On 2nd December, Chitra Ramakrishna, managing director and CEO of the National Stock Exchange (NSE), resigned abruptly citing ‘personal reasons’. The news was sensational because Ms Ramakrishna, along with Ravi Narain (who is non-executive vice chairman), was part of the team that came along with Dr RH Patil to set up the NSE, in 1991.
Ms Ramakrishna’s resignation comes 17 months after the NSE filed a Rs100-crore defamation case against Moneylife for publishing a whistleblower’s detailed and technical account of how certain brokers, in connivance with NSE’s officials, were gaming the bourse’s high frequency trading to make crores of rupees in illegal profits. On 10th September, Justice Gautam Patel, in a far-sighted and path-breaking order, dismissed NSE’s notice of motion and called out the bourse’s ‘egregious arrogance’ in refusing to answer legitimate queries and then claiming defamation. The NSE was asked to pay costs to the tune of Rs50 lakh, most of it going to two Mumbai hospitals. An appeal filed by the NSE remains pending.
The order gave Moneylife the space to dig deeper into various aspects of NSE’s functioning and things began to unravel swiftly. NSE insiders also mustered the courage to send out letters about other goings-on at the Exchange, albeit anonymously. They were marked to the finance ministry and the Securities & Exchange Board of India (SEBI).
The letters provided important information about the manner in which senior appointments were manipulated. Since Moneylife faced a court case, we shared the findings of our RTI applications with journalists in leading newspapers. Almost nothing was published. The NSE, a financially powerful exchange and a near-monopoly, is a big advertiser and sponsor of media events and programmes.
Coincidentally, around that time, SEBI received anonymous complaints against organisations that supported Moneylife with advertisements or sponsorships. SEBI, which stonewalls queries about the NSE and other matters, showed great alacrity in forwarding these anonymous complaints to our sponsors. It asked that the response be put up to the board of directors of the company, before responding to the regulator. Fortunately, the investigation merely established that there were no out-of-turn favours.
When regulators are reluctant to investigate powerful regulated entities, what is the chance that journalists will want to risk investigative work? In large media houses, the marketing department often dictates editorial decisions.
Let us look at events after Justice Gautam Patel’s court order.
SEBI Investigation: The first big break was the fact that SEBI’s technical advisory committee (TAC), headed by Dr Ashok Jhunjhunwala (who is clearly not amenable to pressure and has unquestioned technical expertise), was asked to investigate the whistleblower’s charges. The TAC appointed an expert sub-committee that confirmed the whistleblower’s allegations in the first letter as well as two subsequent letters sent by him. Following the TAC report, SEBI asked the NSE to conduct a forensic audit (Deloitte India was given the job) in October to check if preferential access was given to certain brokers and to fix responsibility for collusion, if any. More importantly, NSE’s revenues from its co-location facilities, including from fibre connectivity between brokers, had to be deposited into an escrow account. Finally, on 2nd December, Arjun Meghwal, Union minister of state for finance confirmed to the Lok Sabha, in a written reply, that NSE’s system was prone to market abuse.
Non-Transparent Appointments: After September, some NSE employees were emboldened to send out anonymous letters giving details about the appointments and functioning of senior management. Anand Subramanian, the group operation officer (GOO) and advisor to MD, abruptly resigned on 24th October (Moneylife alone reported this then; the biggest media houses were silent) and was asked to vacate his apartment immediately. Almost nothing about Mr Subramanian’s professional background is available in the public domain or in NSE’s circulars announcing his appointment and promotions internally.
Our investigation reveals that Anand Subramanian had some experience in Balmer Lawrie, a public sector travel company (but nothing to do with finance or technology). Yet, he was the second highest paid executive at the NSE with an office next to Ms Ramakrishna’s. His perks included permission to work from Chennai three days of the week, because his wife heads the NSE’s office there. Insiders, in their letters, allege that his appointment did not even go through the regular recruitment processes.
What is more worrying is that several key appointments at the NSE are as consultants who are beholden to the MD for continuation of contracts. When Mr Subramaniam left the NSE, our queries for details met with a, typically, aggressive response. We were told that as a consultant, his salary did not have to be disclosed in the annual report with that of key personnel. Is the board now looking into all consultants on contractual employment appointed by the NSE? Will their pay and perks ever be made public?
Moneylife also investigated Ravi Narain (as non-executive vice chairman) and Chitra Ramakrishna’s own re-appointment as MD and CEO. Answers to RTI queries filed by
Moneylife and Shailesh Gandhi revealed issues with both appointments. Ravi Narain, who stepped down as executive vice-chairman (VC), was sought to be appointed as public interest director (PID) in January 2013. SEBI received a legal notice objecting to Mr Narain smoothly switching roles from the top decision-maker for two decades to a PID. The NSE then re-designated him a shareholder director (SD) which SEBI was quick to accept. However, its own legal department (LD) raised several queries that appear to have remained unanswered. On 12 March 2013, LD pointed out that Stock Exchange and Clearing Corporation Regulations, 2012, do not provide for the post of a VC. It also raised the issue of his appointment on a fixed term of five years with no retirement clause (this made his term longer than that of the chairman). On 4th April, LD also said that, since the VC was not a PID, “…he may be appointed as non-executive VC but he shall not act as chairman of the meetings of the board or general body of shareholder, in absence of the chairman.” This is because only a PID can chair audit committee meetings, etc. Why were the rules being twisted to accommodate Mr Narian if he no longer wanted to be in an executive function? Even in Chitra Ramakrishna’s case, there is no record of the NSE having advertised the post of the MD and CEO, as was specifically required by SEBI regulations. There are indications of regulatory capture and explain the soft stance of SEBI towards the NSE.
Role of Board and Former Chairmen: Things began to change at the NSE after Ashok Chawla’s appointment as chairman. Until then, the NSE invariably ensured a ‘friendly’ chairman (retired heads of IDBI, LIC or Dr Vijay Kelkar) who were happy to play along with the myth that the secretive NSE remained a perfect, professional institution that nobody should dare question after two decades of control by a couple of persons. The rest of the board, which included judges, top accountants and former SEBI officials, appears to have gone along with this view, despite plenty of indications to the contrary. After all, the NSE is a prestigious and profitable sinecure.
What Next? A couple of management changes at the top are just the beginning; the NSE needs to appoint a new MD and the composition of the board also needs some spring cleaning. The NSE needs to push ahead with its $1.5-billion public offering to give an exit to its impatient institutional shareholders. Public listing will force the NSE to become more transparent; but it also needs to stop gaming the slow judicial system to resist coming under the ambit of the RTI(Right to Information) Act. The bourse has contested rulings of the central information commission as well as the Delhi High Court and has filed an appeal before the division bench. So far, the NSE board appears reluctant to discuss the exit of its two top officials. But, if the intention is to maintain a dignified silence, its actions still need to indicate that it is working to create an open and transparent quasi-regulatory organisation that no longer functions like a private fiefdom.
What mechanisms will now be put in place by Finance Ministry & other powers that be.
The plot thickens...