Rs 50,000 or Rs 75,000 crore? NSE co-location scam still a mystery six years on

If the figure is anywhere close to the numbers doing the rounds, this will perhaps be the biggest stock market scandal the country has ever seen.
Chitra Ramkrishna and Anand Subramanian (Photo | PTI)
Chitra Ramkrishna and Anand Subramanian (Photo | PTI)

Scams are all about money. But in the unfolding NSE case, which first surfaced in 2015, no one has a clue about the true extent of the alleged financial fraud.

Appallingly, even six years after the chilling revelations, it's unclear if investigators are anywhere close to cracking the crux of the case, which is the amount of unlawful gains traders made, and who are those foreign institutional investors and foreign portfolio investors, who accessed the exchanges order book hours before market opening for over five years on a trot.

While a public interest litigation filed by a journalist cited a Sebi-Technical Advisory Committee report that pegged the scam at Rs 50,000 crore, Parliamentary member Arvind Ganpat Sawant in his question last year referred it as a Rs 75,000 crore scam. Other than these two sparing mentions, there's no official word on the enormity of the unlawful activity. If the figure is anywhere close to either of the numbers mentioned above, this will perhaps be the biggest stock market scandal the country has ever seen.

Frustratingly, the penalties imposed by market regulator Sebi on various parties including NSE, its top management and brokers is coin change ranging from Rs 1 crore to Rs 15.6 crore, excluding interest. Worse, investigating agencies are yet to even establish firm facts whether the world's largest derivative exchange and its then management indulged in any intentional wrongdoing.

Stripped of technicalities, the key allegations were that NSE staff allowed preferential access to a handful of traders, and this crucial data was then allegedly shared to a few traders in offshore locations such as Singapore, as per the whistleblower letter in 2015. Curiously, NSE's forensic audits focused largely on brokers' preferential access to exchange servers, but not on data sharing, or on foreign investors, who made money using the data.

The ISB, which was tasked with estimating the unlawful gains of 17 trading members, who may have had preferential access, found that Delhi-based broking firm OPG Securities profited by Rs 25 crore due to unfair advantage. But this is only one part of the crime. OPG Securities also had access to NSE's time series data for research purposes, which allegedly was used to generate algorithms to maximize profits.

Just to get a sense of it, NSE has about 1,000 trading members, but only 188 availed the co-location facility. Out of these 188, only a handful had preferential access as against the whole market, every day for at least five years. It's estimated that the trading volume at NSE that time was roughly Rs 2.3 lakh crore a day.

Here's another glaring fact. NSE's first crime wasn't giving preferential access to select brokers, but starting the tick-by-tick (TBT) High Frequency or Algo trading (HFT) and co-location service itself, which began in January 2010. NSE neither informed Sebi nor sought necessary approvals to start the service, which means all these trades were illegal to begin with, but Sebi dealt with the issue with kid gloves as if NSE had committed a schoolboy error.

But the money the exchange made via co-location facility (excluding rack charges) stood at a whopping Rs 811.54 crore FY11-FY14, so in some consolation for onlookers, the regulator had asked NSE to deposit Rs 1,000 crore in an investor protection fund (disgorge Rs 625 crore along with interest of 12% per annum from April, 2014) to the Investor Protection and Education Fund. Predictably, NSE challenged the order and SAT ruled in its favour last year.

Meanwhile, as Sree Iyer of PGurus noted, India’s stock market is influenced by Singapore markets where only foreign investors and very few others have access. These handful of HFT operators were making an average of Rs 50-100 crore a day, which when stretched to five years, puts the illegal gains at about Rs 50,000-60,000 crore, at the least.

Now look at the penalties imposed: A monetary penalty of Rs 3 crore on Chitra Ramkrishna, Rs 2 crore each on NSE, Ravi Narain and Anand Subramanian for administrative lapses. As for the co-location case, both Narain and Ramkrishna are to disgorge 25% of their salaries of three years (FY11-FY13) and and one year (FY14) respectively, which is roughly estimated at Rs 4-5 crore. OPG Securities was asked to disgorge Rs 15.6 crore, with an interest of 12% per annum since April, 2014. All of them moved the Securities Appellate Tribunal separately against the Sebi orders, and the matter is currently being heard.

Related Stories

No stories found.

The New Indian Express