NSE-Colo Scam: How Long Can the Regulator Drag on with the Drama of Investigation
How long should it take for Securities and Exchange Board of India (SEBI) to complete an investigation and book the culprits? While the Supreme Court (SC) bench, hearing the Adani stock price crash issue, correctly refused to give SEBI another six months to complete the investigation, the fact is that SEBI has no timelines for its probes and cases have dragged on 20 years, in some cases.
The SC has with it a report of its expert committee, headed by justice AM Sapre, which has some pungent remarks on the speed and manner in which SEBI conducts its investigation, attention to legal precedents and lack of separation of quasi-judicial functions from investigation and executive functions.
Take, for example, one of the most important recent cases pertaining to the National Stock Exchange (NSE) co-location (Colo) or high frequency trading (HFT) scam of 2015. The NSE Colo scam is already eight years old but SEBI shows no signs of winding up the investigation; it will probably continue with its roving investigation and stream of show-cause notices (SCNs), unless there is some external pressure to force SEBI to adhere to a timeline of closure.
In this context, on 20th March this year, SC refused to stay an order of the securities appellate tribunal (SAT) against NSE and ordered SEBI to release Rs300 crore out of the Rs944 crore it had impounded (read: NSE Colo Case: Apex Court Refuses To Stay SAT Order).
When I first reported the Colo scam on 19 June 2015 (Blowing the Whistle on Manipulation in NSE) NSE slapped us with a Rs100 crore defamation case which it withdrew in 2017 after paying Rs50 lakh fine. (NSE withdraws its Rs100 crore defamation suit against Moneylife, pays Rs50 lakh as cost and penalty). It is then that SEBI reluctantly began to investigate the issue.
This was confirmed in February 2023, when SAT questioned the regulator’s casual attitude, even as it threw out the bulk of SEBI’s findings. The order expressed surprise at how SEBI had repeatedly asked NSE to investigate itself and turned serious about the investigation only when questions were asked in Parliament. (Read: What about National Pride When SEBI Is Repeatedly Embarrassed by Overturned Orders in Major Scams?).
None of this seems to have pushed SEBI to improve its investigation or wind up the scam, as is clear from this chronology:
  • Between May 2017 and July 2018, SEBI served SCNs to over 47 entities under Section 11 B of its Act and, finally, issued five weak orders on 30 April 2019. They dealt with the issue of how certain brokers profited by obtaining preferential access to NSE systems, in collusion with officials of the Exchange. The fate of the key orders has been discussed above.
  • A separate set of proceedings looked into allegations that certain brokers raked in huge profits by using dark fibres (low traffic routes) to gain faster access to NSE’s trading system. Here, SEBI went after 56 entities between September 2018 and January 2022 and had passed 25 orders until October 2022.
  • This is not all. SEBI has issued two new SCNs this year (on 28 February 2023 and 17 May 2023) in connection with the trading access point (TAP) architecture. They resulted from two developments. The first was a reference from the tax department that brokers in collusion with NSE officials could bypass the TAP system to get faster access to the trading system; the same allegation made by Universal Brokers in 2013 had been ignored. The second SCN is the result of SAT asking SEBI to take another look at its findings about OPG Securities, a broker with the suspicious ability to constantly log in first to NSE’s trading system and reap big profits.
SEBI was unable to tell me exactly how many adjudications and actions under Section 11 B actions in the Colo scam are continuing. The results of an investigation headed by a retired judge are still not in the public domain; the findings of the Indian School of Business, Hyderabad, on profiteering by brokers other than OPG Securities are also unknown.
The two latest SCNs seem to be a winding-up exercise looking for scapegoats, since SEBI is unable to pinpoint individual culpability. A curious aspect of one of the SCNs is that it helpfully suggests the ‘settlement’ route to ‘noticees’, perhaps hoping they would agree to the stigma, if only to put an end to the decade-long harassment and repeated summons. Consider this.
