NSE Needs Complete Overhaul of Management Role and Responsibility before Appointing a New Chief
In a curious development, the Securities and Exchange Board of India (SEBI) has gone from issuing press releases supporting the National Stock Exchange (NSE), to throwing the book at it over the mishandled four-hour disruption in trading on 24 February 2021. 
 
SEBI has accused NSE of having “faulty design in its critical trading infrastructure, lower than required capacity to handle the peak load, failure to test and supervise ‘failover logic’.” It has also alleged a casual, lackadaisical and less-than-honest approach on the part of managing director (MD) Vikram Limaye, the head of NSE’s clearing corporation (Vikram Kothari) and the chief of operations and technology (Shiv Kumar Bhasin) in allowing trading to continue without adequate risk management from 10.06am, when the problem was detected, to 11.40am. These are just a few of the allegations in a show-cause notice (SCN) issued in August 2021, which were scooped by the Hindu BusinessLine recently. We will discuss them a little later.
 
At the beginning of March, NSE put out an advertisement (Amidst ‘Himalayan Yogi’ Controversy, NSE Begins Hunt for New MD and CEO) seeking applications for the post of MD. Vikram Limaye, the present incumbent, appointed in July 2017, has announced that he is not looking for re-appointment when his term ends on 16 July 2022. In a media statement, he said, “I have done my best to lead the organisation in a very difficult period and to stabilise, strengthen and transform NSE. We have come a long way in terms of controls, governance, technology, regulatory effectiveness and business growth.”
 
The two key expectations from Mr Limaye were that he would clean up the organisation left in disarray after the ignominious exit of two predecessors, Chitra Ramkrishna and Ravi Narain and would get NSE listed. Neither has happened; although that is not entirely his fault. He was literally parachuted into the quicksand of an organisation that had been run like a private fief for two decades. 
 
Except for business growth (which was a global phenomenon when retail investors rushed to the capital market during pandemic-related lock-downs) and better stakeholder relations, the rest of the claims about ‘controls, governance and regulatory efficiency’ are not true, as is clear from SEBI’s notice on the technical outage last February and the spate of  broker defaults—30 in the past 2.5 years—which raise serious questions about risk management, quality of audits and supervision. Again, the seeds of this lax attitude to violations by brokers and their misuse of investors’ funds started well before Mr Limaye’s time. The only celebrated metric for judging brokers at NSE was their success in drumming up higher trading volumes.
 
But if there is one big bad move that was the root cause of Vikram Limaye’s failure to clean up the Exchange, it was his decision to contest SEBI orders on the algo scam of 2015, instead of paying up the paltry penalties that were imposed by the regulator and moving on. Almost all his other problems emanated from there. To be fair, this bad advice came from a big law firm and was endorsed by the high-profile board of directors. There is also some chatter about a nudge from SEBI to contest the orders; but it cannot be verified. Here are the deadly consequences of NSE’s action.
 
  • The legal advice to NSE was that failing to contest SEBI orders would lead to criminal investigation. Well, not only a criminal investigation, but more draconian action followed when the Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) got into the act.
  • By contesting SEBI’s orders, Mr Limaye ended up taking a stand that NSE and its top management had done nothing wrong. This is contrary to his own claim of a major clean-up and what is now public information about the lack of systems, controls and even a proper chain of command in key decisions including appointments and evaluation during the time of his predecessors.  
  • Having decided to contest, he was also forced into a position of defending his two predecessors and their policy failures, while also allowing them to shelter behind the Exchange in their own defence. The institution and its former employees had to take the same stand. NSE’s stated role is “…to ensure trading in a transparent fair and open manner with access to investors from areas in or outside India.” SEBI’s orders expose how his predecessors, at the very least, failed to do so. Both former MDs, Ravi Narain and Chitra Ramkrisha, have admitted that even basics such as email/data storage, which is mandatory for smaller intermediaries, was not in place. Co-location was started without ensuring simultaneous and fair access even to large traders who paid for co-location facilities. And, worse, on all key failures of policy and implementation both MDs brazenly shifted responsibility to department heads, after having claimed all credit and large salaries and perks when the going was good.
  • Another direct consequence of contesting SEBI’s orders and admitting no wrong is that NSE has had to retain all officials who were in the close group around the former MDs and had colluded or turned a blind eye to wrongdoing. So, instead of a much-needed overhaul, NSE resorted to more scheming, media management and stealthy ways to get around the SEBI action and deal with the pressure to list the Exchange.
  • Litigation in India is expensive, drags on for years and only benefits lawyers. But it had significant consequences for NSE. The initial public offering (IPO) was a direct casualty. With investors turning restive, NSE resorted to ways of getting sympathisers at SEBI to relax its penalties. It was quietly allowed to launch new trading products and co-location profits, impounded in an escrow account, were released by approaching the appellate tribunal in cahoots with the regulator. In February this year, whole-time member (WTM) Anant Barua had submitted an internal note to argue why NSE ought to be allowed to go ahead with the listing—the Himalayan yogi saga has blown that possibility. Mr Barua’s note shows why a clean-up of NSE must be accompanied by a clean-up at SEBI, the captured regulator. 
 
