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NSE Co-location Case: CBI Court Accepts Closure Report in Audit Scam, Slams SEBI’s Weak Oversight
Moneylife Digital Team 29 August 2025
Economy & Nation
 A special central bureau of investigation (CBI) court in New Delhi has accepted the closure report filed by CBI in a case involving allegations of fake audit reports and violations of system audit norms by two stockbrokers SMC Global Securities Ltd and Shaastra Securities Trading Pvt Ltd (now Tower Research Capital Markets India Pvt Ltd), along with their audit firm iSec Services Pvt Ltd, founded by Sanjay Pandey, former commissioner of Mumbai police.
 
The case, registered under cheating and corruption charges, alleged that the firms conspired with auditors to submit fraudulent system audit reports to the National Stock Exchange (NSE), in violation of Securities and Exchange Board of India (SEBI) circulars issued in 2013 and 2014. These circulars mandated biannual system audits for brokers engaged in algorithmic trading to ensure safeguards against market manipulation.
 
The case related to alleged lapses in audits of SMC Global Securities and Shaastra Securities Trading, conducted by iSec Services. CBI alleged that while the market regulator's audit guidelines for brokers using the NSE’s co-location facility were violated, the investigation did not uncover evidence strong enough to prove criminal intent or manipulation of trading patterns.
 
CBI investigation revealed that while audit reports were filed in the names of qualified auditors, the actual on-site work was carried out by an unqualified iSec Services employee. Reports were also signed by auditors who never visited the premises. Payments for most audits were routed through iSec Services, raising suspicions of a larger conspiracy to evade regulatory scrutiny.
 
However, after extended investigation, including analysis of trading data and call records, CBI concluded that, while SEBI’s audit guidelines were, indeed , flouted, there was insufficient prosecutable evidence to prove criminal intent or establish that trading systems were compromised. NSE’s own review also found no evidence of price manipulation, circular trading, or pump-and-dump schemes during the relevant period between 2013 and 2015, the Court noted.
 
Accepting the closure report, special judge Gagandeep Singh observed that the brokers, in collusion with iSec Services, bypassed SEBI’s audit guidelines by filing 'paper audits'. But he held that the evidence fell short of proving offences of cheating or forgery. 
 
Instead, the order squarely blamed gaps in SEBI’s enforcement mechanism, saying that while the regulatory intent was sound, “implementation was lacking… which defeats the very purpose of issuance of the guidelines.”
 
The Court noted that SEBI has a statutory duty to protect investor interests and urged the regulator to strengthen enforcement. It pointed to recommendations already made by CBI to SEBI in July 2023 for plugging systemic gaps and taking regulatory action against the firms and auditors involved.
 
“No ground for taking cognisance of the offences is made out. The closure report is accordingly accepted,” the Court ruled.
 
The decision effectively ends criminal proceedings in a case that raised questions about the robustness of oversight in India’s capital markets, even as it underscores the urgent need for SEBI to tighten monitoring of audits meant to safeguard investors against manipulation in algorithmic and high-frequency trading.
 
CBI had originally filed a closure report in 2023, but the court had rejected it and directed further investigation. Following that order, the agency revisited trading data and call logs of the period between 2013 and 2015. However, investigators noted limitations, as SEBI’s directive mandating brokers to preserve call records came only in 2018, leaving no contemporaneous records for the period under probe.
 
The first information report (FIR) in the case had been registered on a reference from the directorate of enforcement (ED), which had flagged irregularities in system audits by iSec Services, particularly multiple audits allegedly conducted in violation of SEBI’s rotational rules and instances where audit reports were prepared without proper site visits.
 
In 2001, Mr Pandey set up iSec Services when he was not in the service. Mr Pandey quit the company in 2006 when he returned to the police force and his mother and son became directors of iSec Services. The alleged irregularities in audits were said to have taken place during 2013–2015, years after his exit.
 
While this case has now been formally closed, the broader NSE co-location probe continues, with multiple cases still under investigation involving brokers, former exchange officials, and audit lapses.
 
The Colo case dates to 2015 when Moneylife first 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. 
 
The NSE Colo scam has been documented by Moneylife editors Sucheta Dalal and Debashis Basu in their book Absolute Power: Inside Story of the National Stock Exchange’s Amazing Success, Leading to Hubris, Regulatory Capture and Algo Scam, released in June 2021. 
 
You may also want to read...
 
 
 
 
 
 
Comments
parimalshah1
4 months ago
The regulators usually sleep on the wheel enjoying all the power and perks but without doing their job honestly (often conveniently looking the other way), and are jerked awake when some serious complaint is lodged.
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