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Former CEO and MD of National Stock Exchange arrested by ED in money laundering case

The National Stock Exchange’s (NSE) former senior executive Ravi Narain has been
detained by the Enforcement Directorate (ED) in connection with an alleged unlawful
phone-tapping scheme involving bourse workers.
The former managing director and chief executive officer of India’s largest stock
market, a job he held from 1994 to 2013, was arrested earlier today, according to
sources in the directorate. According to additional sources, Narain is also being
looked into as part of the investigation into allegedly giving some stock market
brokers special access.
The arrest represents a significant turning point in the ongoing investigation into the
NSE case, often known as the “co-location” fraud. The alleged unfair practises in the
NSE, according to insiders, took place between 2010 and 2015.
Narain and Chitra Ramakrishna, the business’s Deputy CEO at the time, are also the
subjects of a CBI investigation. She took over for Ravi Narain as NSE president in
December 2016.
On Wednesday, Narain is anticipated to appear before a special court for custody.
Sanjay Pandey, Narain, and Ramakrishna, the former Mumbai police commissioner,
were named in an Enforcement Case Information Report (ECIR) filed by the ED
earlier this month for illegally tapping employees’ phones between 2009 and 2017.
Based on the FIR filed by the Central Bureau of Inquiry, the ED has started a money
laundering investigation (CBI).
In this case, the investigation agency has filed a case against New Delhi-based iSEC
Services Private Limited Ltd, its then-officials and directors, including Santosh
Pandey, Anand Narayan, Armaan Pandey, Manish Mittal, Naman Chaturvedi (then Sr
Information Security Analyst), including former Mumbai Police Commissioner
Sanjay Pandey, as well as NSE’s previous heads Ravi Narain, Chitra Ramakrishna,
Ravi Varanasi (then Executive Vice President), Mahesh Haldipur (then Head
Premises) and unknown others.
The case was filed in response to a referral from the Ministry of Home Affairs (MHA)
on allegations of illegal telephone tapping of NSE workers from 2009 to 2017 by the
business’s top management acting in concert with the accused private entity.
“The defendants and a private business allegedly planned to illegally intercept the
telephone calls of NSE workers between 2009 and 2017. The private company
allegedly worked at the NSE under the pretence of conducting a “periodic study of
cyber vulnerabilities” in order to pursue this scheme. Furthermore, it was claimed that
top NSE officials signed contracts (Work Orders) in the private company’s favour and
installed devices that illegally intercepted calls made by its employees, in violation of
the Indian Telegraph Act “Earlier, the CBI had stated.
The investigation agency has also claimed that no approval was obtained for this
conduct from the appropriate party as required by the Indian Telegraph Act.

What does co-location fraud entail?
Co-location facilities must be understood in order to comprehend the co-location
scam. High-frequency and algo traders can set up their systems or programmes in
designated areas of the exchange building, close to the exchange servers.
Because of the decrease in latency and the close proximity of the co-location facilities
to the stock exchange servers, traders here have an advantage over other traders (time
taken for order execution). But only institutional investors and brokers employ the co-
location for their own traders. Retail investors are hardly present in this market.
Nearly ten years ago, a fraud took place in the co-location space of NSE. It was
claimed that between 2012 and 2014, OPG Securities, one of the trading members,
received unfair access that allowed him to connect in to the secondary server first and
access the data before other users in the co-location facility. Due to this member’s
preferred access, his or her algo trades were executed before those of other members.
How did it take place?
A Technical Advisory Committee inquiry by SEBI found that the broker had received
assistance from some NSE staff. Between December 10, 2012 and May 30, 2014, it
would have been challenging for this specific stock broker to continuously connect
first to the NSE’s secondary server.
He was frequently the second person to connect. Nine NSE workers were awarded a
clean bill of health by SEBI in 2020 despite the fact that many of them were
mentioned in the SEBI ruling from 2019 for conspiring with OPG Securities.
How was the fraud discovered?
The scam was exposed as a result of a whistleblower’s report to SEBI in 2015, which
detailed the full method by which those who were gaming the system operated. The
NSE management adopted a haughty tone when Moneylife revealed the scam, filing a
$100 crore defamation suit against Moneylife.
The case was brought to the Bombay High Court, which harshly ruled against NSE
and dismissed its lawsuit. Additionally, NSE was ordered to pay a fine of 50 lakh for
its haughty response to the media.
What is the amount of the loss or default brought on by the fraud?
It’s important to keep in mind that there is no way to demonstrate that any investors or
traders lost money as a result of this scam. According to the SEBI order from 2019,
OPG Securities and its directors were required to return unfair gains totaling 15.7 core
with interest starting on April 7, 2014. If any notional loss was experienced by other
privileged trading members in the co-location facilities, it was to that extent.
What followed, and how did the SEBI’s investigations develop?

NSE was required to conduct a forensic assessment of its systems and deposit all co-
location facility revenue into an escrow account in 2016 at the request of SEBI. The
task of performing a forensic audit of NSE’s systems was given to Deloitte.
2019 saw SEBI announce a ruling on the matter, ordering NSE to pay $625 million
with 12% interest and forbidding NSE from raising capital on the stock market for a
period of six months.
In addition to receiving a fine for abusing the system, Ravi Narain and Chitra
Ramakrishna, who were in charge of the situation, were asked to forfeit 25% of their
pay earned over a certain length of time.
A recent order issued on February 10, 2021, levied fines of Rs. 1 crore on NSE and
Rs. 25 lakh on Ravi Narain and Chitra Ramakrishna, respectively.
What effects will this have on traders and investors?
Since retail investors and traders do not use co-location facilities, the scam has no
effect on them. Since April 2014, NSE has switched the order execution protocol in
the co-location facility to Multicast TBT, closing the security flaw that previously
allowed some users to manipulate the system.
However, the entire affair raises concerns about the oversight and flaws in the system
at the country’s first exchange. Over the past four years, SEBI has implemented a
number of regulatory adjustments to address these flaws.

Anamika Singh
Anamika Singh
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