Why IN­CoME TAx of­fI­CErS ArE zE­ro­INg IN oN AjAy ShAh

The re­cent In­come Tax raids on NSE bro­kers, of­fi­cials and aca­demi­cians in con­nec­tion with the colo­ca­tion scam could open a Pan­dora’s Box.

The Sunday Guardian - - Covert -

Ex­actly two days after the scam-hit Na­tional Stock Ex­change sub­mit­ted a foren­sic au­dit re­port from Ernst & Young and In­dian School of Business to the Se­cu­ri­ties and Ex­change Board of In­dia, In­come Tax sleuths started na­tion­wide raids, cre­at­ing a rip­ple im­pact on the coun­try’s fi­nan­cial mar­kets.

The I-T raided premises of for­mer and cur­rent top NSE of­fi­cials and its bro­kers, seiz­ing Rs 11 crore along with some lap­tops, stor­age de­vices and con­fi­den­tial doc­u­ments. A se­nior I-T of­fi­cial called the cash hid­den in sofa sets and pil­low cov­ers as “just the tip of ice­berg”, hint­ing the trail could ex­pose many pow­er­ful peo­ple, as the En­force­ment Direc­torate (ED) was roped in to widen the scope of the in­ves­ti­ga­tion.

“This is a se­ri­ous one, the I-T of­fi­cials have landed on scores of doc­u­ments,” quipped BJP spokesper­son Naren­dra Taneja. The preparations for the raids, it is re­li­ably learnt, were done for over a year.

I-T of­fi­cials say one name that has re­peat­edly cropped up dur­ing the raids is that of Ajay Shah of Na­tional In­sti­tute of Pub­lic Finance and Pol­icy (NIPFP). The news is rock­ing Delhi’s pow­er­ful cir­cles, pos­si­bly be­cause of Shah’s re­ported prox­im­ity to for­mer Finance Min­is­ter, P. Chi­dambaram and a blue-eyed bu­reau­crat, K.P. Kr­ish­nan.

The over­all scam in NSE’s High Fre­quency Trade, claim I-T of­fi­cials, could be in the range of Rs 50,000 crore. It all hap­pened when a whistle­blower in 2015 blew the lid on how NSE de­cided to of­fer colo­ca­tion fa­cil­i­ties, with­out tak­ing any ap­proval from SEBI in 2010. The colo­ca­tion fa­cil­ity al­lowed pref­er­en­tial ac­cess to se­lect bro­kers for the trad­ing sys­tem, wherein they could get split-sec­ond faster ac­cess to the data feed of the ex­change, in­dulging in a wide­spread mar­ket fraud on mil­lions of in­vestors at the cost of few bro­kers.

One of the al­leged key con­spir­a­tors of the scam, Ravi Narain, has been ac­cused of al­low­ing the fraud to hap­pen under his reign as the MD & CEO of NSE. Narain put in his pa­pers and the chief ar­chi­tect of the com­plex al­go­rithm pro­grams specif­i­cally de­signed for the colo­ca­tion scam—Ajay Shah fell into the I-T net. A se­nior NSE of­fi­cial said Narain and Lala would not of­fer any com­ment as the case is sub-ju­dice. Re­peated mails and text mes­sages to Shah did not yield an an­swer.

The whole colo­ca­tion scam was re­port­edly hatched when those as­so­ci­ated with high fre­quency trade (HFT) teamed up and worked in tan­dem for a lit­tle over five years, by­pass­ing rules and reg­u­la­tions set in place by SEBI, the mar­ket reg­u­la­tor.

Shah, claim I-T of­fi­cials, worked in tan­dem with his wife Su­san Thomas and sis­ter-in-law Su­nitha Thomas (wife of Suprab­hat Lala, the then trad­ing head of NSE). In the garb of re­search, they got full gran­u­lar time se­ries data from NSE—none oth­ers had this ex­clu­sive data—and cre­ated al­go­rith­mic pro­grams to game the mar­ket through bro­kers like OPG, Al­pha Grep etc. Thanks to the data, a band of bro­kers is said to have stayed ahead of the rest in the mar­ket to gain what I-T of­fi­cials claimed as “il­le­gal gains”. The I-T of­fi­cials ad­mit that they have gath­ered re­con­structed or­der books with cash be­ing trans­mit­ted to tax havens (pre­ferred by FIIs) like Cyprus, Bri­tish Vir­gin Is­lands, Mau­ri­tius, Hong Kong— wher­ever Ad­van­tage Strate­gic Con­sult­ing, OPG, etc., had ac­cess.

I-T of­fi­cials main­tain that Shah de­vel­oped the al­go­rithm for the com­pany OPG Se­cu­ri­ties, whose pro­mot­ers San­jay Gupta and oth­ers were also raided by the I-T and Rs 11 crore seized from them. Re­peated ef­forts to reach Gupta through text mes­sages proved fu­tile. From the data, an­a­lysts and in­ves­ti­ga­tors say, Om­nesys was ap­par­ently given pref­er­en­tial treat­ment by both Narain and Chi­tra Ra­makr­ishna (who suc­ceeded Narain as CEO and MD of NSE). In short, from algo to soft­ware, which were used by OPG Se­cu­ri­ties, were sup­plied by In­fotechSo­lu­tion and Chanakya among oth­ers, which were pro­moted by Su­nita Thomas, wife of Lala. In case of Om­nesys, what is more in­ter­est­ing is the fact that NSE ac­quired 26% stake and Ra­makr­ishna was on the board of Om­nesys Tech­nolo­gies, de­spite the fact that the par­ent of Om­nesys was a broking firm of NSE.

