A growing clamour and pressure from influential quarters for the capital market regulator to wind up the algo-trading scandal at the National Stock Exchange (NSE) may have been put on pause by a timely public interest litigation (PIL) filed in the Madras High Court.
This PIL asks for very specific action against NSE’s entrenched top management, which had, over two decades of absolute control, converted the Exchange into a private club that ran roughshod over competition and retained its near-monopoly through the regulatory capture of SEBI (Securities and Exchange Board of India) and the finance ministry.
The PIL, and the investigation launched by the Central investigation agencies, are the only developments that seem to stand in the way of SEBI burying the issue with a consent order and continuing to allow the Exchange to function without forcing better transparency or accountability.
Is it possible that SEBI is in a hurry to close the matter because digging deeper would expose its own inaction over the years that led to NSE’s extraordinary arrogance?
Two weeks ago, I wrote that SEBI’s 1500-page show-cause notice
(only the 2nd set) shows poor investigation skills, inability to join the dots and come to specific conclusions. This time, let’s look at just a part of one testimony—that of Chitra Ramkrishna, NSE’s former managing director (MD), and how it was handled.
Others Are Responsible, Not Me
SEBI asks Ms Ramkrishna who was responsible for the decision to implement tick-by-tick (TBT) architecture, using TCP/IP (transmission control protocol/internet protocol) protocol. This had allowed certain brokers to log in earlier, or to less busy secondary servers, and obtain a considerable advantage. NSE multicast the TBT system since 2014, after complaints mounted about its faulty system.
Ms Ramkrishna’s answer—to the best of her recollection, she claims—fobs off responsibility for all issues to the technology teams. She claims that she was responsible only for the policy, that too jointly with NSE’s board members, advisers, consultants and the board of directors of NSE’s subsidiary companies.
A simple Google search will reveal how she and Ravi Narain (former vice-chairman) claimed credit for being part of the founding team and have been part of the top management team for over 23 years! Those from SEBI dealing with NSE know that its management was entirely led by the founding team.
Ms Ramkrishna also claims she does not recall how responsibility was divided between the three technology heads. There are no details provided on the role of NSE Tech (the NSE subsidiary company and not NSE’s tech team) in this crucial decision, which took NSE’s trading to the next level and caused trading volumes to soar dramatically to over Rs1 lakh crore a day.
Transcripts of Ms Ramkrishna’s testimony show that SEBI had no follow-up questions that would nail attempts to deflect responsibility or claim ignorance about specific decisions.
But what about SEBI’s own records and inspection reports of that period? The regulator conducts annual inspections of stock exchanges. Isn’t it SEBI’s job to check its records for permissions sought by the NSE and granted? Did its inspection reports have any adverse comments at all?
This is important because the NSE was at its most arrogant those days. Among other things, it brazenly blocked smart order routing (SORs) by firms that used its co-location facilities from using algorithms that would route trades to the Bombay Stock Exchange (BSE), if it offered a better price. This led to open outrage that was documented by the media.
Alice in Wonderland Regulation
The NSE had also outraged market participants and coders by demading source codes and competitive details of their algos, while it had invested in a private firm writing algos and offering order management systems to brokers as well as frontend software (called NOW).
The BSE had not taken this lying down. Speaking at a technology seminar in November 2009, Jim Saphiro, BSE’s head of market development, had lashed out at the unfairness of the system (and the silence of the regulator) saying he felt as though he had landed in a regulatory Alice in Wonderland
He also talked about how regulation in India did not see the encouragement of competition as a central part of its mandate. This probably embarrassed SEBI into initiating corrective action in 2010 after BSE’s stand was openly supported by leading market participants.
It is, indeed, an Alice in Wonderland regulatory system when SEBI will not look into its own record of failures, while trying to nail a market participant for flouting rules or trampling over competition.
Coming back to Ms Ramkrishna’s testimony, SEBI asks her about steps taken to ensure ‘equal and fair’ access to all. The response is breath-taking in its deflection. She evades responsibility saying, “I do not recollect any specific exceptions flagged off nor a report of positive confirmation on the same.”
Again, SEBI does not confront her with the stack of emails complaining about unfair access to certain brokers that are a part of the show-cause notice. It is amazing how a founding member of the NSE, who has been among the top three officials, can deflect all responsibility and claim no recollection of crucial decisions.
Among the various flaws of NSE’s system that Ms Ramkrishna did not remember were failure to use randomisers, select brokers gaining an advantage by logging on to faster secondary servers, despite being told not to do so, responsibility for circulars, empanelment of telecom service-providers and whether the NSE provided incentives for using Omnesys, where it had investments, as an algo-generating firm.
Top Appointments Without Due Process
SEBI’s questions on Ms Ramkrishna’s appointment of Anand Subramanian as group operation officer (GOO) without following an appointment process—giving an advertisement and without any qualifications appropriate to his power and salary—are extraordinarily vague. She passes the blame on the human resources (HR) department, whose chief has been sacked for following her diktat.
