How CBI Bungled Up The NSE Scam Probe
Five years have passed since the CBI had registered a first information report in the NSE co-location scam, India's biggest stock market scandal in over two decades after the Harshad Mehta and Ketan Parekh days. This year, one of the CBI officers probing the case was promoted to the rank of Deputy Inspector General. His colleague, another key figure in the probe team, was awarded the Union Home Minister's Medal for Excellence in Investigations. But court records are a screaming testimony to CBI's mishandling of the NSE probe - a massive failure.
Piecemeal chargesheet, incomplete investigations, distortion and digression from the original case are a few observations that emerge from the court records. This despite the fact that a lot of ground with regard to the investigations was already covered by forensic auditors and SEBI's own technical advisory committee headed by an IIT professor. Yet, the most obvious trails, documentary evidence and clues have been blatantly ignored by the CBI so far. Even after five years of the probe, the only charge the CBI has been able to bring against NSE's former controversial boss Chita Ramkrishna pertains to an illegal appointment she made at a senior level. Narain was charged in an illegal phone tapping case but managed to get bail on humanitarian grounds.
Checks and balances: Gone with the wind
To understand the failure in the probe, it is necessary to know the basics of the scam.
Co-location is the high-tech trading infrastructure built by NSE inside its premises at the Bandra-Kurla Complex in Mumbai in 2010. Simply put, few brokers with top dollars got the rack space inside NSE to place their servers in close proximity to the exchange's main order matching engine. The high speed internet cable lines that connected NSE's servers with that of the brokers made the trading faster. But that still was not a big scam. A mind-boggling scandal was buried in the design of the co-location infrastructure, using which a few brokers could game the stock markets. This went on for 4-5 years.
The NSE had adopted a 'unicast' order execution system for co-location trading, wherein those connecting first to the NSE servers got the data feeds ahead of others. If you were first in receiving the price feeds, even nano seconds ahead, you could be faster in your trades compared to those receiving price feeds late - front running.
Daily, the exchange staffers would secretly inform the favoured ones about the timing of when the servers would start or ready to connect since there was no fixed time of the starting of the servers and the information was much sought after. Forensic audit reports revealed the names of those who connected first to the NSE servers frequently. Employees managing NSE's colocation and data centre would get verbal instructions from the top for favouring a few. By own admission of the NSE staffers, a multicast order system, where data feed would go to everybody simultaneously, was discussed but never implemented. Obviously, those who knew the nuts and bolts of the NSE infrastructure, were master-minds of the scam.
Then, NSE allowed a few brokers to secretly trade through reserved servers that were faster than common use servers. Primary servers were common to everybody in co-location but secondary servers were only to be used when the primary went down. By virtue of such an arrangement, secondary servers had no load and could deliver trade orders and feeds faster for the users - something like a high speed internet line with less load is faster than the public wifi. A few brokers repeatedly connect to the secondary servers every day for years, which allowed them to be ahead of others in trading - another form of front running using inside knowledge of the trading infrastructure.
Crucial tick-by-tick data (TBT) of NSE, which could give insight into the full order book up to the last trade on a real time basis, was shared with a few. For the common people, only the top five trades are visible but those armed with TBT, the whole order book is visible. So full view of the order book with preferential treatment to connect first and trade faster on NSE servers - the game was set for the manipulators.
Before 2018, NSE did not share TBT with everybody. Not only TBT, but even other sensitive data was shared by NSE with Ajay Shah and Susan Thomas. Under the garb of a financial market researcher, Thomas turned out to be the promoter of a company that developed trading softwares and sold it in the market. Her brother-in-law who never informed NSE about the business of Thomas was NSE's chief of surveillance and had also handled other departments. For years, Thomas has claimed to have held a PhD degree from the University of Southern California, which turned out to be a fake. Shah and Thomas got the preferential treatment since they were close to NSE's two top bosses Ramkrishna and Ravi Narain, the finance minister P Chidambaram and high ranking SEBI officials and other finance ministry bureaucrats.
Another fraud was the dark cables of NSE, the fast-paced internet lines, which were secretly laid inside the exchange premises.
The outside world was oblivious and had no inkling to all the happenings inside India's largest exchange that was cast in the lofty standards of the rule book - a facade. The starry-eyed, aspirational retail investors were the lambs going to the slaughter house daily, while the NSE bosses, SEBI and senior finance ministry officials enjoyed the perks and power of sitting on the regulatory boards and positions.
The fault lines with the infrastructure, deliberate mis-governance and the dubious ignorance of NSE top brass and SEBI officials is all available in black and white in the forensic audit reports and SEBI's investigation diaries. This includes Ramkrishna's own admission that a Himalayan Baba was instructing her to run the exchange.
