Market regulator Stocks and Exchange Board of India (Sebi) is expected to issue the final order in the high profile NSE co-location case within “few months” even as the regulator has issued fresh notices to the country’s largest stock exchange, and around 20 individuals, including former and current employees, brokers and service providers.
According to sources, the regulators will issue the final order in the case without much delay as the investigation is complete and final hearing is set to be completed soon.
The regulator has recently served second show-cause notices in the three-year old case to former top NSE officials including Ravi Narain, Chitra Ramkrishna, Subramanian Anand and also to current business development head Ravi Varanasi and charging them of “facilitated fraud and manipulation” giving preferential access to the exchange’s servers to a select set of brokerages.
The three brokerages named in the second show-cause notice were OPG Securities Ltd, Way2Wealth Brokers Pvt Ltd and GKN Securities Ltd who allegedly got access to NSE server and had a latency advantage, lower time for data to travel over other NSE members which resulted in monetary gains for them.
The top brass of NSE were accused of failing to take preventive and curative measures against brokerages gaining preferential access to the bourse’s servers.
In the show cause notice, the regulator has charged Chitra Ramkrishna, Narain, Anand Subramanian, Ravi Varanasi and Ravi Apte, among others, with fraud, violation of the SEBI Act and Securities Contract and Regulations Act.
Narain and Ramkrishna are former managing director and chief executive officers, Anand Subramanian the former group operating officer and Apte the former technology head and Varanasi is the current head of business development at NSE.
The show cause notices states that NSE has undertaken practices of denial of services to certain stockbrokers resulting in discrimination and non-adherence to principle of fairness and equal opportunity by allowing Way2Wealth (W2W) and GKN Securities to terminate the connections directly in the rack placed inside the Exchange’s co-location facility, which is in complete contradiction to normal practice followed by the bourse.
The notice states “?at the relevant period of time Mr Umesh Jain was CTO of NSE and in this capacity he was responsible for inter-alia, network operation, application operation and hardware and storage management. He was also the supervisor of Mr Deviprasad Singh (Head of colo support, NSE) who had granted permission to Sampark to place infrastructure in NSE, without verifying their license. It was Mr Singh’s responsibility to monitor the cabling and ensure fair and equitable access to all its trading members. As a supervisor of colo support, it was Mr Jain’s duty and responsibility to incorporate checks and balances so that, incidents like cabling to Sampark through W2W rack could have been detected early. The show cause notice claims that he failed to establish procedures to prevent such lapses.”
W2W and GKN were allowed to establish P2P connectivity through service provider Sampark, while many stock brokers who desired to lay P2P connectivity through providers other than the four mentioned in the NSE circular on 31 August 2009, were denied permission by NSE staff. It has also been alleged that NSE lacked a clear documented policy for due diligence of service providers by checking their license while allowing P2P connectivity.
NSE also allowed W2W and GKN to continue to avail Sampark connectivity even after finding out that Sampark did not have the requisite Department of Telecommunications (DoT) license. In the process of providing connectivity, a site inspection was conducted for other stockbrokers such as Millennium, GRD and SMC while the same procedure was not followed for W2W and GKN.
The notice said Chitra Ramakrishna, acting MD and CEO of NSE at the time, had the responsibility to create investor confidence for the integrity of the market and also to ensure that the stock exchange abides by all the provisions of SEBI. Subramanian Anand, Group Operating Officer (GOO) & Advisor to MD and Ravi Varanasi, Head of business development function have also been asked to reply to the SCN.
The conduct of NSE and W2W of continuing usage of the Sampark line even after knowing that they did not have the requisite licenses for providing such connectivity, points towards collusion amongst them for the express benefit of W2W. Accordingly, SEBI has named W2W’s CEO R Shashibhushan, and Directors CK Nithyanand and BG Srinath in the SCN. Similarly, GKN was also a direct beneficiary of preferential treatment as they too continued to avail the services of Sampark until September 10, 2015. Thus, SEBI has named partners of GKN Securities Sonali Gupta, Om Prakash Gupta and Rahul Gupta in the notice as well.
