The National Stock Exchange (NSE) has moved an application with the Securities Appellate Tribunal (SAT) to withdraw its plea seeking a stay on a SEBI order involving illegal data sharing by the exchange with Ajay Shah and his relatives, conflict of interest etc. that had culminated into the co-location scam. It simply means that NSE is ready to pay the fine, which clearly implies that crucial non-public data was shared illegally with the researchers. It opens the doors for the Central Bureau Of Investigations (CBI), which has been delaying taking any action against Ajay Shah and entities close to him, to move ahead with charges specified in the 2018 First Information Report (FIR). The co-location and data theft scandal at NSE is a case involving abuse of the exchange's high-tech trading systems that gave unfair advantage and preferential access to few brokers to trade.
Even after six years of registering the FIR, the CBI has failed to make any considerable progress in the co-location scam and its arrest of Chitra Ramkrishna, NSE's former boss, was just on charges of inappropriate appointment at the exchange. SEBI's final order against NSE, Ajay Shah and his relatives, which came in 2019 had confirmed that data was shared illegally with the researchers and the same was used for algorithmic trading.
Algo Trading Scam And Data Theft At NSE
In his order, SEBI's former Whole Time Member SK Mohanty said, "Single piece of evidence (e-mail) speaks volumes about the collusive involvement of noticee no.1 (Ajay Shah) with other noticees and leaves no doubt about the fact that the aforementioned four noticees were using the NSE trade data together for the development of algorithmic trading products with a commercial motive and not for the purpose for which the data was shared with them by NSE under the LIX project."
The email that Mohanty has talked about in his order is this:
“But you have to swear everyone to silence on the fact that the data that we are getting out of NSE for VIX (volatility index) and LIX (liquidity risk index) is being used for algorithmic trading work — it would be a severe problem if this fact comes to light since NSE has not given anyone else this data,” Ajay Shah, the then consultant to the Finance Ministry during the Congress-led UPA regime, wrote in a 2009 email to an employee of his family firm. They were extracting confidential non-public data from NSE. The email is part of a Sebi report that indicted Shah for his role in the co-location and algo trading scam that rocked the NSE between 2010 and 2016.
What Did Investigations Reveal?
Sebi found that Ajay Shah had officially entered into a data-sharing agreement with the NSE after 2012 before which he and his wife Susan Thomas got the information from the exchange informally as researchers. But the data sharing agreement too was fake since it had no date, stamp and notary to make it a legal agreement. While Chitra Ramkrishna and other top NSE executives told SEBI that they did not share any data with Shah in his personal capacity, Shah told the regulator that he and his wife were signatories to a data-sharing agreement with the NSE and “prior to the contract also, the data flow was to Ajay Shah and Susan Thomas."
NSE’s long-serving Chief Technology Officer Ravi Apte too had told SEBI that he had facilitated transfer of data to Shah at the request of Ravi Narain, former MD, and Ramkrishna, under the impression “that an appropriate confidentiality agreement was signed with him (Shah) by NSE.”
Unravelling a web of patronage and favouritism, SEBI had issued a show-cause notice in July 2018 to Ajay Shah for breach of a data-sharing agreement with the NSE and other issues. The CBI had also indicted him for exploiting the exchange’s systems. In 2018 Shah worked with the government supported Think Tank National Institute of Public Finance and Policy. When the Congress led UPA government came to power in 2004, Shah was appointed as a consultant to the finance ministry while his wife Susan Thomas, who faked her PhD degree, was working with the NSE.
According to SEBI’s findings, Shah's sister-in-law, Sunita Thomas, who was a founder-director of Infotech Financial and Chanakya Tradevistas provided algo trading solutions and software to brokers and propriety traders. Sunita Thomas is married to Suprabhat Lala, who was chief of regulation and head of trading division at the NSE during 2010-13.
How Ajay Shah's Own Admission Opened A Can Of Worms?
By Ajay Shah’s own accounts, the checks and balances at the NSE were lax. Shah told SEBI that apart from CD-RoMs and UBS hard disks, they had an arrangement with the NSE to give them an IP address and password for downloading files directly. Shah told SEBI that they shared data with Infotech Financial on one occasion as they had to write (LIX code). Shah told Sebi he had also referred friends to Infotech Financial but there was no commercial arrangement in this regard.
“In 1997, my friend Deepak Kohli (who was then in Abu Dhabi, with Standard Chartered) asked me for suggestions on cheap Indian software development. I connected him to Sunita Thomas and he ended up becoming a customer and an investor, even taking an equity stake... PRISM project, where Susan Thomas and I (then at IGIDR) sub-contracted development work to two software companies, one of which was Infotech Financial. This was in 1998 or 1999.
“The third connection was the LIX project, where Susan Thomas and I worked pro bono , but we required a software development team, and that was organised as a small contract between NSE and Infotech Financial. In February 2009, my friend, Matthieu Stigler, asked me for a suggestion for cheap Indian software development, and I suggested he speak with Infotech Financial. I am a person with strong connections into securities firms and could potentially have done differently in terms of helping (them in business development, but did not),” Shah had told Sebi.
When Confronted by SEBI on his statement on the controversial email that revealed the scandal, Shah said, “The last sentence, ‘NSE has not given anyone else this data’, is factually wrong as this data goes out through numerous channels (Reuters, Bloomberg, CTC, NEAT). What was unique about us was that these files were coming out conveniently as .csv files for research. I was exaggerated in my expression in order to achieve extreme emphasis.”
SEBI order said that Shah was instrumental in giving the LIX project to Infotech Financial and that he and his wife, Susan Thomas were working pro-bono on the said project. "Curiously enough, NSE and its officials ignored the inter se family relations and also overlooked the issues of conflict of interest arising out of such relationships," the SEBI order said.
On SEBI’s question if Lala had shared any confidential data with him or his wife, Susan Thomas, Shah said, “We occasionally look to Lala to obtain insights into the working of NSE and of the financial markets. But I do not recollect any data flows or confidential info.”
Shah told the regulator that his association with the NSE had begun even when the bourse was being conceptualised, though only informally. The association led to not just building Nifty but also to setting up a clearing corporation and launching derivatives trading. However, Chitra Ramkrishna, former NSE boss, who had been with the exchange since its inception, told SEBI that she met Shah only infrequently. All these contradictory statements showed that they were working in tandem.
What CBI Told Delhi High Court
in May 2019, the CBI in its status report on the NSE co-location scam had told the Delhi High Court that it has expanded the scope of its investigation beyond the FIR filed in May 2018 to unearth the "larger conspiracy", including how an accused, in the garb of research, gained access to NSE data.
Therefore, the CBI had come on record that the scope of the investigation can possibly go beyond the FIR filed on May 28, 2018. The agency said that it has concluded in the garb of research, NSE data was misused.
"The investigation of the case is vast, broad and deep to look into the criminality by public/private players and misuse of data of NSE in the name of the research purpose," said the CBI report, filed in response to the court direction seeking a status report by May 22.
It has been six years that the CBI has been probing the collusion between officials of Sebi, stock-broking firms , including its owners, who, along with NSE officials, indulged in fraud, criminal conspiracy and destruction of electronic evidence.
