How checks and balances got broken in NSE?

No one knows whether the instructions for this particular treatment came from the mystic, Himalayan yogi with whom Ramakrishna apparently shared confidential information. Subramaniam, who had little or no experience in the financial sector, was initially appointed as an advisor in 2013 and then as COO in 2015 with highly compensated and exceptional hikes.

In an email to Ramakrishna on 19 February 2015, the mystic, whose identity is yet to be established, directed: “I propose with love and abundant blessings that you be with effect from April 01, 2015” as Group Operating Officer and MD. will be called as consultant. “At the same level as the Group President of the company”. This mail also explained a new travel policy.

Subramaniam was now entitled to fly “business class to domestic destinations” and first class to international destinations, with travel time exceeding five hours. According to the tax department, and as per a SEBI order, both Subramaniam and Ramakrishna traveled to tax havens such as Mauritius. and Seychelles. We do not know whether he has done so in his official capacity.

Meanwhile, NSE verbally changed travel policies for other management leaders. Exchange officials said they were asked to fly economy class even if they were entitled to business class travel.

Soon after his appointment, Subramaniam began tossing around needy officers in every department, as did several NSE employees who spoke to Mint. At times, reporters directly to the CEO had to seek consent from Subramaniam. “At one point of time, NSE was required to clear seller payments immediately. NSE’s arrangements could have stalled otherwise as these payments were pending for a long time. They needed authorization from the CEO’s office, but it was Subramaniam who cleared the payments,” said a former employee, who did not wish to be identified.

Changes and dissatisfaction with all these manuals led to the first whistleblower complaint in 2015, opening the door to several investigations.

Still, the powers of the mystic, who runs the show at India’s most technically savvy exchange, and Subramaniam, are two key spokespeople in the vast cycle of bizarre breaches and governance failures at the NSE. Officials said that between 2013 and 2016, almost every NSE system was put at risk. How the exchange’s procedures and policies were undermined, there were fiduciary failures at every step; how the Board conducted its business; And how the regime was sidelined.

An email query sent to NSE remained unanswered.

Markets regulator- Securities and Exchange Board of India (SEBI) in its order in February this year had underlined that hiring a person without relevant experience and delegating powers equivalent to MD and CEO was a significant issue that could have significant implications. Is. On the working of the stock exchange. Sebi said the amount of disproportionate advantage or unfair advantage made as a result of sharing of information with an unknown third party – mystic in this case – and a recruitment irregularity cannot be quantified.

Some experts see this episode as a failure of SEBI. About that later. First, let’s take a closer look at the governance failures of NSE.

government slip

The list of regime violations is endless. Technology policies to allow Mystic to communicate were circumvented even as key data disappeared from the exchange, its former board (before 2015) failed to heed the regulator’s instructions, and under Ramakrishna The former NSE management stopped the internal secretarial audit in 2015. Then there were allegations of unfair advantage provided to some brokers. A whistleblower complaint on behalf of a person named Ken Fung stated that NSE’s collocation and algo trading services provided unfair access to certain brokers. Colocation refers to the service where the exchange allowed brokers to locate their servers on their own premises. This reduces latency and enables faster access to market data and thus trading.

Listed companies are prohibited from sharing financial statements and board meeting agendas, or even minutes of any board meeting, with unauthorized persons. All such violations are covered by insider trading. For an exchange that imposes governance and disclosure standards on listed companies and can initiate disciplinary proceedings against brokers, the must certainly be high.

“The exchange has miserably failed to maintain high standards of governance by sharing key data with a person whose identity is still unclear. Sure, the exchange is privately held, but that is for all purposes. is a public institution,” said the head of the equity desk of a foreign institutional investor, who did not wish to be identified.

Ironically, Ramakrishna proposed a new corporate governance initiative called ‘NSE Prime’ during his tenure as head of NSE. The idea was to raise the governance standards for companies listed on the exchange – it was launched in December 2021.

Despite all this, some are of the opinion that governance lapses in NSE are a thing of the past.

The National Exchange Members of India (ANMI), a pan-India body for national exchanges, issued a statement on Twitter saying it “reflects confidence in the functioning of NSE”.

“Entities differ from individuals. We cannot destroy the reputation of an institution because of just one person. In Ramakrishna’s case, the results have come out,” said JN Gupta, founder of Stakeholders Empowerment Services and a former executive director of SEBI. said.

data leak

The business of stock exchanges thrives on data security. And every department of NSE has a Data Leakage Policy (DLP). But between 2013 and 2016 it could not function adequately.

As per DLP policy, Exchange employees cannot use USB (Universal Serial Bus) on computers. Emails containing sensitive and confidential information are intercepted through an automated alert system. Such emails are quarantined, brought directly to the notice of the reporting head, and issued manually when rectified by the senior officer concerned.

In November 2015, the DLP policy prevented the distribution of emails between Ramakrishna and a third person- Mystic.

