Lessons from NSE Saga: Heads It Wins, Tails Investors Lose
Mandatory corporate governance rules have not stopped the management of listed companies, public-private partnerships or even first-line regulators from doing what they please. The independence of boards is a sham; directors are usually eager to please management and ignore whistle-blowers, so long as the sitting fees and perks are good. It doesn't matter whether the directors are former bureaucrats, bankers, judges, regulators or even heads of industry. Their interest is aligned with top management which, in professionally-managed companies, is focused on their own salaries, perks and stock options.
Evidence of boards failing to provide the right checks & balances is overwhelming and it has tumbled into the public domain through charge-sheets, forensic audits and show-cause notices. The most notorious are Infrastructure Leasing & Financial Services (IL&FS) and the National Stock Exchange (NSE) which were both perceived as well-run public sector institutions but actually ran private fiefdoms for nearly 25 years each, in collusion with the very regulators and bureaucrats who failed to check the management.
Investigation into a mega scam does not lead to systemic changes resulting in better accountability or compensation. Instead, wrongdoers are able to game the media as well as a slow and broken judicial system, until the verdicts, which come a decade down the line, become meaningless. The expense and humiliation of the process is the only punishment.
We are seeing this being played out with NSE in the aggressive posturing by Chitra Ramkrishna’s defence team, as well as what the present top management of NSE has said in a court in Hyderabad. Let’s look at some quick facts, in sequence. 
NSE Co-location (Colo) Scam
NSE is the largest derivatives exchange in the world (in terms of orders processed), a first-line regulator and a systemically important institution. Yet, for over a decade, it functioned like a mom-and-pop shop, despite a galaxy of luminaries as directors under the watch of a captured regulator and Ms Ramkrishna used her sweeping, board-delegated powers to appoint Anand Subramanian and give him repeated promotions to group operating office (GOO), despite his complete lack of qualification for the job. As the second-most senior person in the organisation, he was not even listed as a key management person. We have documented all this extensively in our book Absolute Power.
NSE’s flagrant violation of rules was, finally, admitted by the regulator in a weak order on 11 February 2022 which also documented the astounding claim by its former managing director (MD), Chitra Ramkrishna, that she sought help in running the Exchange from, who she believed was, a Himalayan yogi with an earthly email ID, [email protected].
SEBI’s whole-time member (WTM), who had a legal background and 30 years of experience with the regulator, passed a weak and flawed order with multiple loopholes. He also let off a senior executive who acquiesced with the dubious appointment of Anand Subramanian (while himself being promoted).
Ms Ramkrishna has filed an aggressive appeal before the appellate tribunal picking apart these loopholes and mistakes in the order. In our uncertain judicial system, only time will tell if pointless technicalities will override egregious and obvious wrongdoing. 
Even today, the Securities and Exchange Board of India (SEBI) refuses to investigate how the NSE board delegated such sweeping powers to two successive MDs (Ravi Narain and Chitra Ramkrishna). This allowed them to run the Exchange like a private fief and, yet, deflect all responsibility down the line, once the Colo scam was exposed. They even washed their hands off the responsibility for framing guidelines for fair and equal access to co-location facilities and ensuring they are adhered to. 
SEBI’s cross-examination of Ms Ramkrishna under oath in April 2018 saw her passing the buck to successive technology heads and their teams. My sources say that Ms Ramkrishna took the exact same stand when interrogated by the central bureau of investigation (CBI), even when confronted by officials who reported to her. 
This may have happened in the past; but the real worry is that nothing has changed, despite ongoing investigations by SEBI, CBI and the enforcement directorate (ED). Vikram Limaye, the current  MD of NSE has taken a similar stand in court in a matter related to the collapse of Anugrah Stock and Broking Pvt Ltd (Anugrah) where investors have lost nearly Rs1,200 crore because NSE failed to act in time. The matter was heard recently and the order has been reserved (Read: Telangana HC Refuses to Quash Proceedings Against NSE's Vikram Limaye & Priya Subbaraman in Anugrah Stock & Broking Case). 
NSE has had 31 broker defaults in just three of the five years under Mr Limaye’s watch and the losses to investors run into several thousand crores of rupees which are not being compensated by the bourse’s investor protection fund (IPF). Mr Limaye came in with a mandate to clean up the mess left behind by the previous management and completes a five-year term in July, having decided not to seek re-appointment. 
But, in a complaint filed in Hyderabad, his defence and that of Priya Subbaraman, chief risk officer (CRO) of NSE, drawing remuneration in crores of rupees, is to deflect responsibility. Moneylife first reported the Anugrah debacle and has covered it extensively; so, we will not go into its Ponzi-like operation. Instead, let us focus on the responsibility cast on NSE, as first-line regulator and its performance. 
Broker Supervision 
SEBI’s guidelines on ‘Enhanced Supervision of Stock Brokers’ of 2016 make the Exchange responsible, among other things, for monitoring use of client funds, pledge and transfer of client securities by brokers and monitoring their financial strength. It has separate rules on ‘Prevention of Unauthorised Trading by Stock Brokers’, introduced in 2018, which provide for early warning alerts and rules on handling of client funds and securities. All this was already too late for Anugrah investors, since the firm went belly up in 2020. Here is what the court documents reveal. 
