Will Sebi use its powers in NSE algo scam?

For a couple of decades, the Securities and Exchange Board of India (Sebi) has been bleating that it does not have enough muscle to pin down wrongdoers. This was a specious argument of course. But then in July 2013, Sebi acquired huge heft that can be used to beat any violator into submission. What not many readers may know is that Sebi today has powers like search and seizure, attaching properties, arresting and detaining defaulters, and passing disgorgement orders to recover any wrongful gains. Sebi also has the powers to seek information from other regulators within India and abroad with retrospective effect, paving the way for collecting details pertaining to cases pending for over 15 years now.

While I have serious reservations about the concentration of such draconian powers in the hands of more and more state agencies, a curious observer of Indian capital markets may wonder why we don’t hear of arrests, detentions, search and seizures and ultimately disgorgement of gains. Could it be that Sebi suddenly finds there are no crimes to investigate? Well, that there are no serious crimes committed is certainly not true. There are cases of market manipulation in both penny stocks and better-run companies. Most importantly, we have, right in front of our eyes, what is called the algo scam of the National Stock Exchange (NSE). It is not the biggest scam ever in monetary terms but in my view the most significant one in the 26 years Sebi has been the market regulator.

To understand why the scam is so significant, turn towards what the Sebi’s Technical Advisory Committee (TAC), headed by Ashok Jhunjhunwala, who has impeccable credentials, has to say: “[T]he underlying principle regarding the trading through co-location is the faster access to data gives potential advantage to the trading member(s). Therefore, (the) Committee noted that opportunities to have undue and unfair access by some of the trading members is a gross violation of the basic principle of fair and equitable access irrespective of how much profit a firm was able to make. Therefore, (Sebi) can take suitable and appropriate action to ensure that entities including the exchange are penalised and such events do not recur in future.”

I have quoted the TAC because the algo scam is highly technical and there have been multiple attempts, including those by Sebi officials, to obfuscate issues and play down the seriousness of the crime. Even the new NSE management acts as if no major crime was committed and no case exists for punishment. Certainly, neither the new management nor the earlier one has acted on any of the allegations and is lining up an expensive defence of those involved, instead of separating the institutional interests from the personal interests of those who were responsible. But the TAC is an independent expert body and its observation surely nails the true significance of the scam.

The fundamental job of Sebi is to preserve the integrity of the marketplace by ensuring fair and equitable access. If anyone is caught violating this basic principle, he is obviously committing a crime. If the violation is institutionalised, as happened in NSE co-location, it is a grave crime. And if the institution happens to be the first-line regulator itself — a stock exchange — nothing could be worse, and Sebi must come down on it with a decisive and enormous punishment for the exchange and its former top management. This will ensure, as the TAC points out, “such events do recur in future”.

Is there any other situation that is more appropriate for Sebi’s search, seizure, arrests, detention, attachment and disgorgement? Unfortunately, Sebi’s investigation into the NSE algo scam has meandered reluctantly for three years now. From time to time, it has shown every intention of winding it up and letting off the guilty. Only when the Central Bureau of Investigation filed a First Information Report a few months ago on the scam that Sebi stirred itself to put out a second show-cause notice. The notice attaches all the technical reports that nail the scam.

However, armed with all that information, Sebi officials have lobbed softball questions to former top NSE officials Chitra Ramakrishna and Ravi Narain, allowing them to pretend they don’t remember, or were not aware of, and were not responsible for any irregularities. Mysteriously, there is no edgy back and forth, no follow-up questions as one would expect in a scam interrogation. It looks more like a prearranged e-mail interview! Sebi wanted strong policing powers but its officials don’t have the elementary skills of interrogation.

I hear Sebi officials suggesting that they do not think they have enough information on the scam despite mountains of evidence. In that case what stops it from going seeking the information? Isn’t it curious that it has not thought fit to use any of its draconian powers when there is clear evidence, from whistleblowers’ letters and other documents, of the shocking manner in which a top exchange of the world was functioning? Did Sebi demand and get the powers to raid and seize the assets of only petty crooks?