Moneylife Exclusive: Enforcement Directorate Steps in to Probe Money Laundering Angle in NSE Colo Scam
Moneylife Digital Team 11 March 2022
In addition to a large team of the Central Bureau of Investigation (CBI) inquiring into the co-location (Colo) scam at the National Stock Exchange (NSE), we learn that the enforcement directorate (ED) has stepped in to examine a possible money laundering angle, sources told Moneylife.  
 
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 the Securities and Exchange Board of India (SEBI) over the past seven years. 
 
In addition, Ajay Shah, who has been a consultant with the finance ministry, has also been questioned over several days. Mr Shah has a long association with NSE and several subsidiaries of the Exchange. SEBI has already investigated his exploitation of confidential data and passed an order in this regard in May 2019. In fact, Mr Shah and his wife Susan were the only two academicians with deep access into NSE. They first received trading data from NSE in their personal capacity and, later, as academics associated with Indira Gandhi Institute of Development Research (IGIDR). Further, Sunitha Thomas, whose firm Infotech Financials Pvt Ltd which writes algorithms and had access to this data, is married to a key NSE official  Suprabhat Lala.
 
Many senior officials from NSE, having recorded their statements, have been made to confront Chitra Ramkrishna, the former managing director (MD) and chief executive office (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. 
 
It is also unclear if the focus is on Ms Ramkrishna or Ravi Narian, former MD and CEO of NSE. After all, Colo and high-frequency trading (HFT), including scandals, had happened long before NSE began trading (Michael Lewis’s book Flash Boys is all about it). Hence, it is hard to believe that the Exchange forgot to put in place a process that ensured a level playing field for very large investors, who put through millions of trades in seconds. 
 
In February 2021, in his order, Amit Pradhan, adjudicating officer (AO) of SEBI had stated, “NSE has failed to comply with the provisions of SECC Regulations in letter and spirit and Mr Narain and Ms Ramkrishna are vicariously liable for the acts of omissions/ commissions committed by NSE during the investigation period. In the facts and circumstances of this case, the conduct of NSE, Ravi Narain and Chitra Ramkrishna are blameworthy being in defiance of the obligations casted under SECC Regulations. Considering the nature of violation and conduct of the Noticees, I am of the view that the default is grave and the gravity of this matter cannot be ignored. Therefore, no lenient view should be taken and the case deserves imposition of monetary penalty against NSE, Mr Narain and Ms Ramkrishna.”
 
“...many trading members had repeatedly resorted to accessing the secondary server without any checks and balances and actions on the part of the first-level regulator except for certain emails and advisories,” the SEBI order says, adding “NSE as a stock exchange failed to ensure a level playing field for trading members subscribing to its TBT data feed system.”
 
"A review of TBT system architecture indicated data was disseminated to members in a sequential manner whereby the member who connected first to the POP server received the ticks (market feed) before the members who connected later. Hence, the system architecture of the TCP-based TBT system was prone to manipulation," it said.
 
SEBI order says it is alleged that, during the relevant period, Ravi Narain and Chitra Ramkrishna have failed to take any step to ensure proper systems, checks & balances to provide fair and equitable access to all.
 
Another issue that has remained below the radar is the process followed by NSE for the sale and resale of its shares and how this unlisted entity chose its first few rounds of investors as well as the resale deals that large brokers are actively canvassing in the past few months. 
 
The Colo case dates to 2015 when Moneylife published a letter by a whistle-blower going by the name Ken Fong in June 2015. The whistle-blower alleged that NSE officials were selectively allowing a few brokers to reap massive profits through preferential access to its Colo servers in the form of early log-in or access to servers with low trading loads. 
 
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 Mr Narain and Ms 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).
 
SEBI estimated that NSE earned a profit of Rs624.89 crore during 2010-11 to 2013-14 from its Colo operation. Finding Mr Narain guilty in the case, SEBI has asked him to disgorge 25% of the salary drawn for FY10-11 to FY12-13 to the IPEF. Ms Ramkrishna has been asked to disgorge a quarter of her salary drawn for FY13-14. She has also been prohibited from associating with a listed company or a market infrastructure institution for a period of five years. (Read: NSE Co-location Scam: SEBI Orders Disgorgement of Profits from NSE and Salaries of former MDs, Ravi Narain and Chitra Ramkrishna)
 
In a second-order in 2020, related to 'dark fibre' involving unregistered service-provider, Sampark Entertainment, SEBI had said that since NSE is a recognised stock exchange and the leading market infrastructure institution, it occupies a pivotal role as a front line regulator. Therefore, apart from reformatory steps under Section 11, 11(4) and 11B of the SEBI Act, 1992 and Section 12A of the SCR Act, 1956, “considering the gravity of the allegations that have been established…, additional exemplary directives need to be issued could pose an effective deterrence and dis-incentive to the noticee (NSE) to perpetrate such kind of violations in future so far as administration and governance of its Colo facility is concerned.”
 
Read our coverage on NSE Algo Scam here https://www.moneylife.in/tags/nsealgoscam.html
 
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Comments
saharaaj
5 months ago
why all papers are silent on CV of Chitra and narayan some thing stinking and fishy what has been political links ? Silent . what are her qualifications ? silent all puffed up noise to drown material content
sivakumar_go
5 months ago
A stock can move both direction on a given day. Whether all the nano second access orders only resulted in profit and the brokers have not booked any loss which is very difficult to believe.
Kamal Garg
Replied to sivakumar_go comment 5 months ago
valid point.
angelo.extross
5 months ago
The Regulator, SEBI, in its 2020 order on "dark fibre" , defines and acknowledges
that NSE occupies a pivotal role as a "front-line" regulator.
What are we to understand from this? Is SEBI, the Regulator "above" or "below" this
Laxman Reckha line it has defined?
Kamal Garg
5 months ago
Many more skeletons will come out of the NSE cupboard, including TBT, CoLo, Dark Fibre and what not.
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