New Delhi: They are calling it SEBI’s desktop investigation. This is the high-powered market regulator’s decision to grant clean chits to a number of top officials of the National Stock Exchange who were allegedly involved in the co-location scam, indicted by the very exchange and even fined Rs 1,000 crore plus.

The fine itself is enough to start five news channels.

What does the SEBI order say?

The order, passed by S.K. Mohanty, whole time SEBI member, says no wrong happened. “From the records, I do not find any evidence or any material that establishes or even remotely indicates any role played by any of the noticees as far as establishment of P2P connectivity by Sampark (Entertainment) is concerned. There is nothing on record which could even suggest that any of the entities was occupying a post of director or KMP and on account of holding of such post, the respective noticees could be fastened with the accountability for the lapses, breaches and discriminatory treatment meted out to the market participants by permitting a selected few stock brokers to avail dark fibre connectivity from Sampark.”

In one stroke, Mohanty cleaned the stables. Social media went buzzing like never before. SEBI, true to its expectations, remained silent.

Mohanty further wrote in his order: “In my view, based on the evidences available on record and after having considered the same, it cannot be held that the noticees herein were involved in facilitating ‘Sampark’ to lay down the dark fibre line to provide P2P connectivity.

“There is also no evidence to suggest that noticees had any role in modifying the Circular of 2009 in the year 2013. Consequently, they were also not responsible for the non-transparent dissemination of the modification so made in the above mentioned circular of 2009 and therefore, the noticees cannot be held responsible for any misconduct or non-compliance as far as laying of P2P connectivity using dark fibre is concerned.”

He further said: “I observe that the allegations pertaining to the involvement of the Noticees have been made only because of their association in some capacities with NSE during the relevant period of time. It is an admitted position that none of the noticees was occupying the position of a director in NSEIL, more particularly during the relevant period, when Sampark was allowed to lay down dark fibre lines to establish P2P connectivity between the two stock exchanges for a few selected stock brokers.”

The list of those exonerated include Ravi Narain (former MD & CEO), R. Nandakumar (former senior vice president, VP for operations), Mayur Sindhwad (chief operating officer, COO for trading), Sankarson Banerjee (chief technology officer, CTO for projects), G. Shenoy (CTO for operations), Suprabhat Lala (vice president, regulations), Ravindra Apte (former CTO), N. Muralidharan (former CTO) and Jagdish Joshi (former head for Colo).

Almost five years after a whistleblower’s letter was published in Moneylife newsmagazine about the alleged scandal in NSE’s high-frequency trading using colocation—which gives traders advantages by a few milliseconds—the issue is back to square one. And now, the SEBI order says nothing was done to cause unfair advantage and there was nothing in the system through which brokers could make crores of rupees of illegal profit.

Expectedly, many found the order a surprise.

The issue, claimed experts, once again highlighted India’s lack of monitoring of such complex automated systems in the stock exchanges, leave alone trading transaction. No wonder, organisations which handle such technology have, over the years, become a law unto themselves. No one controls them, no one supervises. There is nothing in the public domain to see if any proper investigation was ever made into such alleged violations of such complex trading mechanism. A large chunk of the market does not even know how glitches can help some make fat cash, ostensibly because everything is below the radar. In a nation where whistleblowers are increasingly digging up dirt—ICICI and Jet Airways are two such examples—it’s pertinent to see how this whole co-location scandal first surfaced.

It emerged from Singapore. The email was addressed to B.K. Gupta, DGM, SEBI and dated 14 January 2015. The email alleged NSE was offering a few high-frequency brokers preferential access to its servers by allowing them to place their servers in the NSE premises that benefited both the parties at the cost of others. This was a very, very serious charge. But SEBI remained silent and then it reacted very, very late. Equally silent were the then NSE chairman, Ravi Narain and NSE MD, Chitra Ramakrishnan.

There were many questions about the latest SEBI order.

Asked a top market analyst: “If none of the noticees were concerned with Sampark establishing P2P connectivity, how come these very noticees were identified by the SEBI team investigating the matter? Was the person responsible for non transparent communication of modifications in the 2009 guidelines identified by the investigation team? Why did the report did not remark on what appears to be a very shoddy investigation?”

Remarked another expert: “The whole matter has been given a burial in a context where there will be an IPO and possible merger with MCX. The government needs to overhaul the functioning of regulators.”

What was a surprise was the fact that this very SEBI, in May 2019, had indicted well-known market economist Ajay Shah and Suprabhat Lala, a senior official of NSE in the algo trading scam. So let’s read what the order said. It said a private firm of Sunita Thomas (Lala’s wife and sister-in-law of Ajay Shah), “commercially exploited” confidential data obtained from the NSE for writing algo trading software. SEBI had also directed NSE to take legal action against Ajay Shah, Sunita Thomas, her firm Infotech Financial Services Pvt Ltd, and Krishna Dagli, director of the company.

This was not all.

One of the orders indicted both Narain and Ramakrishna, for overlooking conflict of interest in awarding contract to Infotech Financial. Earlier, SEBI had ordered disgorgement of profits from NSE and salaries of former Narain and Ramkrishna. The regulator also asked NSE to disgorge an amount of Rs 624.89 crore along with interest calculated at the rate of 12% per annum to the Investor Protection and Education Fund (IPEF).

And it is very pertinent to note what an earlier SEBI order had said. In the order that related to “dark fiber” involving unregistered service provider, Sampark Entertainment, SEBI had said that since NSE is a recognised stock exchange and the leading market infrastructure institution, it occupies a pivotal role as a front line regulator. Therefore apart from reformatory steps under Sections 11, 11(4) and 11B of the SEBI Act, 1992 and Section 12A of the SCR Act, 1956, “considering the gravity of the allegations that have been established…, additional exemplary directives need to be issued could pose an effective deterrence and dis-incentive to the noticee (NSE) to perpetrate such kind of violations in future so far as administration and governance of its Colo facility is concerned.”

SEBI had directed NSE to deposit Rs 177.43 crore—considered a reasonable portion of revenue—earned by NSE through its co-location facility from 8 May 2015 to 10 September 2015 to the Investor Protection and Education Fund (IEPF) of SEBI. Now, since NSE had allowed Sampark to provide P2P connectivity without having proper licence, to a few stock brokers in a preferential manner—denying other stock brokers the same service—and that the said illegitimate service continued for a period of four months, SEBI had asked Sampark to transfer Rs 62.58 crore to IPEF. Two co-location traders, Way-2-Wealth and GKN Securities, were found to have “fraudulently availed of P2P connectivity with the help of an unauthorized Telecom Service Provider (Sampark) at the Colo facility of NSE…in a manner to gain undue advantage in terms of low latency and high bandwidth in data transmission as compared to other stock brokers in securities market,” said SEBI. The regulator also asked W2W to deposit Rs 15.34 crore in IPEF and GKN Rs 4.9 crore.

And now, the same SEBI says nothing happened and that it has found nothing illegal. Given its awesome power, it is no wonder marketmen are buzzing about the order, but none seems in a rush to voice such views in public. To protect the credibility of exchanges and institutions in India, Prime Minister Narendra Modi, who has demanded a zero tolerance policy towards any wrongdoing, needs to order the premier investigating agency to have a comprehensive relook at the matter with assistance from independent experts.