On the positive side, for Mr Limaye and Ms Subbaraman, the rot at Anugrah goes back to 2013 and was repeatedly covered up by the previous management. It imposed tiny penalties and allowed it to grow rapidly until it collapsed under the weight of its own machinations. Consider this:
  • 2013-14: NSE imposed a penalty of Rs1.59-lakh, after an inspection revealed serious violations including non-settlement of client funds, operating out of unapproved terminals and funding client operations.
  • 2014-15: NSE imposed a penalty of Rs82,500 for similar violations as above-mentioned. By now, Anugrah’s turnover had jumped 2546%; but NSE was unperturbed. More on this later. 
  • 2015-16: NSE imposed a penalty of Rs75,000 for the very same violation, primarily non-settlement of client accounts.
  • 2017-18: NSE’s penalty increased to Rs1.93 crore. Violations included: misuse of client funds, acting as a principal and giving loans to certain entities of Rs304.8 crore and loans to directors of over Rs1.65 crore. More seriously, this inspection revealed a shortfall in funds of Rs429.79-crore and that the broker was reporting to NSE incorrect ledgers and margins paid.
  • Furthermore, from 7th August 2019 to 22nd July 2020, various system-generated alerts about Anugrah were raised by the Central Depository Services Ltd which were also ignored.
Meanwhile, Anugrah’s clients remained clueless about violations, since it continued to grow and pay high returns. More importantly, its turnover was rising rapidly, since NSE’s actions were too trivial to act as a deterrent. But NSE still failed to act decisively. It was only in 2020 that there was a forensic audit and a joint inspection by NSE and SEBI, during which the shortfall of over Rs112 crore was unearthed, leading to the suspension and expulsion of the broker. By now, Anugrah’s operation had ballooned to Rs1,200 crore.
Looking back, had NSE acted in 2013-14, it could have avoided the debacle. Instead, on 1 September 2014, NSE’s chief business development officer sent out a letter of congratulations to Paresh Kariya, founder of Anugrah, saying, “It has been quite heartening to note the significant contribution made by your team in the growth of volumes in Bank Nifty Options category. The market grew by 33.8% compared to last month, whereas your volumes grew by 2546% in Bank Nifty Options. We commend you and your teams for making this happen.”
In a single sentence, this captures how NSE’s singular focus has been on increasing trading volumes, because the pay and perks of senior management are tied to ever-increasing profits and valuation. This also required ruthless market domination and regulatory capture.
Every public statement by Vikram Limaye about his performance harps on NSE’s turnover and profitability; the 31 broker defaults, that have caused massive losses to tens of thousands of investors, find no mention. After all, it is easy to blame investors for being greedy and careless. Broker defaults have turned so numerous that NSE’s IPF works at finding ways to deny compensation. SEBI has still not stirred itself to re-examine NSE’s risk-management framework or ensure a fair deal for victims of broker default.
The bigger irony is that even today, both, Vikram Limaye and Priya Subbaraman, have taken the Ravi Narain-Chitra Ramkrishna route of defence in court. Both of them claim that they do not look at “day-to-day operational aspects of broker issues” which are dealt with by heads of departments and other officials. Mr Limaye says he is involved only in policy-making and implementation of strategic plans and NOT in operational matters or the day-to-day functioning of the Exchange.
The question is: Do routine issues ever get escalated when there is wrongdoing by NSE brokers who have failed at regular intervals? If NSE’s top management was not involved in routine issues, what explains a meeting between Paresh Kariya of Anugrah, and his associate, who run a sub-brokerage called Teji Mandi (also like a Ponzi) at which Vikram Limaye and Rupa Subbaraman were present? The recording of the meeting has been confirmed and submitted in court.
We don't know how the court will decide this case; but investors, who are being encouraged to invest in capital markets, should be very concerned if the heads of regulatory bodies are able to deflect responsibility so easily. And the fact that an obscenely profitable exchange (70% operating margin at NSE) gets away with anti-investor actions without being forced to compensate losses.
In any other jurisdiction, 31 broker failures in less than three years would have led to serious public outrage, investigation and an overhaul of management and regulation. Not in India. This buck stops at SEBI.
The regulator has even failed to compensate investors for losses when their trading positions were compulsorily squared off after the trading glitch on 24 February 2021. NSE failed to follow standard operating procedures (SOPs) to re-start trading and abruptly reopened the Exchange towards the end of trading hours after large brokers had force-squared investors’ trading positions. Disaggregated investors, having already suffered heavy losses, do not have the resources for a legal battle.
The conclusion is that we will continue to muddle along in this fashion, with small investors helplessly accepting losses and senior management using unlimited organisational resources to put together the legal firepower to deflect responsibility and accountability. Over time, it will erode investor confidence in the system.

2 years ago
None of them looks at share holders or investors interest they look at their entitlement on and off balance sheet
2 years ago
Gullible but greedy small investors are there to give which smart few make plans to take. That's the system.
2 years ago
National Stock Exchange proves itself to be the Grand Casino that I have known since the 1970s the Indian bourses to be: But the real reason is the absence of a proper structure that establishes measurable Key Responsibility Areas, Key Performance Paramaters and Objectives by role to fix accountability. Without this, India will remain a reflection of its Government. Yatha Raja, Thatha Praja where all praise an honest Prime Minister while paying bribes through their nose to receive what would be their entitlements in any real democracy.
Sudhir Mankodi
2 years ago
Unfortunately, majority of media houses are sold out to such regulators who can \"keep them happy\" somehow. Not all are principled like you. Those directors of Regulators who were present in the meeting over Tezi Mandi, should be held accountable and criminal proceedings should be initiated against them.
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