NSE CO-LOCATION SCAM: AN INTROSPECTIVE CASE STUDY By - Waniya Javed

NSE CO-LOCATION SCAM: AN INTROSPECTIVE CASE STUDY

Authored By - Waniya Javed

INTRODUCTION

The case to be discussed, Central Bureau of Investigation v. Chitra Ramakrishna, is related to the NSE's co-location scam and left an astonishing effect on the stock markets. The co-location facilities are adopted by the traders and brokers at a payable fee through which the computerised data server transmits the information at a faster rate to such traders and brokers. The delay in the transmission of information between co-location and no co-location is of micro seconds but it leads to gross consequences for the big traders who are stakeholders in the stock markets.

In the immediate case, the Managing Director, Chitra Ramakrishna, Vice-President Ravi Varanasi and Mahesh Haldipur played a key role in the NSE scam. The rules and guidelines of the co-location facilities and of Securities and Exchange Board of India were violated by the NSE under the directorship of Chitra Ramakrishna which caused grave upheaval and personal benefit to the persons involved. The iSec Services Pvt. Ltd. played a great role through which the offences were committed and provisions of various legislations have been attracted in the case. The case delineates that however the co-location facilities are legal in India, pertaining to the technological revolution but there misuse or breach of trust attracts the question of its legality which differs on the case to case basis.

BACKGROUND OF THE CASE

The facts of the case relate to the violation of Co-Location guidelines. In the year 2009, National Stock Exchange of India introduced the co-location facilities in their premises pertaining to which the traders and brokers dealing with the stocks can establish their IT servers which helps them to collect information of the stock's pricing at a fastest and easiest way.

The service continued for approximately six years when a whistle-blower in January 2015, sent a letter to Securities and Exchange Board of India informing about the collusion of some traders and brokers with the employees of NSE which helps the former to get the knowledge of stock's pricing earlier than the other traders and brokers. After receiving the letter, SEBI conducted an internal inquiry and as per its Technical Advisory Report, the claim of the whistle-blower was held appropriate and true and alluded towards the market manipulation of NSE's measures.[1]

The issue became more intense when the Central Bureau of Investigation filed an FIR against a Delhi-based stock broker named, Promoter of OPG Securities Pvt. Ltd. The FIR alleged that the broker is engaged in market manipulation tactics of the NSE system. It is pertinent to note that there were no active measures on the part of law enforcement agencies to investigate deep into the matter, it was only in 2016 when SEBI seriously took the matter in its hands and issued notices of the NSE's market manipulation. Meanwhile, NSE has filed consent applications to settle the matter with the principles of Negotiation but the same was rejected by SEBI.

Further, in April 2019, NSE was directed by the notice of SEBI to discharge an amount of ₹ 625 crores, with an interest of 12% per annum, starting from the year 2014 and in addition prohibits NSE from accessing securities market for a span of six months pertaining to the co-location misuse.

Then, on February 11, 2022, SEBI vehemently addressed the matter and came with a point of detailed analysis of the NSE Co-location scam and its extending effects on the rules and guidelines of SEBI as well as Co-location policies. The charges were framed and FIR was lodged against the Managing Director of NSE Chitra Ramakrishna who was in the office during the period of the scam from 2009 to 2017 by Central Bureau of Investigation on May 28, 2018. The case against her relates to the illegal phone-tapping of the employees of NSE in collision with the iSec Services Pvt. Ltd. in the guise of the Contract of Study of Cyber Vulnerabilities. The given instances clearly allude to the fact that Chitra Ramakrishna played a pertinent role in the scam and was a part of the conspiracy. Further, it is pertinent to note that after the exit of Chitra Ramakrishna from the office, the illegal services were discontinued.[2]

It was reiterated that along with the accused that is Chitra Ramakrishna, the Vice-President of NSE Ravi Varanasi and Mahesh Haldipur who served as the Head Premises colluded together and engaged with iSec Services with the illegal tapping of phone calls and recording of the same, of the employees of NSE under the facade of a legal contract of the Study of Cyber Vulnerabilities.

