The Central Bureau of Investigation (CBI) arrested Anand Subramanian, a former official of the National Stock Exchange (NSE) in the co-location scam. Subramanian served as a key advisor to former managing director and CEO of the exchange, Chitra Ramakrishna who is herself under the scanner by the CBI and stock markets regulator SEBI. He was arrested from Chennai late on Thursday, after the CBI began to question him last week.
The co-location scandal, where key personnel including Ramakrishna and Subramnaian of stock exchange are accused of being complicit in allowing unfair access to exchange data to certain brokers, resulting in quicker stock prices feeds from NSE and unfair profits from trades.
The formal investigation into this scam was initiated by the Securities and Exchange Board of India, after news outlet MoneyLife published a letter by an NSE whistleblower, resulting in the outlet getting sued for ₹100 crore by the exchange. However, the Bombay High Court dismissed the defamation case filed by NSE.
A sideshow to this controversy also involves an alleged mysterious and faceless ascetic; a 'yogi' dwelling in the Himalayas, who was given access to the confidential information emerging out of NSE by Ramakrishna.
The NSE is the world's largest derivatives exchange based on the number of contracts traded, and an initial public offering for the company was impending, but the controversy has pushed it back by at least a year.
Here's all you need to know about the scandal.
What is co-location and how did it work?
In 2010, the NSE started offering a co-location facility on its premises, that let traders set up their servers right next to the NSE's trading servers for a fee. This was not available to retail investors. The proximity of traders' servers to the main servers meant that they could access market data quicker (by a few milliseconds) than live market prices. It was a facility to be used only by brokers and institutional investors for their proprietary trades (or trades they did for themselves, and not for their customers).
Interestingly, it is not the co-location facility that was under scrutiny, but rather its misuse.
Several brokers who had access to this facility, most likely hand-in-glove with NSE officials who had access to it too, figured out the working of the facility, where they logged in first to get first shot at trades, and worked on the least crowded servers, putting other brokers at a disadvantage.
Who was Subramanian?
Subramanian was appointed formally as Chief Strategic Advisor to Ramakirshna in 2013, but his appointment raised questions due to his lack of qualification for the job, as he had never worked in exposure to capital markets before, and the lack of transparency about his hiring.
For starters, the position was never advertised or anybody else considered for the position, with human resources department at the NSE not being consulted. Ramakrishna was also the only person to interview Subramanian, and he was appointed with a pay package of ₹1.68 crore per annum, a huge jump over the ₹15 lakh he was earning earlier.
By financial year 2016 - 2017, this package had jumped to ₹4.21 crore. Subramanian was not even designated as a Key Management Personnel (KMP) despite this disproportionate access. A KMP is a legal designation as somebody who is responsible for the operations in an important financial institution like the NSE.
Enter: the mystic
SEBI's investigation showed that Ramakrishna had an alleged mysterious 'yogi', or a mysterious spiritual person, dwelling in the Himlayas, who influenced her decisions as MD and CEO, with whom she used to communicate via an email email@example.com, allegedly being run by this mystic. Some confidential data was sent by her to this alleged person.
The mystic was consulted and even suggested the staggering increases in the compensation to Subramanian, and was communicating with Ramakrishna on various issues like board meetings, agendas, appraisals and business plans.
When being questioned, she said that she had been taking directions from the mystic for more than 20 years.
What is Subramanian's role?
A forensic audit of the emails to firstname.lastname@example.org by consultancy firm Ernst and Young suggested that Subramanian could have been the creator of the email address, and was indirectly manipulating Ramakrishna. This was based on several factors, including the Skype ID associated with this address being found on Subramanian's computer, and his name being on the 'created by' and 'modified by' sections on documents found in the email.
The NSE concurs with these findings, but SEBI does not, and Ramakrishna has said that Subramanian is not the mystic.
What has Subramanian said to defend himself?
Alongside allegations of being the spiritual yogi, Subramanian is also accused of not taking effective steps to plug in the deficiencies of the co-location trading facilities since he was part of the top management.
He maintains that he was never a KMP, and was not even in charge of co-location facilities, as he worked on the regulatory side of the exchange.
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