 Hello and welcome to NewsClick, I am Bharanjoy Gohar Thakurtha. We are going to discuss the scandal which has rocked India's financial sector. The scandal didn't happen today, it happened six years ago but the regulator of the country's financial markets, Sebi or the Securities and Exchange Board of India has just come out with a report which makes certain shocking revelations of misgovernance and conflicts of interest in the national stock exchange. Now the national stock exchange is not just any old stock exchange, it happens to be India's biggest stock exchange, not just that. At present it is the world's biggest exchange for trading in derivative instruments, instruments that derive their value from other instruments and the Sebi report, I mean parts of what the Sebi has said are salacious, worthy of being included in a script of Bollywood or Bollywood film script, maybe one of these days a film will be made on the subject but what the Sebi report reveals is shocking mismanagement, collusion by senior management personnel and the board of directors to suppress information on appointments, responsibilities, evaluation of salaries from even the market regulator which is Sebi. So to discuss this and you know at the epicenter of this entire scandal is Ms Chitra Ramakrishna, she had to resign from her post, she was the head of the national stock exchange and the other person in the eye of the storm is the former group operation officer Anand Subramaniam who was appointed as a consultant on the very day Ms Chitra Ramakrishna joined the NSC on the 1st of April 2015. That was the day she was appointed managing director, she has been disgraced, Mr Subramaniam has been disgraced but we come to all these issues in greater detail. Let me welcome the guest who's joining me from Mumbai, India's financial capital, I have with me Hemindra Hazari, he's an independent analyst of India's financial sector and he's also a Sebi registered independent analyst. So Hemindra let me ask you to give me your preliminary observations on this scandal that happened more than six years ago but which is currently rocking the country, the country's financial sector, it's all over the financial need. Let me have your preliminary observations. See one expects that blue chip companies which are listed on any exchange to have very high qualities of corporate governance therefore when these companies are listed amongst many other companies are listed on any exchange and in particularly India's leading exchange one expects and very rightly so that the corporate governance in a stock exchange should be far superior than what is seen and what is demonstrated in blue chip companies. Now sadly and horrifyingly what we have seen from this report that there is very poor and abysmal standards of corporate governance, the kind of behavior that the CEO of national stock exchange has shown and even worse one expects that the board of directors and in particular the public interest directors whose interests and loyalty should be aligned with the public and not with the executive they have done a huge cover-up and sadly today the media is not naming and shaming those public interest directors which has to be done because they also sit on various other blue chip companies. Why don't you name some of them Hemindra? Well you see you had people very noted people when he was appointed when this Anand Subramaniam was appointed and he was informed and the board decided to give him powers very similar to the CEO's powers at that time and this was the board meeting which was held on August 11th 2016. You had Mr. S.B. Mathur who's formerly from LIC, he was the chairman of the board. You had the famous Mr. Vyaj Maligham who's a very eminent chartered accountant and is used by the RBI and consulted by the RBI on many decisions. You had the famous Justice Vy and Sri Krishna. You know again a very famous person, several committees. Exactly and these people along with Professor Sadhgaon Mr. S.B. Nayak who was I think representing the interests of LIC, you had Prakash Parthasarthi, you had Abhay Havaldar. Now all these people are very well known and very eminent in both in the corporate sector as well as India's financial sector. Now how is it that when the board decided to give this individual Mr. Anand Subramaniam lot of powers which were given to Chitra, Ramakrishna, they should have inquired that who is this gentleman, what is his experience because the powers they were giving him. And Himindra if I'm just interrupting you, I'm not even talking, I mean not just the power, look at the kind of money that was given to him. You know I mean 1811 2013 there was a contract it was 1.68 crore then in 2014-31-3 it's 2.01 crore then it goes up to 2.32 crores then 3.33 crores on 16-4 2015 we find that this person Mr. Anand Subramaniam is getting 3.67 crore and it just I mean it's truly mind boggling the kind of money that was given to a person who was appointed on the very same day as Mr. Chitra Ramakrishna was appointed as managing director which is in April 2015. See I can understand if the board prior to this board meeting was formally not informed by the executive which is mainly the company secretary and Chitra Ramakrishna or even for that matter even Ravi Narayan. By the way we were in college together. I must say you have very illustrious companionship. I was a schoolmate of Vijay Mahalaya. Please continue this is just an answer. I trust you shall not include my name also as one of your acquaintances that please continue. So I can understand but you know not that I can excuse the board that prior to August 16 when this board meeting was held right sorry August 15 that they were not aware of who this individual was because I think deliberately the Chitra as well as the you know the company secretary had not informed the board of this kind of outrageous salary package that was given to Anand Subramanian which was totally outlandish because here he was he had no background at all in the markets. His salary was benchmarked at the other and there's only one other gentleman who was the company secretary and president who had that kind of salary. You know his name comes in the FY 14 and FY 15 annual FY 15 and FY 16 annual report which the