RELEVANT STATUTORY PROVISIONS

The immediate case involved numerous statutory provisions attracting the various legislations and codes.

The case is registered under Section 409[3] and Section 420[4] read with Section 120B of Indian Penal Code.[5] Section 409 of IPC mentions about the criminal breach of trust by a person who is acting as a public servant. It says that when a public servant acting in his capacity as a banker, merchant and so on, and entrusted with any property or any dominion, does breach of trust, then he is liable for imprisonment for life, or imprisonment which may extend to ten year with fine. While Section 420 of IPC deals with the instances where a person cheats and dishonestly delivers or disposed any property or valuable security is liable for imprisonment for a term which may extend to seven years with fine.

Further, the case attracts Section 20[6], Section 21[7], Section 24[8] and Section 26[9] of the Telegraph Act, 1885.[10] Section 20 of the Act provides the instances where any person establishes, maintains or works on any telegraph which is prohibited by any rule or direction, he is liable to be punished. Section 21 talks about the instances where any person receives or sends any message which is prohibited by any other act or direction is liable to be punished. In this continuance, Section 24 of the Act provides that if any person tries or attempts to learn the contents of any message is liable to be imprisoned for a term which may extend to one year. Further, Section 26 says that if any telegraph officer or any other person relating to such authority unlawfully discloses the contents of any message shall be punished with imprisonment which may extend to three years or fine or with both.

Next in the scene are Section 3[11] and Section 6[12] of the Wireless Telegraph Act, 1933.[13] Section 3 of the Act mentions that no person shall have in his possession wireless telegraphy apparatus without the issuance of the license in his name by the Central Government. While Section 6 of the Act talks about the penalties which are to be imposed on the person who commits any offence under Section 3 of the same Act.

The provisions of Information and Technology Act, 2000[14] are also framed under the charges. Section 69B[15] of the Act talks about the power of an organisation dealing with computer resource to monitor or collect any traffic data for the purpose of cyber security and if anyone contravenes with such power then he shall be punished with imprisonment for a term which may extend to three years with or without fine. Further, Section 72[16] says that if any person is found to breach the secrecy and confidentiality of any electronic record or book, who is authorised by this Act to act in the manner shall be punished with an imprisonment of two years, in addition to fine which may extend to one lakh rupees. Section 72A[17] of the Act provides that any person who is authorised under this Act,  if involves in the breach of any legal contract through the disclosure of information shall be liable for imprisonment of a term which may extend to three years, with or without a fine which may extend to five lakh rupees.

Besides these explicit provisions, the case also involves the provision of the Prevention of Corruption Act, 1988[18], Prevention of Money Laundering Act, 2002[19] and Code of Criminal Procedure, 1973.[20] The innumerability of the Sections attracted in the case make it complicated to pronounce the judgement in the easiest manner possible.

CONTENTION OF THE ACCUSED

On the inclusion of the above mentioned Sections in the case, the accused contended the fact that Section 13[21] of the Prevention of Corruption Act, 1988 does not apply to the immediate case. On this point, it becomes pertinent to delineate as to what Section 13 is. Section 13 of the Prevention of Corruption Act, 1988 talks about he criminal misconduct done by any public servant. It says that if any public servant during his term as the public servant of any authority involves in any kind of criminal misconduct or in furtherance of any treachery of deceit he will be liable for imprisonment for a term which may not be less than four years but which may extend to ten years and shall also be liable to fine. On this contention, the court reiterated that in the case of Delhi Stock Exchange v. K.C. Sharma[22], it was explicitly held that on the administration and functioning of the Stock exchange, the Central government has deep and pervasive control hence its employees are deemed to be as public servant. Thus, the contention was rejected by the court.

Further, Section 45(1)[23] of the Prevention of the Money Laundering Act, 2002 says that where an offence has an imprisonment of more than three years and the offence is cognizable and non-bailable, the public prosecutor is at liberty to oppose such bail through an application. And even after the application of opposition of bail, if the court is satisfied that the accused would not commit any offence during bail then the same can be directed upon.

