National Stock Exchange Co-location Scam

What if the one who’s responsible to expose the scams, does the scam itself? Is NSE actually “a wolf in sheep’s clothing”? The NSE acronym of the National Stock Exchange of India is the worlds’ largest derivatives exchange in terms of contracts traded, and second-largest in terms of currency futures traded.

The role of NSE is to set out and implement rules and regulations to govern the securities market. But what if the NSE itself becomes the one to manipulate the market and pocket crores by going beyond its own set rules and regulations? Are you perplexed as to what it is all about? Let’s explain it further.

The whole Phenomenon

NSE’s co-location facility was the location of this nearly ten-year-old scam. It was claimed that one of the trading members of OPG Securities, was given unfair access to the secondary server, allowing them to log in and acquire the data before the rest of the co-location facility between 2012 and 2014. This preferred access allowed this member to execute Algo-trading (it is an order executing method using pre-programmed automated trading instructions that account for price, time, and volume) before those of others.

The Unearthing of the Scam

This scam was exposed in 2015, due to a whistle-blower (who calls himself Ken Fong) report to SEBI which revealed the full scheme of the persons manipulating the system. Ken Fong had copied his first letter to Moneylife magazine leading to the NSE filing a Rs100 crore defamation against this publication, which was subsequently withdrawn, with the exchange paying a fine of Rs50 lakhs imposed by the court.

Initial Findings by SEBI

After the submission of a preliminary report of the CFT- Cross Functional Team constituted of SEBI officials, on 30^th November, 2015; an ‘Expert Committee’ was constituted for further investigation. The report (also referred to as TAC Report) prepared by the said committee was submitted on 02^nd March, 2016, it was founded that the co-location facility was prone to misuse. Also, one of the brokers of OPG Securities was rigging NSE’s Algo-trading and using co-location servers. The fact findings prompted SEBI to deepen their investigation. NSE roped in consulting firms Deloitte and EY to conduct a forensic audit against the allegations in various trading segments. 

SEBI came down heavily on NSE for the reported lapses in high-frequency trading offered through its co-location facility, Rs. 811.54 crores revenue were recorded across the year 2010-11 to 2013-14. Alongside, 77% average net profit margins over operations were recorded which was almost Rs. 624.89 crores during the same period of time. Consequently, NSE was barred from accessing the market for funds for six months.

SEBI also asked Ex NSE chief Ravi Narain and Ramakrishna to disgorge 25% of their salaries drawn during a certain period. They were also prohibited for a period of five years from associating with a listed company or a market infrastructure institution, or any other market intermediary.

Major Accusive Associated

Chitra Ramkrishna, former MD and CEO has been accused of oozing confidential information to a mysterious person with not only just financial data, dividend ratio, agenda of board meetings, and employee annual appraisal but also very crucial matters like 5-year projections. When interrogated, she stated that the mysterious person is none other than a “Siddha Purusha” a spiritual guide, who Chitra used to consult on employee annual appraisals, an order by market regulator SEBI. And according to Chitra's statement, he had been guiding her for the last 20 years. Not only that, this guru was the reason why she hired Anand Subramanian- an unknown mid-level officer working initially at one of Balmer Lawrie’s subsidiaries in Kolkata as her principal advisor between April 2015 and October 2016, who didn’t even withstand appropriate knowledge about finance.

Conclusion

India is no stranger to financial scams. The various scams, namely by Harshad Mehta, Ketan Parekh, Ramalinga Raju, and many others have time and again not only shocked the collective consciousness of the country but also rocked India's banking system and stock markets with their financial shenanigans (dishonest activity). But rare are the occasions when people helming institutions that are supposed to be models of financial integrity are sucked into a vortex of monetary controversy. The sordid saga at the National Stock Exchange Scam is one of the same that had bought disgrace to our financial system.

But don't you think that it is a bit of a sorry story, that a country that tirelessly strives to achieve greatness only tops scams and other mishaps? And all this is just because a selfish few place their needs over general ethics. And don't you think India has become a hub for such financial scams? Tell us your views in the comment section

References:

1. https://www.gktoday.in/topic/nse-co-location-case-explained/
2. https://bit.ly/3IvAq00
3. https://bit.ly/3vt86rl
4. https://bit.ly/3M8JKJp
5. https://bit.ly/3HzsJ7w
6. https://www.sebi.gov.in/
7. https://bit.ly/35AAtsI
8. https://www.nseindia.com/
9. https://www.nseindia.com/investor-relations/annual-reports
10. https://bit.ly/3prp4ma