board should have noticed that who is this gentleman. So one he did not bother to find out even before this meeting although his name figured in the annual report but definitely when they approve the pass that were given to him at a board meeting it was their duty in the public interest which they represent to find out who this individual was what was his background and did he deserve to be given such powers. Okay, you made a very important point about the role of the independent directors who are supposed to act in the public interest and you have pointed out how it is there is clear evidence that they evidently didn't take their job seriously enough there might even be application of their responsibilities be that as a name what about what was happening internally the internally checks and balances. Here we have Dr. Narasimhan his full name is Dr. V. R. Ramas Narasimhan. He was the CRO the Chief Regulatory Officer. Despite receiving several complaints at least four occasions in 2016 alone Dr. Narasimhan tells the securities and exchange board of India that there's been no violation of the rules in this case it is the SECC rules the full form of it is securities contracts regulations stock exchanges and clearing cooperation regulations of 2012. Your views. See I have been highlighting and sometimes on your show earlier that the executive management is normally totally aligned to the CEO you know even if they're doing something illegal unethical their loyalty to the CEO is all important. Now let us look at this the Chief Regulatory Officer he can directly report the instances to the regulator which is the securities and exchange board of India. Now from this order we know that he did not do it so this is the entire issue with corporate India today that all the institutional mechanisms which are there which are there in the structure they're just not being utilized because the individual's loyalty is to the CEO and they can see nothing else beyond that. So whether you are appointed by the shareholders like LIC directors were there or you know other institutions or you are there for the public for some strange reason you know your loyalty your duty is apparently to always support the executive in whatever they do. Alright Hemantra let me ask you another question. You are an independent analyst or registered with SEBI why did it take SEBI such a long time to come out with its report? I mean all these events happened several years ago. I mean these pertain to events that took place five to six years ago. We have had various reports by various journalists including Sujatha Dalalan, Devashi Shvasu in Money Life they have even a book on the subject which was released in 2021 June and there have been several reports about the so-called co-location scam, the so-called algo or algo rhythm scam. I'd like you to explain in simple language what these scandals were and the second part is why did it take SEBI such a long time to act? To understand this question I think if you read Sujatha Dalalan, Devashi is very insightful book. You will come to know that SEBI the relationship between SEBI and the NSC was not between a regulator and a regulated entity but SEBI was actually facilitating all these kind of loopholes that NSC was exploiting and sometimes brazenly even violating. You know some cases SEBI was actually advising them how to go about something which was bypassing SEBI's own regulation. So the relationship that you see between a regulator and a regulated entity did not seem to hold in the case of the SEBI and the NSC because SEBI as a regulator was indeed facilitating a lot of these things. That is what the book very clearly reveals and therefore and it's very again very sad to say this because I'm regulated and registered by SEBI is that the Securities and Exchange Board of India has lost tremendous credibility as the capital markets regulator and that is what we are seeing. We are seeing in fact a regulatory capture. Okay, Hamidra according to this report where a lot of the information has that has been disclosed is based on a forensic audit of the NSC's activities done by E&W Ernest and YAM. And one of the disclosures made is that Ms Chitra Ramakrishna has been had been sharing confidential and classified information about NSC's organizational structure, its dividend scenario, its financial results, its human resources development policy, various other issues. And what people find is really mysterious and is the involvement of a so-called unknown person, a so-called guru referred to as siron money and this guru is supposed to be somewhere in the Himalayas but he seems to be rather well acquainted or well versed with the working of the financial sector which has led to a huge amount of speculation and though these confidential emails have been redacted in the SEBI report, people are wondering who this person is. If at all such a person exists or whether he is a front or a pseudonym for somebody else, what do you have to say to that? No, one it is very obvious that it is a pseudonym because you don't have such an identity. Second, it was very easy for a regulator to have authorized any prosecuting agency like the Central Bureau of Investigation or the Enforcement Directorate to find out and check the email ID of this person. Again, the SEBI has not done so. That means it is not even interested in knowing who is this person who was directing the entire operation of the National Stock Exchange even though the SEBI's own order indicates that the officer did not buy Ernst and Young's argument that Mr. Anand Subramaniam was the concerned person that is what the Ernst and Young report eludes to but this is not what the officiating officer, he does not share that conclusion. Therefore, it was all the more important for SEBI to have, should have asked the enforcement agencies like the police and the federal police to investigate because that's a very simple thing to do because they can very easily have found out who this identity of this person was. Okay, Hemitra, we are aware that Ms. Chitra Ramakrishna, she resigned from the National Stock Exchange on the 2nd of December 2016 and the SEBI report points out that there was, raises certain very serious questions on how the Board of