Governance breakdown

Sebi order exposes how NSE was run

The Securities and Exchange Board of India (Sebi) last week issued the final order on the so-called “Algo scam” at the National Stock Exchange (NSE). The regulator indicted five individuals and the NSE for several violations, and acts of mis-governance, which could have potentially rocked the financial system. Using co-located servers on the NSE premises, select entities received price information in advance, and profited by front-running. The period under consideration is roughly 2013-16 with the first whistleblower complaints in 2015. Sebi indicted Chitra Ramkrishna, who was managing director (MD) at the time; Ravi Narain, then vice-chairman; J Ravichandran, then executive director in charge of compliance; Anand Subramanian, group operating officer and adviser to the MD; and V R Narasimhan, then chief regulatory officer. Sebi also passed strictures criticising the NSE board for failing to inform it of the governance issues. The regulator has fined the NSE and the individuals connected to the issue and barred the stock exchange from launching any new product for six months.

However, this is not a simple case of governance lapse and has multiple layers. Mr Subramanian had a crucial role in all this, and the 190-page Sebi order lists astounding underlying rationale for an irregular appointment. He was appointed without employment documentation, or prior experience in finance, and granted compensation of over Rs 3 crore per annum (far in excess of other senior NSE personnel), along with decision-making powers, and unparalleled access to the MD. The order says Ms Ramkrishna was consulting a mysterious “spiritual adviser, largely dwelling in the Himalayas”, who communicated using an anonymous email address. She described this entity to Sebi as a “spiritual force who has been guiding her for the past 20 years and as a spiritual force, their spiritual powers don’t require to have any such physical coordinates”. This entity advised her to appoint Mr Subramanian, and set the terms and compensation. Mr Subramanian was kept off the rolls of the NSE by designating him part-time consultant working four days a week.

A forensic audit by Ernst & Young showed Ms Ramkrishna shared confidential information about the NSE’s organisational structure, dividend scenario, financial results, human resources policy, and related issues, and also the NSE correspondence with Sebi, with the “spiritual adviser”. The email trail also suggests Mr Subramanian was passing on some of his compensation to this entity. Psychology experts consulted by the NSE suggested Mr Subramanian was manipulating Ms Ramkrishna, using this email id, to influence her. It is hard to judge if Ms Ramkrishna was emotionally unstable enough to blindly follow advice coming from an anonymous email account. What is undeniable is that India’s premier financial exchange, which is one of the largest in the world, hosting over $3 trillion worth of listed companies, lacked internal checks and balances. It is worth noting that the board was aware of the exchange of confidential information between Ms Ramkrishna and her spiritual advisor but decided to keep the matter under wraps. This shows complete collapse of governance at the exchange, which could have potentially risked financial stability.

There were multiple violations of the Sebi Act, 1992; the Securities Contracts (Regulation) Act, 1956; and the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012. The fines and penalties amount to a mere slap on the wrist. But punishment aside, the regulator must ensure that something like this never recurs.