Strange NSE Co-Location Case: No Wrong-Doing, Yet Clobber ’Em

To do such nitpicking when there has been no fraud sends out a powerful message to all future stakeholders.

May I begin with a clear/unambiguous disclosure:

I know Ravi Narain, Chitra Ramakrishna, and Ajay Shah, who allegedly did “something wrong” by co-locating trading servers at NSE. Since I am not the adjudicator here, I cannot say anything conclusive about this specific case; but otherwise, I have the highest regard for their professional integrity and achievements.

So, I was astonished to read screaming headlines in pink dailies about how they were indicted for creating a nanosecond trading arbitrage for some brokers who then gamed the system and made huge profits.

Even more astonishingly, the indictment confirmed that “no criminal or mala fide action or corruption or profit was established”. Yet these respected professionals were penalised. Their bonuses were disgorged. Their reputations have got smeared. The situation is incredibly remorseless.

I reached out to a friend who is privy to inside details about this case (I cannot obviously disclose his identity). He sent me the following information:

From 2015 onwards, there were "whistleblower complaints" (anonymous emails that were circulated to thousands of people, and filed as complaints to SEBI, CBI, IB, ED, etc.) about alleged problems at NSE and a brokerage firm called OPG Securities. There was no direct link that could be established between OPG Securities and Ravi or Chitra or Ajay.

In 2017 there was a new "whistleblower complaint" with a conspiracy theory that Ajay was integrally linked to this. Prima facie, it seemed like a strange conspiracy theory. But NSE and Ajay then suffered an income tax raid, a SEBI investigation and a CBI raid.

SEBI wrote a “show cause notice” to Ajay picking on one paragraph from one email of his, in 2009, which talked about “doing something in the future”. But the said act was never done. The investigators never found evidence of actual wrong-doing, of any trading, of any profit, of any money flows to any of the parties. But SEBI has now found Ajay “guilty”.

After reading this mail that my friend had sent me, I found many newspaper reports questioning how SEBI could place large fines on NSE while simultaneously saying that there is no evidence of wrong-doing, only of management actions that appear inefficient with the benefit of hindsight.

More generally, I find it a real tragedy that the community which did the Indian equity market reforms of the 1990s – one of the nice pieces of nation building – is now being put through this. It sends out a bad signal to all future initiatives in the public policy process. People will look at the fate that has befallen this community and go super safe.

For me the anguish is primarily about India’s financial reforms. The equity market reforms of the 1990s were one of the seven wonders of our economic transformation. It is beyond perverse that the leaders of this great story are put into trouble like this. On one hand, SEBI says that there is no evidence of any wrong-doing at NSE, and nobody made money out of the management mistakes, but they have imposed a fine of Rs 1,000 crore and taken a stab at the careers of key persons like Ravi Narain and Chitra Ramakrishna. (A PIL at Delhi High Court by a journalist, Shantanu Guha Ray, who is the author of a book on Jignesh Shah and FTIL, seeks to add CB Bhave, another exceptional administrator, as an accused, by launching a CBI investigation into his role in the story).

Building NSE, NSDL, SEBI in the early years was about a certain kind of policy entrepreneurship. The key persons there took risks, moved fast, and got transformative change. India owes a lot to GV Ramakrishna, CB Bhave, RH Patil, Ravi Narain, Chitra Ramakrishna, Raghavan Putran and Ashish Chauhan, and the Ministry of Finance which supported the work. There was a great deal of new instruments, new institutions, new technology. The key persons did the right thing by thundering ahead, innovating, taking risks, and it all worked our magnificently.

When we assess any organisation or initiative, and look back after 10 or 20 years, there may be processes and paperwork that could have been done better. The point is that the NSE reform worked; it delivered the required transformation of the Indian equity market. To do such nitpicking when there has been no fraud, no wrong-doing, sends out a powerful message to all future stakeholders who need to carry forward India’s economic reforms:

Don’t stick your neck out. Don’t move fast, don’t take risks, don’t offend people,  because the consequences could be devastating.

The Indian financial system is in a terrible mess. We need a dozen teams on the scale of the NSE team to sift through the wreckage and build solutions. Unfortunately, this order could stymie, even abort, these critical efforts. Progress in India’s financial markets has stopped as SEBI is hostile to reformers.