Subsequently, on verbal instructions from Ramakrishna, Sankarasan Banerjee, Chief Technology Officer (CTO)-Projects at NSE, wrote an email internally to Narayan Nilakantan, an employee of his team, asking him to investigate whether the ID-rigyajursama @outlook.com – Why was it. Unable to send or receive email. The mystic went by the title Rigyajursama.

Subsequently, an internal mail was circulated to allow such exchange of emails between the fakir and the CEO.

“It is a clear case of manual intervention that allowed such email exchanges. The data policy was overridden. Coming directly from the CEO, there is very little an employee can do,” said the technology head of a private sector bank. Said who did not want to be identified.

The Sebi order from February also outlines how the technology probe was bypassed on specific instructions from Ramakrishna. SEBI noted that the email alerts by NSE were specifically configured to identify those sent to ‘Rigayajursama’.

Now, most of the data to establish the identity of this fakir has disappeared. Personal laptops used by Ramakrishna and Subramaniam were destroyed as ‘e-waste’.

SEBI’s show cause notice from 22 May 2017 on alleged colocation scam criticizes the electronic data retention policy of NSE. The notice pointed to the lack of documented policies and protocols in the functioning of the tick-by-tick system (market data dissemination system) and the lack of a consistent data retention policy for emails and other information for key employees, now were not. Exchange.

In capital market, brokers are required to maintain data/call data records with clients under SEBI norms. Therefore, an exchange not being able to maintain data records is a serious lapse. “During colocation, NSE claimed to have lost email data citing migration to a new Outlook system,” a regulatory official said.

board error

The NSE board overseeing the rise of Ramakrishna and Subramaniam (in FY 2014-15) had 11 members. It was presided over by SB Mathur, former chairman of Life Insurance Corporation. Regulatory authorities are now questioning its accountability.

Subramaniam was hired and then promoted to the rank of COO under Mathur’s supervision.

In his statement before SEBI, Ramakrishna said that before Subramaniam was hired, he had met both Ravi Narayan (former vice chairman of the board) and SB Mathur.

Apart from the hiring, Subramaniam’s rise to the NSE with powers practically equal to that of Ramakrishna, as the board was largely silent. “The Board of NSE, in its meeting held on 11 August 2015, delegated substantial powers of management at par with the powers conferred on Ramakrishna in the NSE Board meeting,” SEBI said in its order.

“It should be the responsibility of all directors to inquire about Subramaniam’s background, relevant job experience and suitability to be part of the senior management team. And why was a consultant delegated with significant executive powers,” asks Hemindra Hazari, an independent research analyst.

Sebi officials who spoke to Mint said the board under Mathur was resistant to any suggestions and directions from the regulator. When the term of the four directors ended, SEBI insisted on the board with candidates whom it preferred- Mohandas Pai, Ashok Chawla, Dharmishta Rawal and Dinesh Kanabar (FY 2015-16).

“They were SEBI sweepers. He was receptive to SEBI’s communication in the hiring and colocation scam. It was only after these appointments that inquiries started within the exchange.”

On 29 November 2016, the new board members wanted to sack Ramakrishna. However, he quickly penned a handwritten resignation letter, ahead of a possible dismissal, Mint reported on Tuesday.

regulatory lapse?

This brings us back to SEBI and its responsibility as a regulator. While NSE and its board clearly flouted best practices and governance standards, did SEBI crack the whip the way it should? In its February order, Sebi had held NSE and its board, besides Chitra Ramakrishna, Ravi Narayan and Anand Subramaniam guilty of violation of the Securities Contracts (Regulation) Act, the SEBI Act, and the Stock Exchange and Clearing Corporation (SECC) Regulations.

Typically, individuals deemed “not fit and not proper” under SECC regulations may be barred from associating with any exchanges or market intermediaries for life. Still, Ramakrishna was held back for just three years.

Second, the regulator failed to establish the identity of the fakir.

“In this day and age, it is little surprise that the regulator is unable to find the identity behind an email ID,” commented a senior software expert, who did not wish to be identified. “In case of colocation issue, SEBI was able to pinpoint the millisecond gain by select brokers. Hence, finding an email ID should not be difficult,” he said.

The SEBI Act gives the regulator all the powers of search and seizure – it appears they may not have been exercised in this case. The regulator’s February order mostly hinges on the EY forensic audit undertaken by NSE in 2018.

Third, the EY report and NSE responses were sent by October 2018. Hence, many market watchers are questioning why it took three-and-a-half years for SEBI to pass its order.

Nevertheless, under SEBI rules, the regulator is required to give sufficient time to each party to respond as part of the quasi-judicial proceedings. In its order, the regulator has sent a show cause notice and explained in detail the responses received and when it has been received. India’s finance ministry is now also examining whether SEBI has taken necessary punitive measures. Clearly, the NSE saga that caught the attention of the world is not over yet.