A half-baked investigation
For the CBI, the most simple job was to first start with fixing responsibility for the faulty co-location architecture put up at the NSE, with a view to game the markets and give illegal access to traders. Also, SEBI is a party to the case since the violations started when the regulator under the then chairman C B Bhave turned a blind eye, when the co-location architecture was being implemented. Rules stipulate that SEBI first inspect any new system that is being implemented by the stock exchanges and give its seal of approval - a fiduciary duty in which the regulator failed miserably. But was the failure deliberate, given that Bhave had close ties to the NSE top brass?
NSE, which sits just across the lane from SEBI's headquarters, started its co-location operations without a regulatory seal of approval. Even months after NSE announced that it was starting co-location, SEBI did not feel the need for any inspection or checks. Does that not ring a bell with the CBI investigators?
Like SEBI then, CBI now has turned a blind eye to this aspect of violation. Has the CBI interrogated any SEBI official for their deliberate lapse? Who was responsible at SEBI for such blatant ignorance that affected investors? Naturally, the buck should stop at the top - in persons grafted in a serious trust, negligence (deliberate) is a crime.
SEBI's own reports, qualification by multiple forensic auditors and observations of the regulator's technical advisory committee (TAC) headed by an IIT professor had enough evidence that the guilty were afraid of. Instead, what did the CBI do? It brought a lame charge against NSE boss Chitra Ramkrishna of clumsiness in the appointment of an unknown personality Anand Subramanian at a hefty package -- making a mountain out of a molehill.
Court observed that the charge sheet filed on April 21, 2022 by CBI was confined to the investigation related to alleged illegal appointment of Subramanian and subsequent re-designation and is not related to their role in abuse of server architecture.
What has Chitra's closeness to Anand got to do with the abuse of NSE's colocation architecture and traders getting illegal access to it?
What happened to CBI's investigations that were supposed to examine the role of the former consultant to P Chidambaram's finance ministry, his access to NSE's systems and inside information? Or the fake PhD degree of Susan Thomas and their dubiously crafted plan to steal data from NSE and even the commodity exchange MCX? Role of other SEBI and NSE officials and the brokers who benefited from the defects of NSE server architecture? Have the CBI officers answered any of these questions in their charge-sheet?
As per court records CBI's arrest memo had levelled allegations of managing the data centre staff of NSE, who facilitated brokers to get connected to the backup server to get far better and faster access of the market feed, getting benefitted by exploiting the TBT architecture of NSE by using Chanakya Software, destroying of evidence related to the case, influencing NSE staff, influencing officers of SEBI to get favourable report.
But the charge-sheet filed by the CBI did not relate to the offences mentioned in its arrest memo and FIR. Some of the allegations mentioned in the arrest memo of CBI were not investigated. There are several contradictions between the arrest memo, supplementary charge-sheet and replies dated September 9, 2022 and October 15, 2022 filed by CBI, court observed.
Mediocrity exposed by court
"The respondent (CBI) has conducted part investigation pertaining to alleged illegalities committed by the applicant/accused in initial appointment of Anand Subramanian and subsequent re-designation and other related issues but investigation pertaining to allegations made in FIR is still pending. CBI has not investigated the offences for which custody of the accused was sought or given by the concerned court at the time of remand or subsequently while sending the petitioner to judicial custody," said Justice Sudhir Kumar Jain of the Delhi High Court (HC) in his order while granting bail to Ramkrishna and Subramanian.
More than 5 years after it registered the FIR, Justice Jain has faulted CBI for the shoddy job and said that the agency was required to form opinions regarding all offences, subject matter of FIR, after completion of the entire investigation. The Delhi High Court observed that CBI investigation was pending and incomplete against Ramkrishna and Subramanian.
"CBI Charge-sheet is piecemeal and not filed in respect of all offences, subject matter of the FIR. CBI is not legally permitted to pick one portion of investigation and to complete it and thereafter file a piecemeal charge sheet. The practice of filing such types of charge sheets to seek extension of remand beyond the statutory period was deprecated by the Superior Courts in the past," Justice Jain said.
The court observed that if the investigation is not over and the period (90days) mentioned in Section 167(2) to detain the accused is over, by invoking Section 309 of the Code, the custody of the accused cannot be extended and are to be released on bail.
Ramkrishna and Subramanian were arrested by the CBI in March 2022 and granted bail by the Delhi HC in September 2022. What was the CBI doing for six months? Hold your laughter. The agency was seeking permission from the NSE board to prosecute the accused - an act that can put George Orowell's Animal Farm to shame.
