SEBI in its final verdict charges NSE with mere “procedural lapse” – why ignore the scandalous nexus between Ajay Shah and NSE officials, his patronage, business interests of his family?
“No one killed Jessica,” screamed a ‘Times of India’ headline when a key culprit was acquitted by a trial court for the murder of a young model, who then working as a bartender refused to serve a drink to the son of a politician. The proceedings in the co-location scam at the National Stock Exchange (NSE) come close to the Jessica Lall murder trial, which caused a national outcry.
India’s stock market regulator Securities and Exchange Board of India (SEBI) is like the devious Delhi Police that failed to sustain the grounds on which they had built their case. In fact, SEBI has gone a step further and did something that even the spineless cops could not do. As per SEBI, there is no ‘fraud’ NSE committed. SEBI is passing off NSE’s system lapse as a mere coincidence?
There are allegations that the Indira Gandhi Institute of Developmental Research (IGIDR), where Shah’s wife Susan Thomas works, too has got money from NSE for various activities. Did SEBI investigate this?
Like the antagonist of Dostoyevsky’s classic ‘Crime and Punishment’ who gives numerable hypothesis to ‘justify murder,’ SEBI too has formed its propositions, devoid of any deductive logic or empirical observations, in declaring that there is no ‘fraud’ at NSE.
Investigations by SEBI’s own Technical Advisory Committee (TAC) has said, “NSE systems were prone to manipulation, market abuse and brokers got preferential access advantage”. But SEBI considers this a mere violation of ‘flouting principles underlying the conduct of the business of a stock exchange.” Investigations show how NSE executives ignored complaints of misuse of its trading architecture. For SEBI this is just ‘code of conduct violation.’
SEBI, can it not be a ‘system pre-designed for fraud or a deliberate lapse?’ There is compelling evidence to show that ‘few’ derived benefits from this ‘systemic lapse.’ SEBI’s logic to consider ‘by-design systemic lapse as no fraud’ is a crude, distorted and ridiculous representation of the scam, which implies that ‘Murder by Decree’ is no crime.
Effortlessly, SEBI in its final verdict charges NSE with mere “procedural lapse” – why ignore the scandalous nexus between Ajay Shah and NSE officials, his patronage, business interests of his family? Is SEBI capable of investigating this?
The holy nexus
Bureaucrats who worked at Finance Ministry and were close to Shah, who was also a consultant in the ministry, have enjoyed a top position at NSE including that of chairman.
In fact, the same NSE chairman was appointed at top position in the National Institute of Public Finance and Policy (NIPFP), where Shah is a researcher, and wrote letters to ministers and Babus to justify how Shah was clean. The muck runs so deep that the top NSE bosses including Ravi Narain, Chitra Ramakrishna enjoyed the patronage of Shah in the Finance Ministry and in-turn provided him whatever data he wanted at the exchange. Shah’s sister-in-law Sunita Thomas, whose husband was a top executive at NSE, runs an algo software company and has profit sharing arrangement with brokers and funds. Where is the investigation into how much money was made by Shah, his family and Infotech Financial and other companies linked to his family? There are allegations that the Indira Gandhi Institute of Developmental Research (IGIDR), where Shah’s wife Susan Thomas works, too has got money from NSE for various activities. Did SEBI investigate this?
SEBI asked the accused NSE to appoint forensic auditors to probe its systems. The exchange appointed the same auditors, maybe with permission of SEBI, who had worked for it in the past. Is it not a conflict?
Conveniently, serious charge of Prevention of Fraudulent and Unfair Trade Practices (PFUTP) was dropped by SEBI in the co-location scam. SEBI said, “Alleging fraud against the exchange, in this scenario, tantamount to attributing intention or knowledge of which there is no proof.”
Co-location manipulation ‘lacks proof’ but cable infrastructure at NSE has no alibi hence ‘fraud’ in dark-fiber matter. The fact is that two trading modes are just the sides of the same coin – access advantage.
SEBI has looked at all the instances involving data sharing with Shah, his family connections and their nexus with NSE officials and political patronage in a secluded manner to conclude ‘no fraud.’ Seriously, considering the nexus, the design of lapses and ignorance of complaints by NSE officials of how there were no breakers in the system allowing people to take advantage, SEBI believes ‘it was all without intention or knowledge?’
