To consider if it is in Public Interest for the National Stock Exchange (NSE) to be non-transparent, promote corruption by colluding with Reliance Industries Limited (RIL) in insider trading/price manipulation and then go Public to List their Shares.

Arun Kumar Agrawal

Mr. S. B. Mathur (Chairman NSE)
Mr. Y. H. Malegam
Dr. KRS Murthy
Dr. S. Sadagopan
Justice B.N. Srikrishna


I. Investigation of Frauds on NSE by CBI/Police

II. Making public the trading details of Price Manipulation and Insider trading in Reliance Petroleum Limited (RPL) and trading details on the High Frequency Trading platform during the period OPG Securities had manipulated the trading platform in alleged collusion with NSE (refer complaint published in Moneylife).

III. Force NSE to submit to RTI Act and prevent the officials from evading the legal system after the 5-member Central Information Commission (CIC) and Hon’ble High Court Ruled against it.

IV. Cost of 50 Lacs to be Paid by Employees involved in filing of Defamation suit

V. Rationalisation of remuneration of Rs 1- 4 crore per annum

VI. NSE going Public with IPO not in Public Interest

VII. Prevention of Other Undesirable Trading: Object of SCR Act


1. This letter is addressed to the Public Interest Directors on the BOARD of NSE, who by being in a majority are presumed to be in control of the Board of NSE. They are requested to ensure that NSE functions in a corruption free and transparent manner.

2. Two instances of large scale corruption and subsequent cover up have considerably eroded the credibility of the National Stock Exchange among the investors, be it Indian or foreign. The first involved the price manipulation and insider trading by RIL in 2007 in which investors lost thousands of crores. The second was the gaming of the trading platform of the High Frequency Traders (HF Traders), exposed by an article and complaint published in Moneylife, which led to the NSE filing Rs 100 crore defamation suit against Moneylife.

3. It is in this context that this letter is addressed to the Public Interest Directors (PID) (downgraded to Independent Directors by NSE: refer Annexure from website of NSE) and the Chairman of National Stock Exchange requesting them to take stern and appropriate steps to ensure that NSE functions in a corruption free and transparent manner. The NSE, unlike other institution, has a Board in which the PID are in majority, who are capable men with no personal interest (even the sitting fee of Rs 20000 does not compensate for their time) and therefore can ensure that public interest is protected and there is no cover up of corruption. The management of the NSE should not be allowed to use the PID as a shield for its anti-public interest agenda.

4. It is further requested of the PID to ensure that NSE submits itself to the RTI Act not only because it is an antidote to corruption but because it is legally the right thing to do. The remuneration of senior officials/Whole Time Directors should be linked to their performance and they should be made to pay the cost of Rs 50 lacs ordered by the Hon’ble High Court of Bombay from the crores of annual remuneration they earn.

5. Those involved in corruption, cheating of the investors and cover up should be reported to the anti-corruption Branch of Police/CBI for investigation and prosecution. Finally, the PID are requested to decide whether it is in public interest that the NSE should go public through an IPO inspite of the contrary recommendation of the Bimal Jalan Committee report and experience with MCX.

Transparency the only option to answer allegation of corruption:

6. Hon’ble Justice G S Patel while imposing a cost of Rs 50 lacs on NSE stated the following in his judgment:

26. Today, all our institutions face the crisis of dwindling public confidence. Neither the NSE nor the judiciary are exceptions to this. It presents a very real dilemma, for the existence of our institutions is posited on that very public confidence and faith and its continuance. The challenge is, I think, in finding legitimate methods of restoring that public trust, that balance. Hence the cries for transparency and accountability everywhere; and I see no reason why the NSE should be any exception to this. (Emphasis mine)

7. Instead of heading the advice of transparency of Hon’ble Justice Patel, NSE has gone in appeal against his orders. Officials of NSE would do well to recognise the fact that court decisions are no substitute for transparency in matters relating to corruption. Persons with competency to write software of algo-trading are highly intelligent persons (probably even more intelligent than those at the helm at NSE) and at times are rank holding IIT graduates.

The anonymous complaint of the HF Trader, accusing the NSE of gaming the trading platform is very specific, with the names of the brokers, the time period and the modus operandi of rigging by the NSE. A mere reading of the complaint has a ring of genuineness to it.

8. The only way to answer those allegation was to make all the trading details of the period along with the trading record of the broker OPG Securities public. These trading records will establish as to whether OPG Securities, the brokering firm that cornered most of the deals and made profits than it did earlier or later to the period of the complaint. Incidentally, OPG securities has a track record and was also found by SEBI to be involved in Fraudulent and Unfair Trading under the PFUTP Regulations.

9. The pathetic defence by the NSE in the financial papers post the judgment of the Hon’ble Bombay High Court can neither fool the discerning public, nor the HF Traders who, as stated above, are far more intelligent than the NSE officials who have offered the lame explanation. Instead of looking at the trading record or referring the matter to the cyber wing of the CBI/Police or subjecting the data to a cyber-lab, officials of NSE have been filing defamation suits of Rs 100 crores to intimidate the media and lecture on of the infallibility of their system. It may be pointed out that systems are as infallible as the humans who operate them! Even the Libor rates were doctored and more recently Volkswagen gamed the emission software.