LEGALITY OF CO-LOCATION IN INDIA

Co-location facility relates to the renting of data servers and computing hardware to the stakeholders for the fastest transmission of data in the form of codes. In the recent years, during the tornado of technological revolution, the Indian instance over the facilities of co-location become recognizable. Co-location is a system which helps to exchange world offers to stakeholders or the interested brokers and traders. In India, the main stock exchange server is concentrated in Mumbai but it is used all over the country by the brokers and traders. The popularised use of co-location facilities spread because using the normal internet connection to access the stock system leads to delay in the transmission of data. It is pertinent to note that though the delay is only of micro seconds but the consequences of the same are huge which cause huge loss or degrade the position of the big traders.

In the use of co-location, the facility which works is known as high frequency trades or HFTs which aids in the administration of intricate computerised trading programmes through algorithms which is known as algorithm trading or algo trading. The facility is available to all brokers and traders and they can avail the same through paying a fee to stock exchange agencies.

This analysis marks that the purchase of co-location service is not unlawful or illegal and can be availed by such traders to can afford the fee.

Similar is the case with the legality in India. The lending of co-location facilities to the traders and brokers at a payable fee is not prohibited neither illegal in India. In this alignment, it can be said that the installation of the co-location facilities by the NSE and selling those facilities to the broker and traders was not forbidden and not an illegal act done by the NSE. But, the circumventing of the rules and guidelines pertaining to the use of co-location services by the Managing Director and Vice-President and other members in order to gain profit for themselves under the guise of a legal contract of the Study of Cyber Vulnerabilities was totally illegal and jeopardized the very motive of the facility.

On another note, availability of co-location service is condemned by many critics who are sided with the view that the purchasing of high frequency trading by some introduced a gap in the stock market where traders with affordability get the computerised algorithm trading faster than those who are not able to afford the same. This condemnation though specific on its point does not shift the position of legality of co-location facilities in India.

The facilities are legal until no malicious motive is formed on the part of the stakeholders, once the maliciousness is included, the legality of co-location is challenged which differentiates on the case to case basis.

THE REITERATION OF THE COURT

The explicit judgement has not been pronounced by the Delhi High Court in the case and the accused was granted bail through an application as Central Bureau of Investigation does not furnish all the charges mentioned in the FIR against the accused. The court ordered the accused to furnish a personal bond of five lakh rupees with one surety of the like amount to the satisfaction of the trial court. Further, it was ordered by the Court that the accused would not leave the country without the prior approval of the court and is liable to deposit her passport to the trial court. The accused, in the investigation of the matter, fully co-operate with the investigating officers and provide her contact number to such investigating authority. The accused is also directed to not tamper with the evidence and not make any such contact with the witnesses of the pertaining case.[24]

ANALYSIS AND CONCLUSION

From the facts in issues and relevant pronouncements of the competent court, it can be analysed and affirmed that the NSE authorities during time period of 2010  to 2014 cause great destruction to the stock exchange market and adapted to the market manipulation tactics for the personal benefit. The fact that after the exit of the accused from the position of Managing Director of the NSE in 2017, the instances of co-location scam ceased to exist which explicitly alludes to the fact that the accused played a pertinent role in the offence for which she is prosecuted. The relevant provisions which are attracted in the case are from Indian Penal Code, 1860[25]; Telegraph Act, 1885[26]; Wireless Telegraph Act, 1933[27]; Prevention of Corruption Act, 1988[28]; Information Technology Act, 2000[29]; Code of Criminal Procedure, 1973[30] and Prevention of Money Laundering Act, 2002.[31] These provisions fits to the offences that are committed during the continuance of the offence. The instances of disclosing of confidential and private messages, deceit and treachery on the part of the mentioned authorities, criminal breach of trust and criminal disposition of property entrusted in the authorised persons, all forms the facts of the case and are relevant to pronounce the guilt of the accused.

Further, the contention of the accused that the provisions of Prevention of Corruption Act, 1988[32] and Prevention of Money Laundering Act, 2002[33] are inappropriate in the trial of the accused as the accused was not acting as a public servant. On this contention, the court relied on the judicial precedents where it was pronounced that the Central Government has deep and pervasive control over stock exchange markets hence its employees are deemed to be public servant under the fiction of the law. Further, the administration and functioning of the National Stock Exchange of India is under the supervision of the central government.

