An estimated Rs 50,000 crore is suspected to have siphoned off by brokers involved in the co-location scandal of the National Stock Exchange (NSE), preliminary investigations estimate.
Fifteen top brokers associated with the NSE will be probed by investigation agencies, the first round of raids already yielding Rs 11 crore stashed away in furniture cushions and covers.
These brokers are in addition to 14 NSE officials show-caused by the market regulator Securities and Exchange Board of India (SEBI). The names of these brokers are in a document submitted by the NSE to SEBI. A copy of the document—the SEBI-Technical Advisory Committee (TAC) Report—lists over 60 brokers who operated the co-location system and has been accessed by this correspondent.
Income tax officials have described the raid as “a mere tip of the iceberg”, the brokers and NSE officials were raided because they had given algo and software on profit-sharing basis.
“The brokers and NSE officials colluded to siphon off cash to the tune of Rs 50-75 crores on a daily basis for a couple of years (2010-2015),” the I-T officials further said.
The SEBI-TAC report is still not in the public domain despite being finalised last year. A copy of the report, which has been placed by the SEBI to the Standing Committee of Parliament, details meticulously how the entire modus operandi was conducted by the brokers in collusion with top officials of NSE.
“NSE's reports on the matter and their answers to SEBI's queries are inconsistent and contain contradictory information,” said the report. The report further said trading volumes of some brokerage firms recorded a major boost from January 2014 to mid-2015, showing huge trading in algorithm trading volumes at the brokerage firms from 12 to over 27 per cent. In the report, the NSE listed as many as 47 brokerage firms who used the system that was allegedly manipulated by some of the brokerage firms.
As many as 27 premises of people connected with the scandal was raided by I-T officials across India to assess ill-gotten assets and wealth arising out of preferential access on NSE’s co-location platform.
The I-T department, it is reliably learnt, has come across banking transaction records involving some of the brokerage firms where cash was sent to accounts based outside India. “All the 15 (brokers) are mentioned in the I-T investigation report. We suspect a large chunk of the crime money has already travelled out of India. The raids will continue,” the officials said on conditions of anonymity.
The I-T department has now decided to include the Enforcement Directorate in the case so that some of the brokers can be tried under the country’s Prevention of Money Laundering Act (PMLA). The Central Bureau of Investigation, claimed I-T officials, could also be roped in.
The can of worms at the NSE, projected for years as India’s blue chip exchange, opened after a whistle-blower’s letter found its mention in the pages of a Mumbai-based news magazine.
The SEBI-TAC report says: “There were certain software vendors who had developed software to provide their clients first-to-connect access. The set up enabled first-to-connect stock brokers to receive data ahead of others and thus, they were able to react to the information earlier than the rest of the stock brokers,”
The taxmen also suspect some strong political backing in the entire co-location issue, having gathered several e-mails indicating "indirect" links supporting the claim.
The scam unfolded around the time when Ravi Narain was the MD of NSE and was supported by close friends like Ajay Shah, Susan Thomas and NSE’s Suprabhat Lala. Strangely, both Lala and Ravi Varanasi continue to hold important important positions in the exchange despite being show-caused by SEBI.
In Delhi, I-T officials said their investigations showed how the order book was manipulated to the hilt by the brokers. The order book, for any stock exchange, is an electronic list of buying sell orders for a particular security or a financial instrument defined by its price. If offered special access, one can fine tune one’s algorithms to maximize returns in the stock market.
Susan Thomas, wife of Ajay Shah—rumoured to be a confidant of former finance minister P. Chidambaram and his son Karti—and her sister Sunitha, married to NSE’s then trading head Lala, formed HFT firms like Infotech and Chanakya to exploit some inherent flaws in the NSE architecture. And eventually, they offered the technology to brokers like OPG Securities, whose owner Sanjay Gupta, was among those raided by the I-T officials last week.
A spokesperson from OPG Securities said: "We have cooperated with the agencies, have no comments to offer." When contacted, a person who spoke on behalf of Susan Thomas said she has no comments to offer on the current raids. Ajay Shah remain incommunicado despite several calls. A spokesperson for the NSE said the exchange has no comments to offer in the case. Calls, mails and text messages to Lala, Varanasi and Narain remained unanswered.
“This is a serious regulatory issue. It all happened in the garb of research. Some people were privy to information ahead of the rest, (that) they were located at the NSE gave them a tremendous speed advantage,” remarked Gopal Aggarwal, head of the BJP Economic Cell.
Brokers like OPG and Alpha Grep, I-T officials said, even managed data (the order book) three hours ahead of the market opening which gave them time to find the best algorithm for maximising profits. And eventually, these reconstructed order book landed up in tax havens like Cyprus, British Virgin Islands, Mauritius and a host of other countries where shell companies owned by rich and influential Indians had access. Among them was Advantage Strategic Consulting, a company owned by Karti Chidambaram.
Initial investigation showed the duo of Susan and Ajay seized very detailed, precious data from the NSE under the garb of research and used the same to test a program to allegedly hear investors en mass, through brokers like OPG.
During interrogations, NSE officials have confessed how the exchange allowed the algo programs be conceptualised and anchored by them to be used by a band select brokers.
Seasoned stock market analyst Ramdeo Aggarwal said the incident has definitely dented NSE’s blue chip image and some corrective measures are in the order. “It is becoming routine in exchanges in India that some policy decisions are taken, new instruments are introduced and some unscrupulous people take advantage of it. The NSE must set its house in order if it has to maintain its image in India, and the world.”
I-T officials claim that it was abundantly clear that the NSE actually paid to these people to carry out research ( which eventually turned into a scandal). Since Susan and Shah were associated with Indira Gandhi Institute of Development Research (IGIDR), NSE entered into an agreement with IGIDR. “What is surprising is that even after the scandal broke out almost a crore was given to the IGIDR in the name of research aid. This deal was closed as recently as this year,” said the official.
“If someone gets special access to information beforehand, it is likely to be exploited. The onus lies on the market regulator to clean up the system. If some selected brokers are exploiting the system to make extra cash, that will send a wrong signal," says seasoned stock market analyst Dhirendra Kumar.
Preliminary investigations have revealed that Lala was allegedly the main link between NSE and the Shah-Susan duo. During the planning stage Lala was not only heading trading but also was in-charge of algo-related set up of NSE. Lala’s wife Sunitha formed a company to advice brokers and roped in her sister Susan. With this loop it became quite foolproof. The company, namely Infotech Financials Private Limited, advised brokers, including OPG Securities. Shah-Susan wrote the algo which, claimed the whistle-blower, was given to OPG and Lala and his team in NSE approved and allowed to access the electronic trading system.
While the raids are on, both SEBI and I-T officials are closely analysing the forensic audits by EY India on NSE’s cash and currency segments and another report by the Hyderabad-based International School of Business (ISB). ISB conducted a study to determine whether any abnormal profits were made as a result of the first log-in to NSE servers by members named in a report by Deloitte Touche Tohmatsu India Llp.
However, the ISB’s study on whether brokers had made abnormal gains or whether some NSE officials were in collusion with the brokers was “totally inconclusive”, claimed a SEBI official. Worse, it was also brought to the notice of the investigators that NSE paid a huge amount to ISB to set up a trading innovation lab. “We will do our own forensic audit,” said the SEBI official.
The raids, meanwhile, continue across India.