Why are the agencies going slow, or even not moving at all, in such a serious matter that impacts faith in markets?
Market regulator Securities and Exchange Board of India (SEBI) has acted in a flash to stem the rot in Karvy Stock Broking, but is strangely silent on two of India’s biggest co-location scandals at NSE and MCX, where the losses could have been way beyond market imagination, probably in the range of Rs 30,000-50,000 crore.
SEBI, it is now clear, has consigned the NSE scandal to the backstreets, as little is being heard about the scam that had rattled the markets. And now, SEBI has expressed its interest to ask MCX to do an internal investigation to probe what led to the data theft. In other words, those involved will be investigated by those close to them and working in tandem. Why SEBI made such an unprecedented move is yet to be understood. The move has surprised and shocked many who had expected the market regulator not to shut its eyes but use a sledgehammer to crack open the crisis that involves the same set of people (in both NSE and MCX). Unless a full forensic audit is carried out and concealed data retrieved, the culprits will escape. However, such accountability seems of no interest to SEBI.
The fact that all of this happened right under the nose of SEBI raises serious doubts about the ability of inspection by the market regulator.
For all practical purposes, SEBI is in a typical one step forward, two steps backward mode. Why SEBI is silent about co-location, everyone is asking.
Now, SEBI did bar Karvy Stock Broking from acquiring new stockbroking clients due to alleged misuse of clients’ securities worth Rs 2,000 crore. The move was swift. This is one of India’s biggest cases of broker defaults in the equity segment. The market regulator is sanguine that despite regulations, Karvy misused client collateral for its own trades. So Karvy has been punished.
A chart sourced by this reporter shows ICICI gave Karvy Borrowings Rs 875 crore just a month ago. Worse, no one knows under what rules the banks and non-banking financial companies accepted the pledge of shares not owned by the brokerage house. Shocked officials of the Ministry of Finance told this reporter that it was like gullible investors blindly signing over their shares to the brokerage.
Karvy is among India’s top 10 brokerage companies, with 244,000 customers. Probably broking is the only sizable business left after the company sold its registrar and transfer agency, Karvy Fintech, to US private equity investor General Atlantic for Rs 1,000 crore last year. If SEBI’s probe avoids the slip-ups of the past and establishes any misuse of client money and shares, it will be hard for Karvy to regain client trust, central to the business. It is reliably learnt that along with Karvy, approximately 36 brokers are being probed by SEBI for misappropriating client funds worth over Rs 15,000 crore. As yet, the market regulator seems to have adopted the pace of the snail on this matter rather than move with the speed needed to establish faith in markets.
Preliminary investigations reveal rules were violated left, right and centre. Strange it happened because SEBI itself mandates that a broker cannot keep shares of a client for more than 24 hours after purchase in the pool account of the broker. If that happens, stiff penalties are supposed to be imposed. In the last one year, four big brokers have defaulted. Amrapali, Fairwealth (the joke in the Finance Ministry is that Fairwealth has actually bid Farewell and run away from India), K Net and now Karvy. The fact that all of this happened right under the nose of SEBI raises serious doubts about the ability of inspection by the market regulator.
The practice has been rampant as many brokers enjoy powers of attorney on their clients’ demat accounts and are authorized to transfer client securities to the collateral account. Now the watchdog has directed National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) not to act upon any instructions from Karvy in pursuance of the power of attorney given by its clients. “As the Karvy scandal shows, what your broker tells you about your stock holdings could also be fictional. The most worrying implication of the Karvy scandal is that there is never just one cockroach in the kitchen,” remarked seasoned stock analyst Dhirendra Kumar.
But the damage has happened, the losses are still being estimated by market analysts.
Now, SEBI reacted quickly in the case of Karvy. But the market regulator is seen slow pedaling the case of data theft at some of India’s top exchanges. As a result, the big question which emerges is: What does it mean for India’s retail investors who are increasingly looking at the stock exchanges in the event of low returns from banks, gold and real estate?
But if data thieves need to be brought to book and SEBI—whose prime responsibility is to protect the faith of the retail investor in the capital markets—is inexplicably silent, the faith of retail investors in India’s capital market will shrink. Worse, investors will lose confidence.
The current case of data theft comes right after the crisis at the National Stock Exchange (NSE) and revolves around the Multi Commodity Exchange (MCX), which—it has now been conclusively proved—had allowed unfair access to some to use such sensitive data. And worse, instead of conducting a deeper investigation into the theft that took place way back in 2016-17, SEBI has asked MCX to do an internal assessment. Expectedly, the news has triggered widespread outrage in Mumbai, India’s financial capital, where many have asked why there was such a timid response from the market regulator. MCX probing itself is not good news, there will always be doubts about its efficiency. Still, SEBI is silent.
