New Delhi: The Securities and Appellate Tribunal’s (SAT’s) decision setting aside the disgorgement order passed by the Securities and Exchange Board of India (SEBI) against the National Stock Exchange (NSE) in the alleged co-location trading scam will not have any bearing on the CBI’s investigation of the case, ThePrint has learnt.
The SAT had last week set aside SEBI’s April 2019 orders against the NSE and its former top executives, Chitra Ramkrishna and Ravi Narain, and stated that the exchange had “not indulged in any unethical act or unjustly enriched itself”. SEBI is reportedly set to challenge the SAT order.
In April 2019, SEBI had directed the NSE to disgorge Rs 625 crore along with an annual interest of 12 per cent, to be calculated from April 2014, for alleged violations of the Stock Exchanges and Clearing Corporation (SECC) Regulations, due to lapses at its co-location facility. Disgorgement refers to the repayment of gains that have been made illegally.
Last Monday, the SAT set aside the disgorgement order and instead directed the exchange to deposit Rs 100 crore for “lack of due diligence in following its own norms and circulars”.
It also set aside the penalty of 25 per cent salary disgorgement levied on the two former NSE executives during different periods of their leadership stint.
A CBI source told ThePrint that the SAT order will not affect agency’s investigation since theirs is a criminal case and the tribunal’s orders are as per the Act (Securities and Exchange Board of India Act, 1992) under which it was established.
“The requirements of IPC and the Prevention of Corruption Act are different,” the source said, adding: “Further investigation of the CBI is not based solely on the SEBI enquiry. We have carried out a more detailed investigation. The judgment of SAT cannot be used as evidence in the trial of the CBI case.”
However, senior advocate Vikas Pahwa — who represented former NSE group operating officer Anand Subramanian, one of the accused in the CBI’s case — told ThePrint that the order of the tribunal will have a “direct impact on the continuation of criminal proceedings in this case”.
The tribunal has “categorically opined that the charge of collusion and fraud in the trade practices by NSE are not made out”, he further said, adding that the tribunal has also directed the WTM (NSE’s whole time members) to reconsider this charge.
“The law is that if the authority fails to prove the charge on same facts and evidence in the departmental inquiry, like the proceedings before the tribunal in this case, how would the same authority succeed in proving the criminal charge on the same sets of facts and evidence, where test is to prove the same is beyond reasonable doubt, which is much higher than the test of preponderance of probabilities,” Pahwa said.
Taking this ground into consideration, the criminal trial against the accused will be “difficult to continue”, he added.
Also read: Incredible story of how a faceless yogi ‘conned’ NSE CEO, got 9x salary, 3-day week, promotions
CBI’s case
The NSE co-location scam case relates to allegations against NSE officials of making money by giving a company called OPG Securities preferential access to the stock exchange servers, which led to “wrongful gains” to that company and “wrongful loss” to other brokers and traders.
It has been alleged that the NSE violated the fundamental objective of ensuring equal access to all market participants, and that certain users with vested interests were given preferential access to the data. It was further alleged that certain trading members with prior access to the data indulged in front running and abused the market, committing fraud not only to the detriment of the securities market but also to the country.
The NSE had in 2009 launched the co-location facility, which allowed traders and brokers to establish their IT servers within the premises of the bourse’s data centres in return for a fee. These participants could access the stock prices’ information faster, resulting in faster trade execution. In 2015, a whistleblower wrote to SEBI, alleging market manipulation by a few brokers using the facility. The implementation of the co-location technology was carried out under the supervision of Narain and Ramkrishna.
According to CBI sources, bribes were paid not only to NSE, but also to SEBI officials for a favourable report, after the alleged tampering of servers and facts related to preferential access of data came to light.
The CBI had first registered an FIR in connection with the alleged scam back in 2018. In its first charge sheet last April, the CBI named Chitra Ramkrishna and Anand Subramanian for corruption. The agency had arrested Subramanian in February last year and Ramkrishna in March in connection with the case.
According to sources in the central agency, there was information that between 2010 and 2014, Sanjay Gupta, owner and promoter of Delhi-based stock broker OPG Securities, connived with officials of NSE and abused its server architecture.
Gupta, with the help of his brother-in-law Aman Kokrady, who is also named in the FIR registered by CBI, and other unknown persons, allegedly roped in staff of the NSE data centre, who passed on information regarding the “switching on time” of the exchange servers, for monetary benefits, sources further said.
CBI sources added that until 2014, information was disseminated by the NSE server to brokers attached to the co-location facility through a tick-by-tick (TBT)-based system architecture. In this architecture, data was disseminated in a “sequential manner”, and the broker who connected first to the exchange server received ticks — meaning market feed — before the one who connected later.
Alleged unfair access to this co-location facility meant that Gupta’s OPG Securities could log in first to the secondary server and get the data before everyone else, by placing their systems closer to the NSE server.
“[This] allowed a split-second faster access to the data feed of NSE,” the source said, adding that even a split-second’s faster access could result in considerable gains for a stock trader.
Gupta allegedly also bribed staff at the NSE data centre to feed him information on what time the exchange’s servers were switched on, leading to illegal gains for his company, CBI sources said.
A co-location set-up allows the broker’s computer to be located in the same area in which the server of the stock exchange is located. This gives approximately a ten-fold speed advantage in comparison to other brokers. According to CBI sources, Gupta bribed NSE employees to get unfair access to the NSE co-location facility between 2010 and 2014.
The SAT order
The tribunal in its order observed that there were no findings to show that Ramkrishna or Narain, former MD & CEOs of the NSE, had made profits or wrongful gains. ThePrint has accessed the order.
“The charges levelled in the show cause notice have not been proved,” said the order.
It added: “The charge that NSE and its employees have colluded with members, especially OPG has not been made out. The allegation of suppression of material facts and non-cooperation by NSE with the investigating authorities has not been made by the WTM (whole-time members).” Whole-time members are brokers who deal in stocks.
The tribunal also noted that there were contradictions in the findings arrived at by the whole-time member (WTM).
“The WTM, in the order against the NSE held that early log in by TM (trading member) and OPG created an advantage. The WTM held that a TM who logs in first would be disseminated the data first at the start of the trading day and, therefore, has an advantage over other TMs. On the other hand, the WTM, in the OPG matter, held that the early log in by OPG did not make any unfair advantage. This anomaly is one such instance and there are more,” said the tribunal.
SAT also pulled up SEBI, saying that it adopted a “slow approach” and placed a “protective cover over the NSE’s alleged misdeeds”.
“We must observe that when serious allegations were made against a first-level regulator, namely the NSE, SEBI should have been proactive and should have conducted the investigation seriously. We find that SEBI had adopted a slow approach and, in fact, was placing a protective cover over the NSE’s alleged misdeeds,” the order said.
(Edited by Poulomi Banerjee)
Also read: Secret NSE phone-tap or ‘financial fraud’? Inside story of ED case that’s snared ex-IPS officer