NSE: The Slow Process of Change in a Fractured Organisation Does Not Address Structural Issues
Sometimes, no news is good news. After seven long years of turmoil, the very fact that the National Stock Exchange (NSE) is not making headlines for the wrong reasons sounds good. But is that good enough? India’s premier exchange has been badly battered by the co-location (Colo) scam, technology issues that disrupted trading, broker defaults, illegal phone-tapping, the embarrassing ‘Himalayan Yogi’ episode and capricious appointments and promotions which spattered into the public domain in a torrent of sordid facts. These egregious events confirmed that the founding team had been running the Exchange like a private fief for over a decade, under successive supportive boards and a benign regulator. This column has persistently highlighted these goings-on since 2008 and earlier. 
In a fair system, the Securities and Exchange Board of India (SEBI) would also have faced the heat for failed supervision after the Colo scam erupted in 2015, when Moneylife first wrote about it. Instead, the regulator wasted another five years when it approved the appointment of Vikram Limaye as a managing director (MD) and chief executive officer (CEO) with no experience in capital market, regulation and supervision or even a background in technology—the heart of NSE’s operations. 
Mr Limaye spent his tenure defending the previous management and effecting minor staff changes without fixing the core issues. Consequently, new problems and investigations erupted and caught him off guard. In some ways, the appointment of Ashish Chauhan in July 2022 sets the stage for significant change. He was part of NSE’s founding team, understands technology and is open to far more public and regulatory scrutiny after heading the listed Bombay Stock Exchange (BSE) for a long time. 
But fixing a badly battered organisation is not simple, especially when the pendulum of regulatory attention has swung the other way. Some structural issues can only be addressed by the government and the regulator through a non-partisan discussion with all stakeholders, rather than a committee with an agenda, as was done in 2010.
Fractured Organisation
Bringing a sense of calm and continuity in NSE’s day-to-day functioning has to be the first priority. On-going investigations and show-cause notices that continue to be issued by the market regulator, the raids, summons and interrogation of senior officials by the enforcement directorate (ED) and the central bureau of investigation (CBI) have taken a toll on the morale. Two top executives suffered a cerebral stroke; one of them succumbed to it.
An environment of fear and distrust prevails today which is worsened by high turnover of senior managers who were privy to key decisions or part of the close cabal around the two successive MDs: Ravi Narain and Chitra Ramakrishna. NSE has a relatively new company secretary (since December 2020), chief technology officer (since December 2021), group general counsel (since mid-2021) and chief risk officer (a new post created by Mr Limaye). 
J Ravichandran, who was part of the core team that ran NSE for several decades, retired as group president on 31 March  2021. He got away unscathed, despite playing a key role in NSE as head of legal and secretarial matters and his silence over the curious hiring and repeated promotions of Anand Subramanain, the group operating officer, who was arrested along with the former MD Chitra Ramakrishna. In fact, SEBI had asked Mr Ravichandran to hold charge as CEO after Chitra Ramakrishna’s abrupt exit. (Read: Latest SEBI Order against NSE’s Former Management including Chitra Ramkrishna Reveals Shocking Misgovernance and Improper Equations Suppressed by Board
Ravi Varanasi, who actually ran the Exchange with day-to-day operational powers, also retired recently. He is the one who got transcripts of tapped phone conversations and also sent out congratulatory messages to brokers who recorded high trading turnover without investigating their business model. Saurav Ghosh, who joined as group human resources chief during Mr Limaye’s tenure, has made a quick exit in less than five years. 
Three senior officials, including Suprabhat Lala, who have adjudication orders and rulings against them, have been finally sidelined. During Mr Limaye’s tenure, NSE took a formal stand that it would not act against complicit officials, despite repeated directives from the regulator. The Exchange had obtained legal opinion that since the securities appellate tribunal (SAT) had stayed some of SEBI’s orders against NSE, it will not be able to initiate action against the officials. This stand has now been modified to the extent that they have been moved from key management functions.