Market insiders say the MCX data crisis is a matter of grave concern for India’s retail investors. But is SEBI listening?
Market insiders have told this reporter that there are high chances that the scandal could be covered up as a “system” flaw and eventually buried. The sources further say that it is almost clear now that MCX will not take any strict action against its former MD and CEO, Mrugank Paranjape. “It is likely to be passed off as a procedural lapse,” claimed sources familiar with the lackluster investigation into the matter.
Many in the markets have already started drawing parallels between the data theft in MCX with that in NSE. The NSE case was probed by SEBI, but again the result was negligible. The CBI, which is probing the case after this reporter appealed in the Delhi High Court, is yet to give its final report.
So who are the officials who wish to protect the guilty in MCX? Can they be named and shamed? Officials of MCX are not responding to specific queries, including how data was reportedly taken by Dr Susan Thomas, a Doctor of Philosophy (PhD), who is also a professor at Indira Gandhi Institute of Developmental Research (IGIDR). Thomas was helped by her associate, Chirag Anand, a Delhi based Algo software developer. Her husband, Ajay Shah, is being probed for a similar charge in the NSE Algo scandal.
Paranjape, in his defense, says data was shared with Thomas under an agreement and the company (read MCX) had a separate undertaking. Paranjape hopes his statement will be taken at face value, he is not saying the external audit conducted by T.R. Chaddha & Co had called the agreement illegal because no one in MCX legally vetted the agreement between MCX and Thomas. Some in MCX even alleged there was no agreement between MCX and Thomas, and once the scandal surfaced a backdated agreement was created to hoodwink the shareholders. What is interesting is that a website made a shocking claim about an email from former MCX official V. Shunmugam saying Paranjape gave “an end of the day data pipeline to Thomas”. So, how will MCX probe this charge? What is equally disturbing is the fact that IGIDR managed to source price sensitive information and live data, probably because the Delhi-based organisation wanted data not to be available to other traders.
What is worrying many is that the data shared was not exactly for the said project. And then, the project did not produce the desired results. So why was the data sourced? And now, the billion-dollar question is can Paranjape, Thomas and Anand getaway? More importantly, are they being protected by some very powerful people? Data theft is a serious criminal act, and can never be clubbed as a civil issue. If notorious brokers like Ketan Parekh and Harshad Mehta were imprisoned and questioned, how come no one is framing similar charges against Thomas and her team, Paranjape and Anand? How could SEBI not remember Thomas, Shah and Anand managed such exclusive NSE data as well?
The MCX IIS logs show live data being retrieved by IGIDR around 0900 hours, just before the opening of commodity markets. The data is sensitive and could have easily been used for purposes not intended in the agreement. Anand, SEBI should know, is an Algo trading software developer, and had asked for over 100 data fields. In short, it is clear that he wanted the data to develop Algo strategy than the underlying deliverables listed in the agreement.
Market insiders say the MCX data crisis is a matter of grave concern for India’s retail investors. But is SEBI listening? If the market regulator calls the data theft a procedural lapse—like it did in NSE—the dubious, scandalous nexus between scandalous nexus between officials of the exchanges and outsiders will never be revealed. It is now very clear that SEBI had, for reasons known or unknown, completely ignored the criminal angle in the NSE. It should not have, especially when it was aware that Shah for years received sensitive data from NSE because of his understanding with the exchange. Shah, it is also proved now, had passed on the data to his family members and close aids like Anand for Algo software designing. But no one touched Shah. He had, among his backers, top NSE officials, the then Finance Minister P. Chidambaram and bureaucrat K.P. Krishnan. What is surprising is that the same tactics were adopted at MCX. Why are the agencies going slow, or even not moving at all, in such a serious matter that impacts faith in markets?
If such activities continue, the loss will be the credibility of the exchanges, and India’s retail traders. SEBI must act, and act fast.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
 Data theft at exchanges: SEBI’s scandalous inefficiency – November 26, 2019, PGurus.com
 ICICI Bank slippages to rise as Rs 875 cr loan to Karvy may turn NPA – November 23, 2019, freepressjournal.in
 MCX data scandal: Tip of an iceberg or case closed for SEBI? – May 15, 2019, PGurus.com
 SEBI’s ignorance of happenings at MCX – Déjà vu? – April 5, 2019, PGurus.com
 India’s Algo trading scandal: a Tale of Two Exchanges and One Somnolent Regulator (SEBI) – April 26, 2019, PGurus.com.
 Catch the guilty, SEBI – December 7, 2018, PGurus.com
- SEBI wakes up to mess in Karvy, sleeps on Co-location scam - December 8, 2019