Remember this is the world’s third largest exchange and a highly sensitive organisation which probably ought to seek security clearances for top appointments.
The absence of any procedure and a one-line circular issued by Ms Ramkrishna are available with me through anonymous whistleblowers and were also marked to SEBI. How difficult is it for SEBI to check NSE's files and arrive at facts?
Instead, it allows the MD to claim that she had no role in deciding who is reported as key management personnel or how Anand Subramanian was left out, although the entire Exchange, including the tech departments, were made to report to him.
In the entire investigation so far, there is no mention of the role of J Ravichandran who has headed NSE’s secretarial and legal department for decades and has long been one of NSE’s highest paid employees, along with the founding team. Did he have no responsibility for ensuring due process or even reporting key management personnel (KMP) to SEBI?
What about SEBI’s own role in allowing consultants to head so many key departments at the NSE putting their jobs at the mercy of senior management? Was there ever a discussion at the board level? Was the HR committee of the board aware of this strange practice? And did SEBI’s annual inspection reports on the NSE either notice, or raise, this issue?
The Strange Case of Omnesys
On the issue of Omnesys being promoted unfairly by the NSE, there are detailed court documents from a litigation filed in the Bombay High Court and the Competition Commission of India (CCI). This became necessary since SEBI has abdicated all responsibility for ensuring fair competition or to check the NSE.
It is also important to mention that this arbitrariness was possible only because it has the full backing ofthe finance ministry and its joint secretary capital markets (KP Krishnan) who was a member of the SEBI board. Yet, SEBI’s lobs soft balls at Ms Ramkrishna and Mr Narain on this issue in their examination.
Two other issues need a detailed discussion. First is NSE’s acquisition of a 26% stake in Omnesys Technologies Pvt Ltd (through its wholly-owned subsidiary, Dotex International) in 2008, just two months before it launched currency derivatives.
Ms Ramkrishna appointed herself as a director of Omnesys and led a massive effort to force brokers to switch to its front-end software. The highly profitable Omnesys was suddenly and abruptly sold in August 2013 to Thomson-Reuters.
We learn that Omnesys stopped being profitable soon after and was eventually shut down. SEBI, as an investigator, could easily call for records and board minutes of Omnesys of the relevant period to arrive at a conclusion about how its role in NSE’s clearing trading algorithms of market participants and whether there were incentives for dealing with it. Market participants have plenty of stories about this; but is SEBI asking questions and trying to get corroborative evidence at all?
Cosy Cabal of Academics and Relatives
The investigation into Ajay Shah’s role is similarly superficial. In response to a question in the Lok Sabha conveys that SEBI has started enforcement proceedings against Professor Shah and the NSE for granting ‘special treatment’ to him.
The minister’s reply says Mr Shah “had employed a device/ scheme/ artifice, wherein the confidential and sensitive data provided by NSE was misused in fraudulent manner, which resulted in compromising the integrity of the securities market.”
In fact, the issue of privileged access, multiple relationships and the resultant conflict of interest seems like an entire can of worms. Testimony shows that the NSE also gave generous grants to the Indira Gandhi Institute of Development Research (IGIDR). Ajay Shah and his wife Susan Thomas were employees of IGIDR and had ‘full discretion’ on the use of these funds.
IGIDR sub-contracted work to Infotech Financials (one of the two firms offering trading algorithms founded by Sunita Thomas (Susan’s sister), who married to Suprabhat Lala, head of compliance and market operations at the NSE. Ajay Shah and Susan Thomas as leading market academics have been a part of almost all key policy-making committees set up by the finance ministry. Yet, Ms Ramkrishna tells SEBI that she was unaware of any conflict of interest because “she does not recall such a disclosure” being flagged off to her!
A Cover Up—By the Top Management
In fact, investigation officials who have worked at SEBI for over a decade acknowledge that the NSE was openly favoured under chairman CB Bhave and other bourses discriminated against. So much so that competitors were forced to file complaints against the NSE with the Bombay High Court and the CCI, rather than the market regulator.
Writing in The Mint recently, Mark Mobius correctly points out that NSE’s top management not only denied any wrongdoing in the algo-scam “but even dragged Moneylife to court with a defamation suit.” He goes on to say that “the attempt by the Exchange to cover up was far worse than the crime itself. This is simply because a cover-up always involves top officials, while the latter could just be the doing of a few bad elements in an organisation.”
Do we need proof that the NSE cover-up was sanctioned and aggressively pursued at the very top? And, yet, Ms Ramkrishna has walked away from the NSE with a golden handshake of Rs23 crore (total remuneration) for her last eight controversial months in office and Rs44 crore over three years!
Would SEBI care to explain how this Exchange was functioning and what was its own role as a regulator, before it dares to consider a consent application?