New Delhi based broker and proprietary trader OPG Securities was touted as the only mastermind of the NSE Co-location scandal by stock market regulator Sebi but the Central Bureau of Investigations (CBI) is now probing 15 more brokers for illegal access to NSE's co-location trading systems, sources told Businessworld. These brokers have been named in the multiple forensic audit reports and also one prepared by the Indian School of Business. Also, CBI is advancing with its probe regarding the conflict of interest of high ranking NSE officials in facilitating data and other information to brokers and private individuals, who stole data from the exchange, the sources said.
CBI had registered its First Information Report (FIR) in the scandal in 2018 and even though six years have passed since then, there is nothing much the agency has done in terms of bringing a closure to the case or bringing the master minds to the book. Still there is headway with the current investigations, since it has widened its net of probe against stock brokers who had abused the high-tech trading systems of India's largest exchange with the help of high-ranking NSE insiders and officials, as SEBI looked the other way.
NSE's high-tech trading system in the co-location facility at BKC in Mumbai, where broker can place their servers close to the exchange's master trading engine, was abused by several brokers for nearly five years between 2010 and 2015, to gain preferential access and trading data from the exchange but only OPG was singled out by SEBI. The biggest scandal was that certain brokers, to achieve faster trading time and price information from NSE, used the Secondary Server which was reserved for 'back-up' by the exchange. While the Primary Server was the designated server for public trading, certain brokers got inside information and knowledge of the means of using the Back-Up Secondary server, which was faster since it had far less load, compared to the Primary Servers. This inside information to the brokers on how to use the Secondary Server instead of Primary Server to trade at the NSE co-location facility and the timing of their Up Time and Down Time, came from the exchange officials. Despite repeated attempts by brokers to trade via Secondary Servers, NSE took no action against them and just kept issuing warnings. But the investigations have been so botched up due to the involvement of influential people, some of whom were close to UPA era politicians and bureaucrats, that the trail was left cold for long giving a chance to the accused to destroy, distort and disappear the data and evidence.
The key allegation is that NSE's former MD and CEO Chitra Ramkrishna and Ravi Narain, despite knowing that the systems were not only prone to abuse but were being abused, chose to turn a blind eye, making them complacent in the scam. Also, investigations and paper trail have revealed that the NSE bosses and other high ranking officials facilitated easy access to certain brokers and passed on confidential data. During the time when this scandal was ongoing or before NSE set-up its high-tech trading systems, SEBI did not conduct required inspection of the exchange trading systems, which is mandatory, making the regulatory officials complacent in the scam. The 2018 CBI FIR also mentions unknown SEBI officials for their role and connivence in the scam but the delay and lack of progress despite there being a trail has been baffling.
Facilitating Illegal Data
It is now learned that a few months ago, the CBI had asked NSE to clarify the role of some of the former exchange officials and their conflict of interest. Sources close to the investigations told Businessworld that CBI wanted to know the roles and responsibility of Ravi Apte (NSE's former Chief Technology Officer), GM Shenoy (former senior VP, NSE Infotech), R Sundaraman (former Chief of Products, NSE) and Chander Sharma (Associate VP) among others. NSE is alleged to have supplied non-public and confidential data to M/s. Infotech Financials Pvt. Ltd. under the pretext of studying volatility. In the own words and confession of one of the accused, that data which NSE shared was going into preparation of algo trading software. The NSE is already likely to have replied to the CBI, which is now being analysed, sources close to the investigations said.
Before Death, CBI's Original Complainant Sought Action On Broker Nexus
Nearly two weeks before he passed away of cardiac arrest, Shantanu Guha Ray, the original complainant to CBI in the co-location scandal had sought action against stock brokers, whose involvement was unearthed and is part of the legal records. Guha had also referred to the Secondary Servers in his letter this year.
Before his demise on March 25 this year, Guha had speed posted a letter to Praveen Sood, Director CBI and Madhabi Puri Buch, chief of India's market regulator SEBI, titled "Collusion of NSE with brokers, request to take action as per findings on record." Guha's letter states that he had also filed a writ petition in the Delhi High Court in 2020 seeking a court monitored probe into the matter as CBI and SEBI were going slow. The co-location scam broke out in 2015 after a whistleblower highlighted the modus operandi to SEBI. The CBI came into the picture in 2018 on Guha's complaint as SEBI was moving at a snail's pace in the matter.
In his letter before death, Guha said, "The investigations at CBI, searches already conducted on several brokers, wherein incriminating digital evidence including the email dumps, trading data, financial data of the stock brokers has been seized, further action is pending at CBI and SEBI. Despite all the facts, which are needed to prosecute NSE and Chitra Ramkrishna (former NSE MD), on the entire gamut of collusion with brokers both CBI and SEBI are shying away from complete full and comprehensive action by not bringing out their full collusion with brokers. This approach of not charging NSE of collusion with these aforementioned brokers as per the (irr) regularity of the secondary server connections will eventually ensure that that NSE and Chitra Ramkrishna will get away."
Guha had further said that the approach of SEBI and CBI was contrary to the stated position and undertaking of the CBI as submitted status reports dated September 2, 2009 and february 25, 2023 in proceedings before Delhi HC.
Stock brokers named by Guha in his letter include Millennium Stock Broking, Crimson Financial Services, GKN Securities, OPG Securities, Pace Stock Broking Services, Parwati Capital Market, Share India Securities. SMC Global Securities, Tower Research Capital Markets, Way2wealth Brokers, Adroit Financial, KM INVESTORS, PRB SECURITIES, Advent Stock Broking, CPR CAPITAL Services. A report by Indian School of Business (ISB), which was asked to study the data and pattern by market regulator SEBI, had revealed the named of these brokers clearly in Table 14-15 on page no 61-62, Table 31-32 on page no 93-94, Table 70-71 on page no 139-140. Further, a show cause notice issued by Sebi to Ramkrishna on dated May 17, 2023 had also mentioned the names of the brokers in paragraphs 100-104 on page no 41-44 ; para 117-118 on page no 52-53, para 128-140 on page no 56-58, Guha's letter states. The CBI has also conducted searches at the premises of many of these brokers.
Guha had also marked his letter to Finance Minister Nirmala Sitharaman, Chief Vigilance Commissioner Suresh Patel and the Vigilance officer in SEBI. Guha was among India's finest investigative journalists with Ramnath Goenka award for his writings in cricket, Laadli award for his reporting on cervical cancer deaths in India and the WASH award for his work on water-related issues. His other news breaks included the 2011 coal scam -- ahead of the CAG report -- and the irregularities in dealings involving the Airports Authority of India and the GMR-led Delhi International Airport for lease of land.
