NSE: Embarrassing Moral Collapse from Path-breaking Exchange to Lawlessness
On the eve of International Women’s Day, when the financial sector ought to have celebrated a woman finance minister and first woman market regulator, the arrest of Chitra Ramkrishna, once high-profile and much-feted former managing director (MD) and chief executive officer (CEO) of the National Stock Exchange (NSE) dampened the enthusiasm. Her bizarre claim about communicating with a nirakarsiddha purush / Himalayan yogi elicited global ridicule and drew attention to the crony cabal that controlled our capital market regulation. In effect, triggering exactly the negative attention that government had sought to avoid in the past seven years.
It is this very cabal that converted NSE from a path-breaking institution that had led the transformation of India’s capital market in the 1990s, to a pathetic, shadowy organisation that is allowed to rip off extraordinary profits (from investors and intermediaries), get away with poor risk assessment (broker defaults) and persist with a tiny investor protection fund whose rules are designed to avoid compensation by blaming investors. Over the past two decades, NSE has used its power, profitability and dominance to crush competition and buy influence, with massive financial support to academic institutions and the media, until the very people who ought to have blown the whistle on bad governance and dubious practices found it more convenient to remain silent.
Isn’t it odd that the Securities and Exchange Board of India (SEBI) has repeatedly asked NSE to investigate itself over the past seven years without ensuring that the investigators had no financial dealings with the Exchange? SEBI’s orders, based on these findings, were further marred by sweeping assessments exonerating the top management without even completing the basic job of quantifying the extent of profiteering by top brokers who got illegal access to NSE’s co-location (Colo) systems. Extraordinarily enough, the investigation of an event of 2013-14, discovered in 2015, continues in 2022. The idea, of course, may be to let the sands of time dull the outrage and bury the problem.
In the aftermath of the Colo scam, where Chitra Ramkrishna herself is seeking to pass the buck on to her juniors, it is abundantly clear that NSE’s board of legal luminaries, bureaucrats and academics had neither knowledge nor interest in what was going on at the Exchange and had abdicated all responsibility by delegating sweeping powers to the MD as well as the controversial group operating officer, Anand Subramanian, without any application of mind. These boards, as well as NSE’s past chairmen, have escaped scrutiny.
Unfortunately, the omnipresence of a Himalayan yogi ripped apart that strategy to allow the Central Bureau of Investigation’s (CBI’s) inquiry of 2018 to be reactivated and expanded. Will this finally expose what went on at the Exchange? While CBI may or may not do a great job, the credibility of the market regulator lies in tatters and requires a far bigger effort to restore. 
In order to do this, the government needs to dismantle the crooked system entrenched over the decades and break the code of Omertà that ensures the survival of a powerful crony club, by sacrificing a few expendable pawns. The National Democratic Alliance (NDA), while claiming to break embedded cabals, had left the stock market untouched. The booming market was seen as a visible endorsement of government policies and it didn’t want to destabilise things. It should now be clear that stock prices will largely be dictated by global events and a clean-up of administrative and regulatory practices will only enhance our credibility.
The Past Holds a Mirror to the Future
In our book, Absolute Power, we describe how the Bombay Stock Exchange (BSE) dominated trading in the early-1990s, led price formation and accounted for three-quarters of the market-capitalisation. Yet, there was no sanctity to settlements; broker defaults were frequent and investors were hapless victims with no recourse. 
BSE was cut to size when NSE, under Dr RH Patil, its first managing director, led the transformation of our stock market to one of the best and safest in the world, within five years of its launch. This has no parallel anywhere in the world. Ironically, Ravi Narain and Chitra Ramkrishna, his successors, were part of the founding team, but converted NSE into a private fief, in collusion with the finance ministry, while SEBI was rendered irrelevant. 
NSE needs a similar shock treatment today that BSE got in 1992 after the Harshad Mehta scam. Look at these facts: the massive Colo scam of 2013-14; 30 broker defaults since 2020 leading to questions about NSE’s risk management system, investors losing thousands of crores of rupees due to these defaults and, finally, NSE’s frequent trading glitches. SEBI’s only response is to send out show-cause notices to the Exchange.
