The Central Bureau of Investigation (CBI) has examined Ajay Narottam Shah, a close aide of former Finance Minister and Congress leader P Chidambaram in 2018 co-location and algorithm scam. Currently, Shah is serving as a research professor. He was named in a May 2018 FIR in the co-location and algorithm scam. During UPA’s tenure, Shah had served as a consultant to the Ministry of Finance, the Centre for Monitoring Indian Economy, and the Indira Gandhi Institute for Development Research.
In its investigation, the investigating agency has found the former National Stock Exchange (NSE) MD and CEO Chitra Ramakrishna had provided confidential data to Ajay Shah and Infotech Financial Services while being fully informed that the firm was providing software to the brokers. Notably, Sunitha Thomas, sister-in-law of Ajay Shah, is the director of Infotech Financial Services. Thomas is the wife of Suprabhat Lal, who was then-senior vice president of NSE.
Back in 2009-10, NSE had contracted Infotech Financial Services to develop software. Shah provided assistance in developing the software ‘Chanakya’, which was used by the brokers. These brokers had access to a secondary server from where they got data before the other brokers in a co-location facility. In 2018, CBI mentioned that Shah had collected NSE trade data during 2005-06 under the pretext of doing research. He played a vital role in exploiting NSE TBT architecture and provided support in developing the algo software using his research data which was illegal.
When the scam was exposed in 2015, SEBI, in its investigation, had found that Shah was in an official contract on data sharing with NSE after 2012. Earlier, he and his wife collected the data presenting themselves as researchers. Chitra Ramkrishna and other NSE officially categorically denied sharing any data with Shah. However, Shah had informed SEBI, and he and his wife were signatories to a data-sharing agreement with NSE. The then-Chief Technology Officer of NSE, Ravi Apte, had also told SEBI that he had facilitated data transfer to Shah based on the agreement. He also claimed Ravi Narain, former MD of NSE and Ramkrishna, had requested the data transfer to Shah.
CMIE and its links to Congress
Ajay Shah is one of the directors at the Centre for Monitoring the Indian Economy or CMIE. Its surveys and data are often used by Congress and opposition parties to target the central government. In 2019, CMIE had come up with pessimistic estimates of “jobs” in India even though the country was seeing a steady 7% growth and reports had suggested in 4 years, 18 million jobs were created in the transport and professional sector alone.
The co-location scam – what we know so far
Since 2018, CBI has been probing the co-location scam against a stockbroker based out of Delhi. First of all, it is essential to understand what are co-location facilities. These are dedicated spaces with pre-installed infrastructure, including bandwidth, power supply etc., that a third party can take on lease to carry out high-frequency and also trading. These are often used by traders to either set up their system or trade in the stock market.
In 2009, NSE started providing co-location services. Notably, NSE was charging a hefty amount for these services, making it possible only for a handful of traders to opt for co-locations. Because of their close proximity to the stock exchange servers, the traders got quick access to the price feed, i.e. the buy and sell quotes resulting in quicker trade and high profits.
In the co-location scam, it was alleged that some brokers who were in contact with the insiders took advantage of NSE’s data delivered a ‘first come, first serve basis to make profits. Known as the ‘tick-by-tick’ data feed that would provide the brokers connected to NSE server that has the least load would get quicker information about buy/sell order, order modification, order cancellation etc., compared to other traders who would connect to the server later. In the stock market, the difference of milliseconds in obtaining the data and reacting on it means a huge difference in the profit share.
Due to the fact that brokers connected to the server via co-location facilities were getting information earlier than the other brokers, unlike the broadcast where everyone gets information at the same time, they made huge profits going against the market regulations. The whistleblower who informed the agencies about the alleged scam said that a trader agency named OPG Securities was able to spot the server with the least load with the help of insiders at NSE’s IT department and got connected to NSE servers before other brokers. It was alleged multiple IPs were addressed to a single server to access the first two to three connections making the stream crowded for the other traders.
The Securities and Exchange Board of India (SEBI) initiated a probe in the matter in 2015. SEBI first set up a cross-functional team to investigate the case. The Technical Advisory Committee at SEBI recommended bringing in an expert committee. A report was submitted to SEBI in 2016, and it was revealed NSE violated the norms and benefitted a handful of brokers.
Initially, NSE dismissed the allegations and did not take any step to find out if there was a possible scam. Later, SEBI instructed the NSE board to initiate an investigation by an external agency. NSE was further instructed to the revenues from co-location services and from fibre connectivity in an escrow account. Since the revelation was made into the scam, SEBI has tightened the regulations and addressed concerns linked to algo trading and co-location facilities.
SEBI fined Chitra Ramakrishna Rs 3 crore, NSE, Anand Subramanian, former Group Operating Officer (GOO) and Rabi Narain (former MD and CEO) were fined Rs 2 crore each and V R Narasimhan, CRO and compliance officer, was fined Rs 6 lakh. SEBI restricted Ramkrishna and Subramanian from associating with any market for three years. Narain was restricted for two years from associating with any market. Further restrictions were imposed on NSE to ensure such scams do not happen in future.
A few weeks ago, CBI had arrested Subramanian, and on March 6, Chita Ramkrishna was arrested in the scam case. Ramkrishna was sent to CBI custody for seven days for interrogation.
The case of mysterious ‘yogi’
During the investigation, CBI came to know about a mysterious Himalayan “yogi” who was in touch with Ramkrishna. She had shared classified information with the so-called Yogi, and he was providing personal and professional guidance to her, allegedly including the NSE’s matters. Initially, it was believed Subramanian was the Yogi, but later SEBI, in its final report, rejected the claim. Chitra used to say the alleged Yogi had supernatural powers and he could appear at any place at will. It was also alleged Chitra had appointed Subramanian on Yogi’s recommendation and later promoted him to the board of directors.