Consequently, those having to answer queries do not know enough about earlier controversial decisions. What is worse, there is a fear of taking decisions; so most matters are kicked upstairs for approval by committees of the board that end up meeting every few days. This began during Mr Limaye’s tenure. In response to the ‘Himalayan Yogi episode, emails of the CEO and top officials are scrutinised by the audit committee and sent to SEBI. Similarly, even direct orders and directives by SEBI, which need executive action, are also put up before a board committee to be cleared for implementation. This has created an extraordinary work atmosphere which surely cannot be routine in the biggest market infrastructure institution (MII) that India has. 
Governance Issues
After decades of allowing NSE’s top brass to have a free run, SEBI’s hawk-like scrutiny now borders on micro-management, say sources. And, yet, it has not addressed core long-term issues such as: a) listing of NSE; b) ensuring fair and healthy competition among exchanges; c) greater accountability to parliament; and d) more transparency on the part of the regulator as well as MIIs. 
By 2010-11, NSE had turned into a monster institution that would do anything to destroy competition and retain its monopoly. A public listing would have put NSE’s actions under a spotlight which the previous management didn't want. So NSE opted for the backdoor route of allowing early investors to exit at private valuations and was allowed to increase its shareholder base exponentially without getting listed. It got away because SEBI looked the other way regarding NSE’s shenanigans.
A very powerful lobby that supported the erstwhile management cabal continues to push against NSE being listed arguing that exchanges are public utilities that ought not to be driven by the profit motive. This was also the Bimal Jalan committee’s view in 2010; but the agenda then was to prevent MCX Ltd and BSE Ltd from being listed and allow NSE to remain private. That ship has now sailed; moreover thousands of investors, including officials in regulatory bodies and the finance ministry, are holding unlisted NSE’s shares, waiting for a listing. 
SEBI has been a mute spectator to top wealth management firms marketing unlisted NSE shares on the promise they would be listed at a huge premium. Although NSE’s aggressive institutional investors have turned inexplicably silent over listing, it is clear that NSE is no longer in a hurry to be listed. 
Growth versus Competition
If India’s monopoly exchange chooses to remain unlisted, while its significantly smaller competitors are under far more public scrutiny as listed entities, how would this provide a level playing field? 
It is pertinent to revisit a report by International Organisation of Securities Commissions (IOSCO) which had flagged the following concerns with demutualised/listed exchanges in 2006: a) they would focus on profit leading to lower regulatory standards; b) there would be insufficient allocation of resources towards regulation; c) such entities could misuse their regulatory power against competitors; and d) there would be issues about regulation of a self-listed entity.
Ironically, NSE was guilty of all these abuses even as an unlisted entity. Higher profits (translating to greater power and perks for senior management) and preserving its monopoly by hook or by crook led to 30-odd broker defaults (NSE turned a blind eye to Ponzi schemes that brokers were offering investors so long as they recorded higher trading volumes) as well as the systemic and regulatory issues brought out by the Colo scam and phone-tapping scandals. 
The answer to these concerns would be to revisit the issue of segregating the commercial and regulatory functions of stock exchanges articulated in a paper by professors BB Chakrabarti and Mritiunjoy Mohanty of IIM Calcutta. The professors had argued for a single clearing corporation for all exchanges, so that risk could be centrally managed across the system. They said that exchanges should compete on the basis of the trading platform and the innovative products that they offer, while regulation and risk-management should be independent and outside their purview, to reduce conflict of interest.
At present, the Chinese walls that separate the clearing corporation and its functioning do not seem to work. Settlement guarantee funds of exchanges remain untouched and investors bear the brunt of their failure to manage margins, leading to broker defaults and litigation. The Mahalingam committee will, hopefully, revisit these suggestions; but it needs to come up with answers soon. 
2 years ago
NSE looks like an underworld operation with every crime in the book being committed within its four walls.
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