As per Indian laws, the CBI has to seek government permission to prosecute public servants. But does that apply in case of NSE? The CBI has failed to apply its brain in the matter, legal experts say.
Since 2005, the NSE has declared that it does not get covered under the Right to Information Act (meant for public sector companies and government offices) and rejected all the applications for information. Months before the NSE could give its sanction (the board took nearly a year) to the CBI to prosecute Ramkrishna and Subramanian, both managed to get bail by the court in the matter they were arrested.
"Though the right of the investigating agency to file a supplementary charge sheet, or a further report (under Section 173(8) pursuant to order of the court) cannot be disputed, yet the fact remains that there cannot be part charge sheet, as has been contended in the present case. CBI has conducted and concluded part investigation pertaining to alleged illegalities committed by the accused in initial appointment of Anand Subramanian and subsequent re-designation and other related issues but investigation pertaining to allegations made in FIR is still pending, which cannot be termed as further investigation within ambit of section 173 (8) of the Code," the court said.
Killing time? Abuse of trading systems not investigated
The CBI FIR had clearly mentioned that it had information about the abuse of NSE's co-location server architecture and had launched an investigation regarding the same against the accused including NSE officials, Ajay Shah and unnamed SEBI officials. In fact, the CBI went ahead and told the court that further investigation was pending regarding the role of other officials of NSE, payment of bribe to officials of SEBI and NSE, investigation against Ajay Narottam Shah and others, hawala transaction of brokers and their illegal trading.
"Charge sheet filed on 21.04.2022 was confined to CBI Vs. Sanjay Gupta and Ors. (Page no. 34 of 42 Order on Bail application U/s 167(2) of accused Sanjay Gupta) and related to alleged illegal appointment of Anand Subramanian and subsequent re-designation and is not related to their role in abuse of server architecture," the court has said.
It simply means that even five years after registering the FIR, the CBI had still not found enough time to investigate the NSE co-locations scam.
Allegations of managing the data centre staff of NSE who facilitated brokers to get connected to the backup server, to get far better and faster access of the market feed, getting benefitted by exploiting the TBT architecture of NSE, destroying of evidence related to the case, influencing NSE staff, influencing officers of SEBI to get favourable report were levelled, the court had observed. But the CBI had done no work in these areas since they could not bring these charges in their filings, as per the court records.
"The respondent/CBI is yet to receive relevant information from Microsoft (USA) with respect to the offences for which investigation is stated to be completed. The submission of the respondent/CBI about completion of investigation for any of the heads as mentioned in the charge sheet is without any substance. The respondent/CBI has not investigated the offences for which custody of the applicant/accused was sought or given by the concerned court at the time of remand or subsequently while sending the petitioner to judicial custody," court records state.
How NSE boss Ravi Narain got bail
Narain was NSE's longest serving boss for nearly two decades and headed the exchange when colocation infrastructure came up. But what charges does the CBI bring against Narain? He was accused in a CBI case regarding illegal interception/monitoring of telephone calls of NSE employees for which a third-party vendor was engaged. The case against Narain and other accused involved in the alleged phone tapping was registered by CBI under Section 120B (criminal conspiracy) read with section 420 IPC Section (Fraud) 13(2) read with Section 13(1)(d) of PC Act and Section 72 of Information Technology Act. Has the CBI given a pass to Narain in the co-location matter?
With regard to Narain's role in the phone tapping case, the court order notes he was part of NSE's decision making process and he had knowledge of monitoring / recording / interception of telephone calls of NSE employees. Considering the same argument, how can Narain or Ramkrishna have no role in the faulty co-location infrastructure? Have the CBI investigators ever considered this question? If yes, then why have they failed to bring these charges against the duo? If not, then have they given them a clean chit?
Bail was granted to Ramkrishna for incomplete investigations and a peacemeal charge-sheet by the CBI. But the court granted bail to Narain on 'humanitarian grounds' on the reasoning that he was the sole care-giver to his wife, who is suffering from Stage 4 Breast Cancer and requires constant treatment and support while his two daughters were ensconced in the UK.
His lawyers also argued that he had no knowledge about the technological or IT expertise and had no role in alleged phone-tapping and the logistics relating to alleged tapping such as installation of hardware etc. or in the running of the entire operation. On the point of technical expertise, many legal experts point out it would not cut much ice since Narain headed NSE, India's most high-tech exchange for a good two decades.
CBI is yet to oppose Narain's bail but it is opposing Ramkrishna's bail in the Supreme Court, which legal experts say could be a lost cause as the agency has failed in adhering to the principles of proper investigations and filing of timely charge-sheet. Is the agency just playing to the gallery?