All the contentions of the accused were rejected by the court and the charges framed against her were proved to some extent. However, the pertinent fact to note is that the charges framed under the FIR filed by the Central Bureau of Investigation are not holistically proved by the same. Hence, the judgement that was pronounced by the Delhi High Court on September 28, 2022 held that the accused being the conspirator and key person in the NSE scam is granted bail since all the accusations against her are not proved by the competent authority. The judgement, however, granted bail to accused has put severe restrictions which are reasonable in considering the extremity of the case. The accused is prohibited from leaving the country without the prior permission of the court and the court directed that the passport of the accused would be deposited to the court within a period of seven days. Further, the accused cannot contact with any of the witnesses of the case and shall not tamper with the evidences collected by the court. Next to it, the accused shall co-operate in the investigation of the matter and provide her contact number to the investigation authority and carry the same in operational mode so as to be in proximate connection with the investigating authority.

Author: Waniya Javed

E-Mail: waniyajaved2003@gmail.com

[1] NSE's Co-location Scam: Reflects the Need for Checks and Balances in the Corporate Governance, NLUJ Law Review, available at: http://www.nlujlawreview.in/nses-co-location-scam/. (Last visited on Dec. 10, 2022).

[2] Delhi Court denies bail to Chitra Ramakrishna former MD NSE, for alleged active involvement in illegal interception of telephone calls of NSE employees, SCC Blog, available at: https://www.google.com/amp/s/www.scconline.com/post/2022/08/31/delhi-court-rouse-avenue-district-court-denies-bail-chitraramakrishna-managingdirector-national-stock-exchange-money-laundering-corruption-telephone-tapping-illegal-legalupdates-legalnews-legalresearc/%3famp. (last visited on Dec. 10, 2022).

[3] The Indian Penal Code, 1860 (Act 45 of 1860), s. 409.

[4] The Indian Penal Code, 1860 (Act 45 of 1860), s. 420.

[5] The Indian Penal Code, 1860 (Act 45 of 1860). 

[6] The Telegraph Act, 1885 (Act 13 of 1885), s. 20.

[7] The Telegraph Act, 1885 (Act 13 of 1885), s. 21.

[8] The Telegraph Act, 1885 (Act 13 of 1885), s. 24.

[9] The Telegraph Act, 1885 (Act 13 of 1885), s. 26.

[10] The Telegraph Act, 1885 (Act 13 of 1885).

[11] The Wireless Telegraph Act, 1933 (Act 17 of 1933), s. 3.

[12] The Wireless Telegraph Act, 1933 (Act 17 of 1933), s. 6.

[13] The Wireless Telegraph Act, 1933 (Act 17 of 1933).

[14] The Information and Technology Act, 2000 ( Act 21 of 2000).

[15] The Information and Technology Act, 2000 (Act 21 of 2000), s. 69B.

[16] The Information and Technology Act, 2000 (Act 21 of 2000), s. 72.

[17] The Information and Technology Act, 2000 (Act 21 of 2000), s. 72A.

[18] The Prevention of Corruption Act, 1988 (Act 49 of 1988).

[19] The Prevention of Money Laundering Act, 2000 (Act 15 of 2003).

[20] The Code of Criminal Procedure, 1973 (Act 2 of 1974).

[21] The Prevention of Corruption Act, 1988 (Act 49 of 1988), s. 13.

[22] Civil Appeal No. 7055 of 2002.

[23] The Prevention of Money Laundering Act, 2000 (Act 15 of 2003), s. 45(1).

[24] Chitra Ramakrishna v. Central Bureau of Investigation, Bail Application No. 1522/2022., available at: https://indiankanoon.org/doc/24610114/. (Last visited on Dec. 10, 2022).

[25] Ibid. at 3.

[26] Ibid. at 8.

[27] Ibid. at 11.

[28] Ibid. at 19.

[29] Ibid. at 12.

[30] Ibid. at 18.

[31] Ibid. at 21.

[32] Ibid. at 19.

[33] Ibid. at 21.