Employees walk through the atrium of the National Stock Exchange of India Ltd. (NSE) building in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

SEBI Finds Governance Lapses At NSE, Fraudulent Practice By Ajay Shah

Pointing to the lapses in corporate governance at the National Stock Exchange of India, the market regulator has said Ajay Shah, Infotech Financial Services, and two of its directors had misused the exchange’s trading data provided to them for commercial gains.

The data was collected on the pretext of the Liquidity Index Project, but it was eventually used for developing algo trading products for sale in securities market, according to the Securities and Exchange Board of India.

And so, the regulator has directed NSE to take necessary legal actions against Shah, Infotech and its two directors, review all its third-party agreements having a data-sharing component and take action if irregularities are found. It also barred NSE’s erstwhile managing director and chief executive officer Ravi Narain and Chitra Ramakrishna from holding management position in any stock exchange, listed company or SEBI-registered intermediary for three years. The regulator imposed a similar ban on Shah for two years and barred Infotech and its directors from providing any services to exchanges, etc. for two years.

Also read: NSE To Pay Rs 1,000 Crore Disgorgement In Co-Location Case: SEBI Order

Shah-Infotech-Thomas Sisters: Conflict Of Interest

Shah and his wife Susan Thomas have had a long-standing professional relationship with the NSE dating back to 1994, SEBI’s order stated. They have received sitting fees for attending committee meetings, professional fees for conducting training, workshops and research projects, among others from the NSE and its affiliate companies. It’s this relationship, SEBI said, that Shah and his wife used to award the contract of developing the Liquidity Index to Infotech—a financial technology firm that had Susan Thomas’, sister Sunita Thomas, as its director.

This conflict of interest was neither disclosed by Shah, who was a board member of NSE’s subsidiary National Securities Clearing Corporation, nor verified by the exchange and its management, Narain and Ramakrishna, SEBI said.

Ajay Shah in collusion with Infotech and its two directors had pre-planned a scheme in the form of LIX Project which was utilised by them for enjoying seamless data transmission in the name of developing LIX whereas the data was meant to be misused by them for their commercial gains by developing algo trading products for sale in securities market.
SEBI Order

Also read: NSE Co-Location Case: SEBI Bars OPG Securities, Three Directors From Markets For Five Years

This data, according to SEBI, was confidential and exclusive in nature, which was made available only to Shah, Infotech and two of its directors—Sunita Thomas and Krishna Dagli. Internal data of NSE was shared with these entities by Suprabhat Lala, assistant vice president of the exchange’s trading operations, the order said.

For this, among other things, SEBI relied on an email from Shah to his sister-in-law Sunita Thomas:

“… on day 1 Anupam is a finance guy. He is not a programmer. So drive him appropriately. He can go into all your existing projects–but in a domain knowledge roll e.g. he can start working on trading strategies which can go into all algorithm trading work. (But you have to swear everyone to silence on the fact that the data that we are getting out of NSE for VIX and LIX is being used for algorithmic trading work — it would be a severe problem if this fact comes to light since the NSE has not given anyone else this data.)
SEBI Order

This privileged access to confidential and exclusive trade data of the exchange to a select few persons who, clandestinely exploited it for their commercial gains, compromised market integrity, the order said. And so, the regulator has found Ajay Shah, Infotech, Sunita Thomas, Krishna Dagli and Suprabhat Lala guilty of violating SEBI’s unfair trade practices’ regulations.

Also read: SEBI Fines NSE Rs 90 Crore For Violations In Dark Fibre Case

NSE-Narain-Ramakrishna: Governance Lapses

SEBI said the Liquidity Index Project was ultimately developed, implemented by NSE’s subsidiary IISL and that it was never a priority for Infotech. And by awarding the contract to Infotech, NSE, Narain and Ramakrishna not only overlooked the conflict of interest aspect but also put the confidential data of the exchange vulnerable to misuse; thereby compromising the exchange’s governance. Even after a show cause notice was served to Shah, the NSE did not ask him or Infotech for an explanation, let alone taking any legal measure against them, SEBI said.

This shows deliberate negligence by the NSE, unwillingness to recognise evidence, and an overzealous attitude to protect the interest of these entities. The market regulator also found absence of any data-sharing agreement with Shah and Infotech till 2012 and glaring negligence, irregularities and procedural lapses in those executed in 2013 and 2017.

…the (data sharing) policy was implemented in a slip-shod and casual manner so much so that the agreements were full of infirmities and procedural lapses embedded into it….undertaking executed by Ajay Shah and Susan Thomas have no relation as far as the projects for which the agreements were executed as there was no cross reference to the undertaking furnished by Ajay Shah and Susan Thomas for those agreements. …undertaking does not mention any specificity as to the data and purpose of making such data available to them by the Noticees (NSE, Narain and Ramakrishna).
SEBI Order 

And while SEBI has not found NSE, Narain, Ramakrishna guilty of violating unfair trade practices’ regulations, it has concluded their culpability under the Master Circular on Administration of Stock Exchange.

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