Instead of ensuring that the entire administrative and appointment process at NSE is overhauled, SEBI has not directed any change in key personnel, despite their collusive silence. Even recently, J Ravichandran, as head of compliance and law for nearly 25 years, was quietly let off without explanation in the 11 February 2022 order, while others issued show-cause notices for the Colo scam continue to remain in key posts.
It is time SEBI is given a hard deadline to complete the Colo investigation or hand it over to CBI. As I wrote on 22nd February, two key investigations have remained a secret for seven years (Exclusive: SEBI’s 2 Hidden Investigations Key to Unravel NSE Algo Scam). One of these is to quantify illegal profiteering by brokers in the Colo scam which is being done by the Indian School of Business (ISB), Hyderabad. Yet, a lackadaisical finance ministry, responding to a question in parliament on 20 July 2021 appeared to accept that the scam was a massive Rs75,000 crore as alleged by the MP Aravind Sawant.
Regulatory Capture 
At the heart of the problem is the fact that all independent regulators are captured by bureaucrats of their respective administrative ministries, just as NSE’s power and influence ensured a regulatory capture of SEBI. The appointment process is often a farce; the final appointees are not even on the short-list submitted by the appointments committee. Right until Ajay Tyagi’s exit, the tough job of being a market watchdog was considered a sinecure for retiring finance ministry bureaucrats. The appointment of Madhabi Puri Buch marks a significant change and it is up to her to prove that this is an improvement. To do this, she needs to bring SEBI’s governance practices in line with what it mandates for market intermediaries and clean up rampant internal corruption by blocking the access of former SEBI executives who have become influential ‘consultants’ and conduits to senior officials.
The finance ministry also dictates and corners appointments to the boards of stock exchanges. The NSE board, with hefty sitting fees, is especially coveted. In the aftermath of the Colo scam, where Chitra Ramkrishna herself is seeking to pass the buck on to her juniors, it is abundantly clear that NSE’s board of legal luminaries, bureaucrats and academics had neither knowledge nor interest in what was going on at the Exchange and had abdicated all responsibility by delegating sweeping powers to the MD as well as the controversial group operating officer, Anand Subramanian, without any application of mind. These boards, as well as NSE’s past chairmen, have escaped scrutiny, barring a throwaway line in SEBI’s 11th February order holding the board responsible for allowing Chitra Ramkrishna and Anand Subramanian to resign and leave with all benefits.
Isn’t it ironic that SEBI expects stock exchanges to administer corporate governance rules through the listing agreement, when their own internal governance is non-existent? Has NSE’s current board even discussed broker defaults, investor protection fund rules or the linkage of senior executives to those being investigated in the Colo scam? If yes, nothing is known about it, since NSE is allowed to remain secretive instead of forcing it to be transparent. 
Sunlight and Competition 
The way forward to ensuring a clean and transparent exchange is two-fold. First, ensure that NSE has meaningful competition. Second, make all stock and commodity exchanges subject to the Right to Information Act as first-line regulators by directing them to withdraw legal challenges to the central information commission’s orders. Our book Absolute Power has documented the systematic manner in which SEBI and the finance ministry colluded with NSE to destroy competition, rig policies and scuttle expansion. From sabotaging BSE’s attempt to collaborate with NASDAQ in 2005, refusal to allow a level-playing field in derivatives and currency trading, and the dubious stratagems to disrupt listing of BSE and MCX, the systemic damage that allowed NSE to operate like a foul private fief, happened in full collusion with SEBI and the finance ministry. 
All this has been in the public domain since 2010, when Dr G Mohan Gopal, a former Harvard law professor and then head of the National Judicial Academy, wrote an explosive and anguished letter to prime minister Manmohan Singh, about how an “informal clique of current and serving bureaucrats, SEBI officials, lawyers and corporate interests orchestrated a subversion of the due process of law. They illegally interfered with independent SEBI adjudication, manipulated legal opinions, suppressed and misrepresented facts and misled the SEBI Board and Government officials about the legality of the Orders. Law, regulations and established precedent were violated.” 
His letter highlighted four structural fault-lines in the legal framework for securities regulation that made the abuse of power possible and all of these hold true even today.
1. Inadequate transparency, lack of public accountability through parliamentary oversight, absence of protection for whistle-blowers and unwillingness to hear investors’ voices. 