NSC allowed her to exit her position, point number one. The second point is SEBI has barred Ms. Chitra Ramakrishna, the former Managing Director and Chief Executive Officer. Ravi Narayan, the former Vice Chairman and also Anand Subramaniam, the former Group Operating Officer and Advisor to the Managing Director and the Chief Executive Officer. They have been barred from associating with any market infrastructure institutions. A monetary penalty of 3 crore rupees has been imposed on Ms. Chitra Ramakrishna and the market regulator has asked the NSC itself to forfeit her excess leave encashment of 1.5 crore, 1.5 crore and a deferred bonus of 2.83 crore. And the market regulator has also restricted the NSC, NSC also has been fine, it has been restricted from issuing new products for the next six months and Mr. Narayan has to stay away from the market for two years, Ms. Ramakrishna and Mr. Subramaniam has been barred from participating in the markets for three years and yes, the compliance officer has also been penalized with a 6 lakh to be fined and so on and so forth. The question is, was this, what should I say, did they deserve these kind of penalties? Were the penalties adequate or inadequate? What are your views in this regard? It was a gentle tap on the NSC's knuckles as well as all the other people who have been shown so-called notices. Only a gentle... Obviously, because what is the fine to NSC is nothing. In fact, it allows that I think NSC will welcome this because now they can go ahead with their initial public offering which they have been trying to do for the last so many years. Now, all they have to pay is this very, very nominal fine and they can then go ahead and say, now the matter is closed. So the whole approach to me is by SEBI is to shut this matter as early as possible and close it. Now, therefore it's in the interest of the public and the interest of media to keep highlighting certain sections and dig up more information to show that who is this individual actually directing operations because nobody knows. Because you're directing operations, you are an extra constitutional authority. You are an unknown person and you are controlling India's leading exchange where you have everyone's public savings are going there, foreign capital is coming in there. It's a very, extremely, it's a matter of national security also. So these are the things they should have done, criminal prosecution of all these people, they should have been put into police custody, they should have been interrogated by the police. I mean, if you have the top brass of Yes Bank behind bars, if you have the top brass of IL and FS, disgraced and put behind bars, you believe that something such stern action was called for in this case as well? Most definitely and the fact that it was not done indicates there's some extremely powerful and political interest behind this because otherwise if you and I were doing all this, we would have been put interrogated and immediately put in judicial custody. If you can haul up human right activists with virtually no case and put them in jail for two to three years without any solid evidence. We are talking about the Bhima Kure Gaon. Exactly. And here there is so much evidence of wrongdoing, there's not even a police interrogation. So it just tells you, the very fact tells you that there's some very powerful political interest involved here. Would you like to speculate on what these powerful interests are all about? Obviously because I do not have any proof. It as an analyst, I must have proof and that proof must be in the public domain. So I cannot give any names to anybody. Okay, I had a question which I had asked you earlier and I'm now repeating that question. I'd like you to explain in as simple a language as you possibly can. I know it's a very complex matter. What is this co-location scam? What is this algorithm scam? You can kindly just tell us a little bit about these scams. I mean all the action against Ms Chitra Ram Krishna and Anand Subramanya are linked to what happened. Yes please. So in the co-location scam simply put is there are various servers which execute the trades. Now the scam said that as per the NSEs, they had therefore fixed the system that certain servers got the information slightly earlier than it was given to all the servers where the entire market was participating and on those servers, certain brokers had that early access. So in the market, if you get information even a couple of seconds earlier than everybody else, it is a huge advantage and this the scam says was actually it was not a glitch in the system, it was designed to do this. No, the system also designed it, the algorithms will keep playing on it and they will make it but the NSE had facilitated this whole operation that certain servers got the information early and therefore certain select brokers had access to those servers which got the information earlier than the others and therefore they benefited from it. That in a nutshell is what happened. Now here there are some enormous profits to be made. So what you're saying is that there were certain brokers or certain entities or certain players in the stock market who received information, classified information, information that was... No, not classified. No, it is that they just got the information early than what the others got it. So they were able to game the system, they got other benefits. Right. They were given what you might describe as arbitrage opportunities. Yes, because they just they got the same information that the others got but they just got it a little earlier. Okay. I have one last question for you. I mean, there are several questions of course and this concerns the former Chief Regulatory Officer Dr. V. R. Narasimhan. He was a compliance officer. He was supposed to enforce the SECC regulations. He was supposed to report to SEBI independently. He has over 40 years of experience in as an educator, as a person who knows the financial markets. He was a division chief for secondary markets in SEBI itself. Now he's at present a dean and a professor of practice at the school for regulatory studies and supervision and the school for corporate governance at the National Institute of Securities