SEBI has a new chairperson who also has to deal with decisions from the time when she was a WTM. One of these is the SCN issued to NSE on the telecom outage of February 2021, issued in August 2022. The regulator does not come out smelling of roses in its own handling of the situation. 
 
SEBI has correctly blamed NSE for not acting fast enough, keeping the Exchange open from 10.06am to 11.40am without proper risk management and informing the regulator about the outage only at 11.30am and its failure to move to the disaster recovery system. These are questions that every trader and market-watcher had asked on that very day without getting any answers. SEBI and NSE have worked to plug some loopholes and processes, but we will know if they work only when the next disaster strikes. 
 
In this case, SEBI itself has to answer why it failed to follow standard operating procedures (SOPs) on re-starting the market after a trading halt. SEBI cannot claim to be ‘constantly in touch with the exchange’ (as claimed in a press release on 24th February), be a party to the sudden decision to extend the trading session and, simultaneously, shirk all responsibility for losses inflicted on traders by its action.
 
Readers may recall that several large brokers had forcibly squared off open trading positions just minutes before NSE announced the extension of trading hours. Investors who suffered losses due to the decision have legitimate right to expect compensation from the investor protection funds of NSE as well as SEBI. Both regulators ought to have anticipated the consequences of their decision and must pay for it.
 
At the time of the outage,  SEBI was so supportive of NSE that it took the unprecedented step of issuing a second, detailed press release on 25th February which insisted that the ‘framework of interoperability’ that would have allowed trades to switch seamlessly to the Bombay Stock Exchange (BSE) had worked. This was completely untrue. The release also tried to underplay the crisis by pointing out that many other countries suffered trading outages and NSE had been asked to conduct a root-cause analysis. 
 
Indeed, technical and telecom outages due to equipment failure can happen anytime and anywhere which is why there are multiple back-up systems. When these fail, SOPs are ignored and disaster recovery fails to work, then the Exchange as well as the regulator becomes answerable, especially since this wasn’t the first outage. Moneylife had pointed out right then that NSE had suffered nine trading outages in less than four years.
 
This points fingers at the regulator too. Did SEBI fail to audit NSE’s systems? In agreeing to extend the trading session, wasn’t it party to the loss caused to investors whose trades were forcibly squared off? Why have these investors not been compensated? Why is SEBI delaying final orders on this issue?
 
SEBI’s SCN also accuses NSE of “lower than required capacity to handle the peak load.” NSE, in turn, has accused Hitachi of unauthorised changes to its equipment, leading to collapse of the ‘failover logic’ function; but we don't know if it has initiated any action against it. 
 
Interestingly, this ‘lower than required capacity’ argument ought to apply to NSE’s tiny investor protection fund (IPF) too. The IPF was increased to around Rs1,500 crore only after Moneylife wrote about it after several broker failures. It remains tiny compared to NSE’s size, market dominance and trading turnover and is certainly not adequate to ensure fair compensation to investors duped by 30 failed brokers. Investors allege that NSE’s payment processes are not transparent and we only have NSE’s word that it follows an impartial system. The regulator has been silent on all of this, except issuing a few SCNs. 
 
 
After decades of regulatory capture of the regulator—we need a full clean-up at NSE; but the new SEBI chief will find herself in the spotlight too over how she handles the transition in her second stint with the watchdog body!
 
