NSE Scam: Before Death, CBI's Original Complainant Pushed For Action On Broker Nexus
Nearly two weeks before he passed away of cardiac arrest, Shantanu Guha Ray, the original complainant to India's Central Bureau of Investigations (CBI) in the National Stock Exchange (NSE) co-location trading scandal, had sought action against stock brokers whose involvement in the scam has been unearthed in investigations and is part of the legal records. Before his demise on March 25, 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 NSE co-location scandal is a case involving abuse of NSE's high-tech trading systems and data theft that gave unfair advantage and preferential access to few brokers to trade. Co-location is nothing but an exclusive arrangement by NSE to let brokers place their servers in close proximity to the exchange's master trading engine inside its own premises at the Bandra Kurla Complex in Mumbai. 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. But even six years after registering the first information report in the co-location scam in 2018, the CBI has been unable to get to the bottom of it and has bungled up the probe as per court records with piecemeal chargesheet, incomplete investigations, distortion and digression from the original case. CBI's arrest memo of Chitra Ramkrishna and the first charge-sheet filed against her had no connection, Ravi Narain (Ramkrishna's boss and NSE MD prior to her) was never arrested in co-location scam at all.
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.
The secondary servers that Guha refers to in his letters were those servers in NSE's co-location facility that were to be used only as a back-up during emergency situations when the primary servers went down. But some of the brokers connect daily to the secondary servers to trade and get preferential access to NSE order matching engines since these secondary servers were low on load and hence made data transmission and order execution faster than the primary servers. Brokers with insider knowledge could exploit this loophole in NSE's colocation architecture that was left wide open for several years, despite internal alerts from lower rung employees to the top bosses, as revealed in investigations and forensic audit reports.
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.
MP's write to SEBI to investigate broker nexus
Separately, two Members of Parliament, one from Maharashtra and another from West Bengal too have written to SEBI asking it to probe the broker nexus. The letter, which is in possession of BW, says that between 2019 and 2021, SEBI had identified more than a dozen brokers who had logged into secondary servers in NSE's colocation system and the ISB report of 2017 too had quantified the gains of these brokers and some of them had more number of connections than OPG Securities. "Strangely the gains made by these brokers were not considered illegal by SEBI. In fact, no disgorgement proceedings were initiated against these brokers by SEBI and in the adjudication proceedings a minimum penalty of Rs 3 lakhs was imposed," the letter states.
Further, the letter from one of the MPs details that "As per an independent auditor's report states that the act of perfrential login couldn't have been possible without active connivence between brokers directors / officials and NSE officials. This is further quoted in the 2019 WTM order of SEBI and 2023 SCN to OPG. The number of logins, number of secondary logins, nature of logins, time of logins, money earned when login using preferential access are similar for SMC, PACE, Tower Capital, Adroit, Parwati etc. Why are these brokers and their officials and directors not being charged for collusion with NSE officials? It reeks of corruption that a charge like collusion can be easily dropped with respect to brokers," MPs letter says.
In the ISB report, the total profits earned on days when brokers were connected to secondary servers were quantified as illegal gains. According to the MP, the ISB report of 2023 had observed that more than 60 brokers had made illegal gains from secondary servers worth hundreds of crores.