“This is­sue had been go­ing on for quite some time and brought to light only after a whis­tle blower raised a storm. NSE should have re­solved it on its own and not al­lowed such pref­er­en­tial treat­ment to a hand­ful of bro­kers. If re­search is mis-utilised to ma­nip­u­late mar­kets, then it’s dan­ger­ous,” says Gopal Ag­gar­wal, head, BJP Eco­nomic Cell. I-T of­fi­cials, who spoke on con­di­tions of anonymity, claim Shah and his wife (Su­san) got hefty roy­alty ev­ery year from the turnover of Nifty trad­ing, which is 80% of the to­tal turnover of NSE. This, they claim, is in vi­o­la­tion of the stan­dard in­dus­try norm, where a one-time pay­ment is given to de­sign­ers and re­searchers for any of the mar­ket in­dices.

What, claim I-T of­fi­cials, is more un­prece­dented and stun­ning is that a per­cent­age of trad­ing on NSE and its earn­ings was said to have also been given as roy­alty to Shah and his wife, as­so­ci­ated as pro­fes­sors at Na­tional In­sti­tute of Pub­lic Finance and Pol­icy (NIPFP) and Indira Gandhi In­sti­tute of De­vel­op­men­tal Re­search (IGIDR), re­spec­tively. I-T of­fi­cials are also in­ves­ti­gat­ing whether Shah in­flu­enced FIIs and Par­tic­i­pa­tory Notes (PN) ac­tiv­i­ties on NSE. After all, he had profit shar­ing con­tracts with OPG Se­cu­ri­ties, Al­pha Grep and Om­nesys.

“What is dam­ag­ing is that such a cru­cial piece of in­for­ma­tion was sup­pressed from the Red Her­ring prospec­tus of NSE’s on-hold IPO,” claim I-T of­fi­cials, adding it was his prox­im­ity with a se­nior min­is­ter in the UPA and his obe­di­ent bu­reau­crats that helped Shah bag Rs 1 crore an­nual pro­ject for NIPFP for a decade. As per cur­rent es­ti­mates, OPG Se­cu­ri­ties alone had traded over Rs 6,000 crore on NSE, us­ing colo­ca­tion fa­cil­ity. While de­tails of other 15 en­ti­ties that have been named in the I-T re­ports are be­ing probed, huge amount of such trad­ing is likely to sur­face soon. Mar­ket ob­servers claim if a de­tailed probe is car­ried out in the or­der book that was ex­ported to FIIs or FPIs, it would ex­pose the ac­tual amount of il­le­gal gains.

“NSE should have played as per the rule book, but it is clear it did not. The raids and sub­se­quent ac­tions by other rev­enue in­tel­li­gence agen­cies have opened a Pan­dora’s Box. It re­mains to be seen if SEBI agrees to the con­sent route,” or dares to fol­low the trail to the top, says sea­soned mar­ket an­a­lyst Dhiren­dra Ku­mar.

Worse, sev­eral mar­ket pun­dits have termed the Deloitte, E&Y and ISB foren­sic au­dit re­ports as a “to­tal eye­wash” be­cause of clear con­flict of in­ter­est issues. For the records, Narain, as MD & CEO of NSE, was also the head of the sub-com­mit­tee, which chose Deloitte for the foren­sic au­dit of NSE, de­spite be­ing fully aware that Deloitte was do­ing a huge pro­ject for NSE’s dis­as­ter re­cov­ery cen­tre (DRC). This, again, was never dis­closed by both NSE and Deloitte.

But NSE did set aside the Deloitte re­port. When SEBI again asked it to ap­point an­other au­di­tor, this time NSE chose E&Y, along with ISB. “Again, this was an­other case of con­flict of in­ter­est,” claim the I-T of­fi­cials. Like Deloitte, E&Y also has huge fi­nan­cial in­ter­est from NSE in the form of large projects. Sim­i­larly, NSE paid some crores of ru­pees to ISB to set up a trad­ing in­no­va­tion lab.

With En­force­ment Direc­torate step­ping in, the probe against the NSE colo­ca­tion scan­dal is ex­pected to of­fer some more names, some of them with some direct, in­di­rect and solid links with some pow­er­ful politi­cians.

The ED could soon be roped in by the I-T of­fi­cials, who will con­tinue the raids across In­dia.

One of the al­leged key con­spir­a­tors of the scam, Ravi Narain, has been ac­cused of al­low­ing the fraud to hap­pen under his reign as the MD & CEO of NSE. Narain put in his pa­pers and the chief ar­chi­tect of the com­plex al­go­rithm pro­grams specif­i­cally de­signed for the colo­ca­tion scam—Ajay Shah fell into the I-T net. The whole colo­ca­tion scam was re­port­edly hatched when those as­so­ci­ated with high fre­quency trade teamed up and worked in tan­dem for a lit­tle over five years. I-T of­fi­cials, who spoke on con­di­tions of anonymity, claim Shah and his wife (Su­san) got hefty roy­alty ev­ery year from the turnover of Nifty trad­ing, which is 80% of the to­tal turnover of NSE. This, they claim, is in vi­o­la­tion of the stan­dard in­dus­try norm, where a one-time pay­ment is given to de­sign­ers and re­searchers for any of the mar­ket in­dices.

Ajay Shah

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