2. Conflict of interest had caused ‘an influential bureaucrat-corporate-media nexus to emerge, which has immense power to influence SEBI’s decision-making to its own advantage’. 
3. Ineffective framework for law enforcement with overlapping enforcement and punitive provisions leading to multiple proceedings that often ended up excusing wrongdoers through opaque consent orders and faulty adjudication.
4. Outdated governance structure, including a lack of transparency about the resources that SEBI commands.
The government didn't listen to Dr Mohan Gopal and things deteriorated rapidly under three successive SEBI chairmen, CB Bhave, UK Sinha and Ajay Tyagi, as the mess in NSE and SEBI got bigger and bigger. This government, if serious, can still break the decades-old cabal of influencers that controls our financial markets, by putting in place better systems, accountability and clear consequences for bad governance.

Sudhir Mankodi
2 years ago
such rotten executives of NSE who are under investigative radar are financial terrorist and need to be dealt with on the lines of terrorist of 26/11 Mumbai Terror attack. Nothing short of capital punishment. if you kill a person you take life of only one person. However if you commit frauds like this, the savings of poor people get wiped out totally. Some of them may have nowhere to go and may tend to comit Suicide.
2 years ago
Perhaps Chitra madam is using the concept of Yogi as the present ecosystem is very very favorable to Yoga Yogis Patanjalis Babas. These were part of Anna Hazare the self styled moralist.
2 years ago
Curse of Kshichdee Govt when every constituent contribute one jar of water and tales away 2 jars of milk .wants every corporate regulatory job for its Lackeys... hope karamas are visiting the beneficiaries
2 years ago
Anyone who visits the Facebook page of SEBI will know how they are functioning. When we want to make a complaint to SEBI in the normal course and not on the Facebook the box in which they say, 'Please do not use any special characters' .It's not at all easy to make a complaint to SEBI. They have structured it in such a way so that many may not be able to make a compalint. Anyone, just try and see how difficult it is to make a complaint to SEBI. We find this type of rules only in internet banking.
2 years ago
Do you believe seriously that we live in a morally and ethically upright world?
S K Nataraj
2 years ago
You have clrarly stated that SEBI was under a tight leash of Finmin bureaucrats.
Replied to S K Nataraj comment 2 years ago
like Aircel
2 years ago
You mention about expectations from new SEBI Chairperson Madhuri Buch - but that is contingent upon whether she has any skeletons in the closet herself? If so, those will be exploited to the hilt by the cabal to make her subservient. That is just the way these things work. Assuming she is reasonably clean, we can expect better functioning of SEBI - but whether we can expect a return to era of G V Ramakrishna... I will not hold my breath.
2 years ago
Change the current Board with more independent thinkers and leaders. Start legal action against the board who approved the actions of Chitra Ramakrishna and also the brokers who benefited from the COLO Scam.
2 years ago
"This government, if serious, can still break the decades-old cabal of influencers that controls our financial markets, by putting in place...."? Unthinkable. Given the fact that this govt has anything but contempt and contempt only for the enforcement of the RTI Act, 2005 in full as it became evident in the case of its persistent and vague denials to bring the PM CARES Fund under the ambit of the Transparency Act and the way it uses the enforcement agencies, viz., the ED, the CBI, etc., it's the last of all the things to expect it to be serious about high stakes corruption in the govt, much less to be accountable and transparent to the citizens.
2 years ago
Government has much bigger problems on hand to solve and NSE issue is relatively small in their opinion. You can not expect any sweeping changes from the Ministry in the foreseeable future.

S K Nataraj
Replied to sivakumar_go comment 2 years ago
If the Colo scam is a 75000 crores scam, it\'s not small. Capital market cleansing and reform are very important.
2 years ago
Excellent write up.
2 years ago
I am curious to know why this government which is boasting of transparency, honesty apnd uprightness is not willing to bring to books the person responsible in NSE fiasco. With such background, there may be skeletons hidden even now and may not see the light of the day.
Replied to sathya2011 comment 2 years ago
It is true that there may be skeletons hidden even now. So far no investigating agencies have revealed that why Chitra appointed Anand Subramanniam in such a key post. What is her motive? At whose behest he was appointed? These questions are not answered.
Free Helpline
Legal Credit