In fact, Sampark acted in collusion with W2W and NSE to lay the cabling in such a way that W2W had lower latency compared to other trading members connected to the line. Accordingly, Prashanth D’souza, CEO of Sampark has also been issued this notice as it was his responsibility to not indulge in manipulative, fraudulent or deceptive transactions or scheme and abide by all the provisions of law while dealing in its business.
According to the document, to the question on how the principle of fair and equitable access was ensured, the notices quoted Narain as saying that “equal and fair access was seen to be an outcome of ensuring adequate capacity at all times as the market gradually grew and ensure that no crowding out could take place”.
Chitra Ramkrishna said, “While the principles of equal and fair access would need to be embodied, in the actual practices and implementation, the respective departments may have had their own monitoring ranges (i.e. a range which was acceptable as a level of service)”.
The notices point out that adherence to the principle of fair and equitable access was left to the technology team without any specific guidance. Narain, Ramkrishna and Anand failed to perform their role in establishing adequate systems, according to the notices.
Also, the manner in which OPG continued to gain preferential access day after day “indicates complete laxity and dereliction of duty” by the three senior-most NSE officials, the notices said.
The notices have been directed to provide a reply to the show cause notice along with any supporting documents within 21 days of the receipt of the notice. Sebi said failure, which will allow the regulator to assume that notices have no reply to submit and accordingly proceed to take action in accordance with the law and the SEBI Act.
The controversy over the issue has delayed the NSE’s listing plans and investors in the exchange are getting wary over the delay in IPO process.
SEBI has also returned the NSE’s plea seeking to settle the co-location probe. The exchange had filed the consent petition on behalf of 13 current and former officials, including itself. The Securities and Exchange Board of India has asked the applicants to file a fresh consent plea once it completes the probe against brokers allegedly involved in the case.
This uncertainty over the probe, that started in 2015, and lack of clarity regarding the IPO timeline has prompted some of NSE’s domestic and foreign investors to exit their investments, said one of the persons quoted above. In the last six months, domestic investors IFCI Ltd, IDBI Bank Ltd, Bajaj Holdings & Investment Ltd have pared their stakes in the NSE, as per information filed with stock exchanges. Bank of Baroda has also stated in disclosures to investors that it is in the process of selling its NSE shareholding.
According to reports, in the last six months several investors in the exchange had sold all or some of their shares given the rise in the exchange’s share price and uncertainty over its initial public offering, said two people familiar with the transactions.
Besides the Sebi, the Reserve Bank of India (RBI), the income tax department and the Central Bureau of Investigation (CBI) are looking into the matter after it came to light that the country’s largest exchange had been compromised so significantly.
The architecture of the scam has been unraveled by CBI. Sources close to developments revealed that initially NSE did not have the system of starting its TBT servers (tick by tick server) at a fixed time everyday. But Sanjay Gupta with the help from unknown persons, managed the data centre staffs of National Stock Exchange (NSE) who passed the information regarding switching on time of NSE exchange servers. During October 2012, NSE improved the system of imbalance load factor among difierent TBT Colocation servers and introduced load balancer among the various TBT Co-location servers. Load balancer ensured that the load is evenly distributed among the TBT servers. ln addition there were backup servers available in NSE for providing connection to the servers of the brokers only in case primary servers had some technical glitch or failure. While servers of all other brokers were connected to the primary seryers of NSE, Sanjay Gupta once again dishonestly and fraudulently managed the data centre staff of NSE who started to let OPG Securities Pvt. Ltd. connected to the backup servers especially.
The country’s largest bourse had earlier engaged Deloitte for a forensic audit of its equity derivatives platform. In July, the NSE had approached Sebi to settle the case through consent mechanism but a decision from the regulator is yet to come.
