Is NSE being run as a private club to benefit a select few?

National Stock Exchange (NSE), India's premier stock exchange, is mired in two major controversies - the first controversy being co-location issue and now the arbitrary appointment of key managerial personnel.

In January 2015, a whistleblower wrote to SEBI alleging that a few brokers were able to log into the NSE systems with better hardware specifications while engaged in algorithmic trading, which allowed them unfair access and advantage. Audit of NSE’s algorithmic trading practices by Deloitte has found that the systems of the country’s premier stock exchange are prone to manipulations by brokers and in fact indicated that some brokers may have had unfair access to NSE’s servers.

The allegations against NSE pertain to members who co-located their servers on the BKC premises of the National Stock Exchange. This reduces the time it takes for an order to travel to the exchange, giving them a speed advantage over those who are at farther away places.

The unfair access being referred to has occurred by enabling certain brokers who had their co-location servers in NSE premises, to get price information ahead of the rest of the market participants. To understand how this has happened, one has to first understand how the price information is disseminated by NSE.

The exchange disseminates price information through two types of price feed streams, one is the broadcast stream or UDP stream (User Data-gram Protocol) which is used by NSE for its VSAT and leased line networks. This multi broadcast (which everyone can view on TV) is limited to 2 mbps bandwidth due to NSE leased line network capacity. The second price feed stream is TBT (tick- by- tick) which actually reflects each and every new order price information coming into the exchange system. Due to the large size of the price information, TBT price stream was available only to co-location brokers of NSE.

After the whistleblower's letter, SEBI decided to conduct a special inspection of NSE, after which it found preliminary evidence that as many as 12 brokers might have got unfair access to NSE servers.

After three years of investigations, SEBI then passed an order in 2019 on the co-location issue and the penalties imposed were :

- disgorged an amount of Rs 624 crore from NSE (profit earned from its co-location operations)

- barred NSE from accessing the securities market for six months

- barred NSE from floating any new derivative products for six months

- the regulator has also ordered Ravi Narain and Chitra Ramkrishna - both former MD & CEOs of NSE - to disgorge 25% of their salary drawn when they were at the helm of affairs at the exchange

- barred OPG Securities, allegedly the prime beneficiary of the co-location matter, and its directors from accessing the securities market for five years, while directing these entities to disgorge Rs 25 crore.

“NSE has committed a fraudulent and unfair trade practice as contemplated under the SEBI (PFUTP) Regulations. It is established beyond doubt that NSE has not exercised the requisite due diligence while putting in place the TBT architecture," G Mahalingam, the then whole-time member of SEBI said in the order.

SEBI has now passed an order on February 10 on the issue of arbitrary appointment of key managerial personnel by NSE, imposing monetary penalties on Ravi Narain, Chitra Ramakrishna and NSE .

On January 18, 2013, Anand Subramanian - little known in the securities industry - was offered the role of Chief Strategic Advisor at NSE for an annual compensation of Rs 1.68 crore against his last drawn salary of Rs 15 lakh at Balmer Lawrie. In March 2014, Chitra Ramkrishna approved a 20 per cent increment to Subramanian and his salary was revised to Rs 2.01 crore. Five weeks thereafter, Subramanian’s salary was again revised upwards by 15 per cent to Rs 2.31 crore as Ramkrishna dubbed his performance to be A+ (exceptional). By 2015, his cost-to-company had zoomed to almost Rs 5 crore.

All this was done in accordance with the instructions of an unknown yogi, as narrated in the SEBI order. Chitra Ramkrishna, the former CEO and MD of NSE, was guided by a yogi residing in the Himalayas for the appointment of Anand Subramanian.

Ramkrishna referred to the unknown yogi as “Siromani” [the exalted one] and shared with him information such as NSE’s five year projections, financial data, dividend ratio, business plans, agenda of board meeting, and even consulted him on employee performance appraisals.

For illustration - an email on September 5, 2015, from the yogi told Ramkrishna, “SOM, if I had the opportunity to be a person on Earth then Kanchan is the perfect fit. Ashirvadhams”. ‘SOM’ refers to Ramkrishna, and ‘Kanchan’ refers to Subramanian, the SEBI probe revealed.

An email dated February 18, 2015, from Ramkrishna to the unknown yogi, reads, “The role and designation of Group Chief Coordination Officer is fine and we could take that forward. I have a small submission, can we make this as Group President and Chief Coordination Officer? And over a time frame as you direct we can move the entire operations of the exchange under G and re-designate him as Chief Operating Officer? Seek Your guidance on the path forward on this Swami If this meets with your Highness’ approval, then parallelly could we coin JR (Ravi) as Group President Finance and stakeholder relations and Corporate General Counsel?” ‘G’ refers to Subramanian.

One can understand the corrupt motives behind running NSE as a private club to benefit a few select brokers who were provided co-location facility for their servers in NSE premises.

Only a philosopher can understand how an educated, suave CEO of a premier exchange can come under the spell of an unknown yogi and run the exchange like a 'math'.

(The author is a retired corporate professional and former M D of Ahmedabad Stock Exchange.)