The Securities and Exchange Board of India (SEBI) has commenced conduct hearings from Wednesday on the show-cause notices (SCNs) issued to a total of 25 entities and individuals in July 2018. There were two sets of SCNs issued. One related to the abuse of the tick-by-tick (TBT) system (eight entities) and the other related to dark fibre (17 entities). Included in the noticees were former managing directors Ravi Narain and Chitra Ramkrishna.
While all the 'noticees' were asked to be present in SEBI Bhavan in Mumbai on Wednesday and Thursday, it appears that SEBI was only interested in questioning National Stock Exchange (NSE), for now. In all cases, they were represented by their lawyers. NSE was represented by AZB & Partners and Somasekhar Sundaresan. Interestingly, the lawyers representing former managing director Chitra Ramkrishna and Anand Subramanian were absent.
The colocation or algo scam came to light in mid-2015, when Moneylife wrote about it for the first time, following multiple letters from a whistleblower. For this, NSE had filed a defamation case against us. A single-judge had penalised NSE for Rs50 lakh for having filed a case against us. After filing an appeal against the order, NSE paid up the penalty. Meanwhile, in the wake of the scam, the top brass of NSE had to resign and a new management team took charge.
In May 2017, SEBI issued its first set of notices to 11 entities, even as NSE had filed for consent mechanism. In July 2018, a second set of notices was issued, after SEBI recorded statements of various NSE officials, brokers and others involved.
SEBI’s SCNs were backed by three detailed reports: SEBI’s technical advisory committee (TAC), NSE-appointed forensic auditor, Deloitte Touche Tohmatsu India LLP (Deloitte) and, finally, an independent audit by Ernst & Young, all established wrongdoing.
The first SCN on TBT was based on investigations that certain brokers could get advantage in connecting to the NSE’s servers because the Exchange had faulty systems. The reports said Delhi-based OPG Securities was consistently able to connect to NSE’s trading system ahead of other trading members, as alleged by the whistleblower’s letter. The TAC also found that the architecture of NSE with respect to dissemination of TBT through TCP/IP was prone to manipulation/abuse. (Read: TAC Report Proves Systemic Lapses at the NSE)
The second set of SCNs alleges that NSE has undergone practices of denial of services to certain stockbrokers resulting in discrimination and non-adherence to principle of fairness and equal opportunity by allowing Way2Wealth (W2W) and GKN Securities to terminate the connections directly in the rack placed inside the Exchange’s co-location facility. This, the SCNs says, is in complete contradiction to normal practice followed by NSE.
W2W and GKN were allowed to establish P2P connectivity through service-provider Sampark, while many stock brokers, who desired to lay P2P connectivity through providers other than the four mentioned in the NSE circular on 31 August 2009, were denied permission by NSE staff. It has also been alleged that NSE lacked a clear documented policy for due diligence of service-providers by checking their licence while allowing P2P connectivity.
To make matters worse, NSE allowed W2W and GKN to continue to avail Sampark connectivity even after finding out that Sampark did not have the requisite department of telecommunications (DoT) licence. Furthermore, in the process of providing connectivity, a site inspection was conducted for other stockbrokers such as Millennium, GRD and SMC while the same procedure was not followed for W2W and GKN.
NSE has been trying to go for a consent order to 'put the past behind' and launch its initial public offering (IPO). The IPO has been on hold and SEBI has returned NSE's consent application, citing pending investigations in the algo scam case.