Shah and Thomas were involved with NSE since the inception of the exchange in 1993 and were key creators of NIFTY index along with Narain and Ramakrishna. Can investigators conclude that the ‘four Musketeers’ did not know what a systemic lapse at NSE co-location can do and how algo or high frequency trading can prosper due to such lapses?
So, was the ‘systemic lapse’ a mere ‘code of conduct violation’ as SEBI paints it in its verdict? If that is the case, all the financial scams in the world are a result of ‘mere systemic lapse and can be passed as a violation of the code of conduct’ as they involve no gun totting or knife-wielding antagonist but ‘wily and well researched’ experts who can take advantage of system lapse.
Has SEBI details of what data Shah and gang extracted from the NSE? Was it ‘live’ market data? Like it has now been revealed in MCX data sharing scandal involving Shah’s wife Thomas?
For, the fact in Shah’s own words is that they had password access to NSE systems and files could be downloaded easily. Is there any record of what files were downloaded? Where is a full investigation into all the nexus as per criminal procedure code?
Birth of co-location & SEBI’s role: A wider scheme?
SEBI has botched up the investigation from the beginning as the regulator itself is not clean and needs to be probed as it is conflicted in the scam. There are allegations that when the co-location started in 2009, no representation about it was made to the regulators or no formal permission sought. Usually, when new significant changes are made SEBI issues paper for public comment with regard to the changes or even appoints expert committees to suggest ‘safeguards.’ But nothing like that was done by SEBI when NSE started co-location, which has come in public domain. Considering this grave and vital fact, can NSE’s defective and faulty ‘co-location trading infrastructure’ be still passed as procedural lapse? Is it not a sleazy tale of a large scheme to defraud the entire market?
SEBI after 2016 brought about changes in NSE systems that act as a safeguard to ‘system lapse.’ Who is responsible for the absence of such safeguards for the past many years when co-location trading was allowed and no details about it were sought by SEBI? Does it not make SEBI a part of the larger scheme too?
Murder by Decree?
The Nexus gets only deeper. C B Bhave, who was then heading depository NSDL, a 100% NSE subsidiary, was made the SEBI chief and it is under his nose that the entire co-location trading at NSE came into existence. Is it not a conflict of interest that an executive who got a salary for years from NSDL, whose parent was NSE, came to SEBI and ignored the shenanigans at NSE? The same Bhave, whose position at NSDL depended on NSE bosses for years, on becoming SEBI chairman did not ask how co-location started in the absence of all the formalities?
It is the same Finance Ministry, where Shah was a consultant and Babu’s who got later appointed at key NSE positions, that were backing Bhave’s appointment at SEBI. Murder by Decree?
It seems SEBI, like Dostoyevsky’s antagonist Rodion Raskolnikov, in giving its final verdict in the scam of ‘no fraud,’ truly believed that those in the position of power are ‘naturally capable of scandal by design and even have the right to do them.’
Crime & Punishment
Now, in not alleging a ‘fraud’ by NSE in co-location but still asking the exchange to pay Rs.624 crores plus 12% interest, has SEBI played to the gallery and created a sensation so that people will not prod over the lacuna in its order?
SEBI’s disgorgement order is an eyewash. Nearly Rs.1,000 crore disgorgement for ‘no fraud?’ Is there any parity between ‘Crime and Punishment?’ Dostoyevsky is galore!
Courts will observe the disparity of punishment, when there is no crime and let the accused free. ‘Has SEBI given a verdict to be exploited?’
SEBI asked the accused NSE to appoint forensic auditors to probe its systems. The exchange appointed the same auditors, maybe with permission of SEBI, who had worked for it in the past. Is it not a conflict? Auditors probed NSE systems and have even told SEBI that in lot many places proper information was not shared with them. How can SEBI reach conclusions on such grounds?
Is there a law of land in India? Courts, public institutions may not be dead but have they slept? Stock market integrity is susceptible to the acts of its very guardian – SEBI – time and again the blatant misuse of power, ignorance of serious violations by suited booted top dollar earning NSE executives, who boost of high political patronage, is being harboured and nurtured. Does the government realize the cost of SEBI’s incompetency? Not NSE, but investigators in co-location and preferential access scam should be knocking at the doors of SEBI.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
 SEBI’s verdict on the collocation case doesn’t go far enough – May 1, 2019, The Hindu Business Line
 Anatomy of a Crime P4: Who benefited from the HFT scam? Oct 4, 2017, PGurus.com