 

Comments
Kamals
3 months ago
Hail the queen sucheta dalal for the work they do to let the truth prevail. Gem advice coming from her articles and interaction with it.
Agupta90
3 months ago
Ceo ought to change permnanent settlement of full management team and their incompetent chamchas that are planted in company in critical positioning for futuristic help. why the people who retire come back in board and consultant. heard of any private company where all full co stays for 25 years and also people convicted not recuse. All legacy to be wiped clean. So much politics inside outside company that requiring cleanup and culture overhaul required. For this money even a foreigner ceo come with exchange running exeprience. Objective of ceo to clean exchange, get competency people and rebuild trust. New ceo to change direction of company.
pmbhate
3 months ago
Who were NSE’s founder investors? If you go on the net you will get general statements such as “The National Stock Exchange of India Limited (NSE) was set up by leading financial institutions, banks, insurance companies, and other financial intermediaries.” and “NSE was set up by a group of leading Indian financial institutions at the behest of the Government of India to bring transparency to the Indian capital market”. Only Wikipedia says “The key domestic investors include Life Insurance Corporation, State Bank of India, IFCI Limited, IDFC Limited and Stock Holding Corporation of India Limited. Key global investors include Gagil FDI Limited, GS Strategic Investments Limited, SAIF II SE Investments Mauritius Limited, Aranda Investments (Mauritius) Pte Limited, and PI Opportunities Fund I.[14]” where [14] indicates the source of information which is “14 "NSE Shareholding Pattern (For the quarter ended on September 30, 2014)" (PDF). Nseindia.com. Retrieved 7 January 2015.” When you click on the pdf icon you are taken to the NSE webpage that reads “404” very prominently and which says “The Page you are trying to access doesn't appear to exist.” Clearly, NSE does not want to part with this information readily. It would be interesting to get hold of a list that contains ALL current shareholders and the extent of their holding. Nobody will grudge the windfall gains genuine financial institutions will earn when NSE goes public. It is another story if the list includes ‘certain’ individuals or companies linked to these individuals or companies/firms linked to those who gained most from the co-location scam.
Hemah
Replied to pmbhate comment 3 months ago
All investors are interested in ensuring no skeletons come out till lic ipo and till they exit and all lobbying happening . Will a promoter led company have similar immunity and fate if it had done what nse done? The institution and its people enjoy this power and immunity which should be bequeathed and reset button pressed
Chandra_m
3 months ago
New ceo to look at deep rooted nse old nexus, their activities since 2013 and change all teams top to bottom. Skim out heritage entitled scum and understand how they spread their hold and powerful even though such questionable history. Why privilege extended to nse? He or she will need to do complete refresh. Nse privilege reason with all scams, defaults, public fights and glitches to be looked into.
saharaaj
3 months ago
standard roar of incoming king after few days of courtesy and familiarization business as usual ..
jaishirali
3 months ago
Till the time SEBI continues to ask NSE to do internal investigations into its lapses, which is too idiotic to discuss, NSE will remain the same arrogant, shady and unresponsive institution. It's time the older NSE scoundrels are not just terminated, but barred from the capital markets for atleast 20-25 years, to ensure that they cause no further damage.
gomessb
3 months ago
In the first place why did Limaye accept the job? Was he paid a huge remuneration to warm the chair at NSE? He should have put his papers as soon as he was unable to discharge his duties.
neerajv20
3 months ago
In my opinion fresh professionals in all the departments should be recruited. People who have spine, Unless this is done minor changes in the Board or the management will not give desired results.
The patient is in the ICU, major efforts will be required for sustained periods of time to make NSE in the forefront of governance, compliance and risk management systems.
Hez_Hem
3 months ago
People who were named in sebi orders are most powerful in NSE today and will continue to be so. No clean up ever happened and now they have consolidated their cartel further with their own who know how to manage things for them. Rewarding incompetence only gets more blind loyalty. Some of them have got board seats and will continue their rein. Difficult for things to come out moreso. New ceo will focus on brushing things under carpet and going for ipo. No clean up will happen as dust will settle down on this noise fairly quickly and it will be back to ipo push. This will be a small hicup and same things and arrangments continue. What is needed is a big shakeup but which leader will be able to look beyond myopic ipo vision and really rebuild the legacy of dr patil of an institution that exemplifies the very mandate for which it was set up at first place.
surajit.som
3 months ago
NSE and SEBI: Of cartel. by cartel ,for cartel !!!! Small investors can go to hell !!!!
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