MUMBAI: The former management of premier stock exchange NSE and people connected with them have grabbed the headlines recently, for all the wrong reasons. Chitra Ramkrishna, former MD & CEO of NSE, is presently in CBI custody, her then advisor Anand Subramanian is in jail and prominent public policy expert Ajay Shah has been interrogated by the federal anti-corruption agency.
The latest events unfolded after a Sebi order of February 11, which levelled grave and serious allegations of corporate governance lapses against Ramkrishna and her former colleagues, besides noting that she and Subramanian shared confidential details of financial projections, dividend payouts and HR policies, among others, with a purported mystic over an email id: email@example.com.
Stock market regulator Sebi stumbled upon these email exchanges while investigating the co-location scam of 2010-14, in which the CBI filed an FIR in May 2018. CBI’s recent arrests of the two former top management executives after new facts presented by Sebi are to ascertain any likely link between the co-location scam and these messages.
Neither Ramkrishna nor Subramanian were named in the 2018 FIR, though unknown NSE and SEBI officials have been cited as being involved in the co-location fiasco.
The co-location scam
Co-location was conceptualised and implemented from 2009 when Ramkrishna was joint MD of NSE.
It means that a market participant places his server next to the exchange server rack, allowing him to execute orders and get exchange price feeds quicker than the others.
Co-location’s the fastest mode of connection to an exchange server, the others being through a leased line, multiprotocol label switching, internet, computer to computer link, etc. This naturally gives him an edge over other market participants.
“Co-location is a natural progression of algorithmic or programmed trading, where speed is the key,” said a former exchange official requesting anonymity.
With Sebi permitting algo trading, NSE set up co-location facilities during 2009-13, allowing brokers to avail of this architecture for a fee.
Nothing seems wrong with all of this until Sebi received a whistleblower complaint alleging that NSE was allowing certain brokers unfair access at its co-location facilities, enabling them to gain at the expense of the other brokers. The regulator stepped in to investigate the complaint in 2015.
Sebi directed the NSE to run a forensic audit of its exchange architecture, and the exchange appointed Deloitte Touche Tohmatsu for the same. The auditor found that the architecture was prone to manipulation.
Role of brokers & Ajay Shah
CBI stepped into investigating the co-location case after the then Sebi chairman received a second whistleblower in 2017 alleging irregularities at the NSE co-location facilities and bribes having been paid to certain Sebi officials to settle cases favourably.
This smacked of misuse of office and corruption, the remit of CBI.
In its FIR in 2018, CBI alleged that certain brokers, including OPG Securities, through its promoter Sanjay Gupta, gamed the exchange data centre in collusion with unnamed NSE officials.
Between 2010 and 2013, OPG was allegedly given the switch-on time of the exchange servers and through this was able to log on first and place its orders, gaining an undue advantage.
Then, during 2013-16, when Ramkrishna was MD & CEO, the broker was able to access the secondary server, where the order load was light to negligible, allowing it to execute transactions faster than others in the co-location facility.
This was in violation of NSE rules as the secondary server’s function was to take the load off the main server so as not to clog the same.
CBI also alleged that Gupta bribed Sebi officials when he was being investigated by the regulator for his role in the co-location matter.
Pertaining to the role of Ajay Shah, CBI found that NSE, with Ramkrishna in harness, transferred trade data to him under the guise of research, but that Shah allegedly passed this on to Infotech Financials, which in turn developed algo software called Chanakya used by brokers on NSE, including OPG.
Interestingly, one of the directors of this firm was Sunitha Thomas, Shah’s sister-in-law, who is married to Suprabhat Lala, Senior VP of NSE, CBI noted in its FIR.
Nemesis catches up with Chitra
Though Ramkrishna and others weren’t named in the CBI FIR of 2018 and SAT stayed a Sebi order against her in 2019, Sebi’s stumbling upon email exchanges between her and an outsider and its subsequent order of February 11 made the CBI sit up and examine the co-location case in light of the new facts, said a CBI official.
CBI noted the lapses in her appointing Subramanian, having no prior experience of financial markets, to the post of group operating officer.
Sensing her possible arrest, Ramkrishna moved a special CBI court for anticipatory bail, which rejected the same, noting that she ought to be confronted with Subramanian for the CBI to get to the bottom of the co-location scam.