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.

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.

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:

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.

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.

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.