' in the probe against her over the past four years.
CBI, in its submission, told the special court that Anand Subramanian was well-connected with Ms Ramkrishna prior to his engagement as her chief strategic adviser at NSE. His wife Sunitha Subramanian also served as the regional head of NSE at Chennai from April 2011, the agency says.
As reported by Moneylife, the enforcement directorate (ED) has stepped in to examine a possible money laundering angle in the NSE colo scam.
Over the past few days, CBI has taken statements from all the senior NSE officials who had been named in the show-cause notices issued by SEBI over the past seven years.
Many senior officials from NSE, having recorded their statements, have been made to confront Ms Ramkrishna, the former MD and CEO who quit the Exchange in 2016. However, Ms Ramkrishna, say sources, has steadfastly denied all responsibility for the colo scam and claimed that only the technology team would have answers to issues like preferential access.
We learn that the CBI team has done extensive work on the scam and seems up-to-date with all developments. However, it is not clear if they are correctly focused on who are the beneficiaries of the crooked system, which was facilitated by a porous and easy-to-manipulate access system.