1. The SCN of February 2023 drags in Vikram Limaye, who joined NSE only in July 2017 to clean up the Exchange, which was left in a shambles after the entire founder-management and their cronies were sacked or resigned. It seems absurd that SEBI has served him a notice without any strong or direct evidence that he is shielding anyone or burying the Colo investigation!
2. The SCNs seem to assign blame and responsibility on the basis of the designations of various officials. But key persons directly involved have escaped unscathed. Our book Absolute Power documenting the rise and fall of NSE, pointed out how power was captured by the founding team comprising Ravi Narain and Chitra Ramakrishna, who both rose to be managing directors (MDs) and CEOs. Under them, NSE had unconventional organisation structure where power was delegated to the MD, who worked with powerful consultants who reported directly to them. Officials, identified as key management persons (KMPs), often reported to these consultants who were the true KMPs, but off the books. Isn’t it strange that SEBI’s investigation team still remains clueless about this structure? Its latest SCNs have elaborate organisation charts to justify targeting those in official posts, even though they had no power to initiate mitigating action on issues.
3. It is strange how certain consultants or heads of teams who worked directly with brokers have been completely left out of SEBI’s eight years of roving investigation. They include a member of the founding team and a mysterious Chinese international tech consultant who has wiped out his public profile after the Colo scam.
4. The SCN of 17 May 2023, in response to the SAT order asking SEBI to examine possible collusion between OPG Securities and NSE officials, again comes up with a list of scapegoats and generalities. After quoting copiously from NSE’s documents and internal investigations, SEBI has not come up with anything more substantial than lack of diligence, laxity, failure to take preventive action and thereby facilitating fraud, etc. The only important finding is that OPG’s profits did increase in the period when it was getting early log-ins, leading to the conclusion of collusion with NSE officials.
In fact, SEBI needs to be asked why its investigation into OPG Securities did not come up with these findings in 2015 or 2017, although the firm was specifically mentioned by the whistle-blower. Wouldn’t it be fair to assume that SEBI officials who were sitting on these letters for six months, colluded with NSE to bury the whistle-blower’s letter until we published it in Moneylife?
The multiple investigations into the Colo scam have led to reports about loss of data, destruction of computers, and even the (false) claim that official emails were not archived and stored. So officials who have been charged in 2023 are expected to defend themselves without access to proper information on matters that happened a decade ago!
Isn’t it time for SC to examine whether any investigation into technology-intensive operation like the NSE can drag on inconclusively for 10 years? Who else but the SC can ask whether SEBI officials had colluded with the powerful Exchange to bury the scam with a weak investigation? It must also be remembered that NSE’s listing plans remain in limbo until the Colo scam is finally resolved and impacts valuation.
The SC-appointed committee on the Adani-Hindenburg matter has also identified and raised serious questions about the functioning of the market regulator. The committee notes that SEBI already has robust powers but it needs to develop a proper timeline for initiation and completion of investigations, proceedings and their disposal. It also needs to “develop a proper enforcement policy that would optimise the utilisation of precious regulatory resources.” Further, the absence of separation of investigation and adjudication functions means that SEBI is the investigator, the judge and the jury!
With two important cases involving the regulator’s investigation before the SC, we can only hope that there will be some directions that bring order and timeliness to SEBI’s investigations through judicial pronouncements.
12 months ago
SEBI , by it's conduct has covered itself with egg on it's face. There is no seriousness in anything they do. Leave alone investigations, what has it got to show for regulations except levying fines, that too after the horse has bolted. Despite useless performance by the officials, no one is held accountable and they all enjoy fat retirement benefits including Directorships in many companies for obvious reasons.
12 months ago
Sebi, supreme court and Rbi.. Jobs are without responsibility and accountability. One can safely retire with all perks.,
12 months ago
Each time one thinks SEBI cannot sink lower, it sets a new record low ????????
12 months ago
The matter is straight. A serious investigation could have identified the culprits within months. It is clear. SEBI wants to protect the culprits. So, the charade simply goes on.
12 months ago
Gone, gone with the wind, the integrity of institutions in India! None, including courts, are dependable and reliable. We just exist by default or by chance, not by choice.
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