Markets. Now this is supposed to be a public trust but remember it has been set up and established by SEBI, the Securities and Exchange Board of India. So should Dr. Narasimhan continue in these posts, in these positions that he is holding even as we are talking? Any self-respecting individual for enjoy, the moment they received a show-cost notice from a regulator should have immediately resigned from such positions. Later, if he had been proved innocent, he could have always been appointed again. The very fact that this individual did not voluntarily resign indicates the kind, the quality, the caliber of individuals who are put into such sensitive posts and sat again, I must say, this is the norm in corporate India that most people occupying high offices appear to share similar values because today there's been a great and tremendous erosion of the value system in the higher echelons of corporate India and this includes the political classes, includes the judiciary and it includes the regulator as well. So they don't feel, they don't think anything is wrong if they continue, even when they are indicted like this, they should have immediately resigned, they will all profess their innocence. Okay, let me just quickly return to what is arguably the most scandalous aspect of the SEBI report and that is the association between Mr. Anand Subramaniam and Ms. Chitra Ramakrishna. It was not just his appointment. Kind of perquisites he got, first-class airfare across the globe. He often accompanied Ms. Ramakrishna outside the country. His wife was employed by the National Stock Exchange. He would spend two or three days in a week in Chennai. Now all of this shows that this association was not just leading to conflicts of interests and scandalous whichever way you want to look at it, but it just showed how the entire system could be so subverted by a particular individual while Ravi Narayan and Ravi Chandran and all these people seem to have just looked the other way. See again, I am not surprised because I have been exposing a lot of these type of conducts and behavior in the financial sector, in the private sector mainly and you will find that the senior executives, those who are close to the CEO, they live a very charmed existence. That basically as long as you do what the CEO wants, you can do practically anything, you will not be faulted, you will not be hauled up and most importantly, you will constantly be rewarded. I have seen this in the case of Yes Bank, I have seen this in the case of Axis Bank, I have seen this in the case of HDFC Bank, in Indus Inn Bank. So unlike the public sector, if you challenge the CEO, you will be posted on either the North East or Kashmir or given some departments like planning. In the private sector, if you challenge the CEO, you will be sacked, you will be fired. So therefore the culture is always get say yes and give a salute all the time to the CEO. I know I am sort of moving back and forth a little bit. Besides being imposed, I mean besides being barred from participating in the markets, besides being fined, besides being penalized, Sebi has also asked both Ms. Ramakrishna, Mr. Raveena Ryan to disgorge or return a quarter of the salary they drew in Lanshidia in 2014 and we find that Sebi's estimate says that the National Stock Exchange was a highly profitable organization. It earned a profit of 624 crores between 2010-11 and 2013-14 only from its co-location operations. So by asking these individuals to disgorge, which is a way of saying give back what 25% of the salary you got, etc, etc, does this also mean that you're holding them up, I mean you are sending out a signal, don't do this and it has an impact on others, dissuades others from abusing the system. You see when a regulated entity knowingly commits violations, what is the calculation that they do? They take the calculation that if I do such violation, I will get a certain amount of X which is illegal. However, if I am caught, I will be fined a fraction of that X. Therefore, I will continue to do that operation because the penalty is not severe enough. Therefore, what any regulator should do is first quantify how much the ill-gotten gains came from such deeds and then your fine should be a multiple of that amount. But in India, we see the exact other way around, you're finding these individual and these entities a fraction of that amount. So how can that be an impediment? So all these people, they take this calculation and they continue to do it because they know that even if they are caught, they will be fined a fraction of the amount they have gained. I have to conclude our conversation here. Last words from you, your final observations, the important lessons we need to learn from this scandal. See the important lesson which one has to see is that you look at the macro context. We welcome liberalization, we welcome competition, we welcome capital flows. And all this you see, NSE has come up because of that. NSE came up because the BSE was being misgoverned. The NSE itself has foreign shareholding in them. They even got people representing them on their board and there was a belief in this theory that this will lead to ensuring better public commitment. It will ensure better corporate governance. But what are we actually seeing? We're actually seeing the opposite. You're seeing extremely abysmal standards of corporate governance. So what does it say about this grand theory of privatizing everything, treating such events as liberalization? The regulators should be toughened up. But everything we see, everyone is working in collusion so that a few can profit enormously at the cost of the public. But nobody is challenging this basic theory. And doubt to me is the larger question today. Okay. But thank you so much Hemendra for sharing your views with the viewers of Newt Slick and being so frank and candid in explaining the circumstances which have led to this controversy relating to the National Stock Exchange. And in particular, it's former managing director and CEO, Ms Chitra Ram Krishna, as well as its former top officers, including Mr Anu Subramaniam. Besides us. Thank you very much for being with us. Keep watching Newt Slick. 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