Deloitte Touche Thomatsu, which did a forensic review of the NSE’s Colocation facility, found that OPG Securities was the first in most cases during trading sessions. Moreover, in order to secure a favourable report from SEBl in the on-going enquiry being carried out by SEBI against the role of OPG Securities Pvt Ltd in the misuse of TBT architecture of NSE, Sanjay Gupta dishonestly and fraudulently influenced the officials of SEBl for which bribe money was exchanged between Sanjay Gupta and some unknown officials of SEBl. It has further been revealed that bribe amount was paid to unknown officials of NSE and SEBI by accused persons which shows criminal misconduct on part of unknown public servants for showing undue favour to OPG Securities Pvt Ltd.
The NSE had 79 shareholders when it filed its IPO draft red herring prospectus in December 2016. That increased to 84 as of December 2017, according to exchange filings, and is expected to top 100 by the end of March, said the second person. Many of the new investors are high-net-worth investors and pre-IPO funds, he added.
In December 2016, the NSE filed the draft red herring prospectus with SEBI for an IPO of 11.14 crore shares constituting 22.5 percent of the post-offer paid-up equity. The IPO size was estimated at Rs 10,000 crore, valuing the exchange at close to Rs 45,000 crore.
The entire IPO was an offer for sale of shares owned by 27 investors, both domestic and foreign. Bankers to the issue included Citigroup, Morgan Stanley, JM Financial Institutional Securities and Kotak Mahindra Capital Company, HDFC Bank, ICICI Securities, IDFC Bank Ltd. and IIFL Holding Ltd.
NSE is now in discussions with Singapore Stock Exchange to work out new structure and then approach Sebi for approval under the broad framework of ‘bringing back liquidity from Singapore to India,’ Limaye said. He was in the capital for the silver jubilee celebration of NSE, which also saw the oldest exchange going for a logo change.
“It will take some more time to come to an understanding of what market participants’ feedback is on the structure. Then we will have to take it to the regulator. The structure (of the agreement on the products) is still evolving. We are trying to bring back liquidity from Singapore to Gift City. I am hopeful that the current discussions will result in a structure that will be acceptable to both of us,” Limaye said.
The matter relates to a tussle between the NSE and Singapore Exchange (SGX) over the launch of some products. The two exchanges last month resumed discussions on a potential collaboration in Gujarat’s International Financial Services Centre, while the arbitration proceedings were deferred pending outcome of the talks. The move will help in transition of liquidity from the offshore market to the GIFT City.
Markets watchdog Sebi and Singapore’s integrated financial regulator MAS had also discussed amicable resolution of the NSE and SGX matter, among various issues of cooperation.
Limaye said the exchange is keen to provide depth to the spot market and NSE could be interested in participating in a spot exchange for gold if the government comes out with proper policy changes.
“We will try to focus on delivery based contracts in commodities. But that cannot be done in crude. As per spot market, the government is thinking of policy change in gold. There is a potential of setting up of a spot exchange in gold. That is an area we would also be interested in. But it will require regulation from the government first. If that’s the case we would be very much interested in participating in spot exchange for gold,” he said.
Limaye further said that NSE’s SME platform is a huge success and its pipeline is very strong and over 100 companies are already listed. “In this fiscal another 50-60 SMEs could get listed. The SME platform has broadened the investor base beyond HNIs.”
NSE, which was reportedly in talks with the Multi Commodity Exchange for a merger, is going to launch commodities trading from October 1.
“We have filed for our product approval to Sebi for commodities exchange which starts on October 1 offering other classes of products, including agri- and non-agri commodities,” Limaye said.
He, however, offered no comment on rumoured merger plans with MCX. Since MCX is a listed entity, it will let its investors know what is in their best interest, he said while stating generally the bourse is open to inorganic growth if that makes sense.
NSE was hoping to complete the IPO in financial year 2018-19.
Read More: How the scam unfolded