10. The case of Rs 513 crore insider trading by RIL and price manipulation: The second case relates to the Rs. 513 crore insider trading done by 13 front companies on behalf of RIL in November 2007 in the F&O section of the market. The shares involved was that of RPL, which was a subsidiary company of RIL, in which it held 75% of the shares. The brokers close to RIL indulged in price manipulation from September 2007 to November 2007 during which the price of the shares RPL doubled. The price manipulation was done so that RIL could realise twice the value when it sold 20.5 crore shares of RPL held by it in the cash section. The sale value of 20.5 crore shares of RPL was around Rs 4000 crores which would have been Rs 2000 crores had the price not been manipulated by the brokers. While RIL realised an additional Rs 2000 crores on account of sale of 4 crore shares, the brokers made upwards of Rs 1000 crores on account price manipulation on high trading volumes in the F&O section. RIL made an additional Rs 513 crores through insider trading by 13 front companies. This Rs 513 crores was credited by the 13 front companies to the balance sheet of RIL! There could not be a more blatant form of insider trading.

11. It is my allegation that the officers of the NSE were complicit with the brokers in allowing the price manipulation and the subsequent cover for the following reasons:

  • With expensive computers and software, this type of blatant manipulation and insider trading could not but be shown up and flagged by the computer unless the computers too were rigged by the officials of the NSE on the behest of interest parties.
  • The matter was never reported to SEBI by NSE officials.
  • The scandal was brought in the public domain four months later by a prominent Member of Parliament Shri Amar Singh on 17/4/08 through a Parliamentary question.
  • Shri Amar Singh not only accurately named 10 of the 12 front companies involved but also the amount involved in the insider trading months before the investigations were ordered by SEBI. The article was published by Business Standard.
  • Shri Amar Singh had attributed the knowledge of the insider trading and the companies involved in it, to information received from his sources in the Stock Exchange.
  • When Investigations were finally ordered by SEBI a year later in November 2008, on the persistence of Shri Amar Singh, it was found that allegations of the companies and the amount involved were true! Amar Singh had named 10 companies and Rs 402 crores as the profit while the finding of SEBI on investigation was Rs 513 companies involving 12 companies. Names of 10 companies was common.
  • The price manipulation by the brokers for the period in September to November 2007 was never investigated by NSE. It was not even investigated after the Parliamentary question and the letter of Amar Singh to SEBI published in the newspaper. The inaction on part of NSE can only lead to only one conclusion: that of collusion in enriching RIL and the brokers who benefitted by the price manipulation.
  • If Amar Singh had the information from the NSE ‘sources’ and NSE officials were blissfully unaware of it then the matter needs to be investigated by the CBI. In this connection my complaint to the CBI is pending and can be forwarded if thought to be necessary.
  • The undersigned has fought five cases with SEBI/RIL in various High Courts so far over issues of transparency. It is my experience that almost every authority is helpless against RIL. In another issue unrelated issue concerning RIL on preferential allotment of shares at a throwaway price, the same has been pending with SEBI/ government for over fifteen years even after obtaining legal opinion from one of most respected judges of the Hon’ble Supreme Court.

Rs 5 lacs as price for transparency for exposing corruption

12. There is a tendency at every level to run down the character of ‘activists’ who expose corruption in high places. Choice words like stoolpigeon are used which cannot be sustained on facts! The complainant, therefore, volunteers to deposit Rs 5 lacs in advance for making the entire detailed trading information broker/party wise of the two cases available to him/public. The relevant period in case of RIL is the trading in cash and forward section for RPL shares from August – December 2007. The amount can be forfeited if he is not able to show that there was manipulation. This information for which Rs 5 lac is being offered should have been made available for Rs 10 under RTI Act.

13. The legal fees paid to senior Counsels to prevent NSE from coming under the RTI too should also be disclosed.

14. The undersigned is enclosing a cheque for the amount favouring the Chairman of NSE requesting him to accept his unilateral offer. The account will have a balance for the amount for the next 30 days.

15. The undersigned hopes that if the efforts of the complainant results in disgorgement of profits (by SEBI) made by the brokers and RIL then 50% of the amount should be used to compensate the investors who were cheated by the fraud committed on them. The entire amount should not be appropriated by SEBI/NSE/government or to the so called investor protection fund which is used by the Authorities in an arbitrary manner. The NSE is using the Investor Protection Fund to collaborate with a TV channel to entice investors to invest in shares! This is condemnable as there are large number of investors who have burnt their fingers by investing in shares and vowed never to return on account of various scams that have taken place.

16. It is indeed a tragedy that the authorities, after putting every possible hurdle against financial ‘activists’ to uncover their scam, ultimately benefit from the efforts of the activist in case they happen to succeed!

Senior officials game the legal system to escape accountability under RTI Act

17. The information for which the complainant is willing to pay should have been made available to him under RTI for Rs 10 but for the anti-public interest elements in the NSE who first went in appeal against the order of a five-member CIC Bench (dated 7/6/2007) which in a 25-page reasoned order held that NSE was covered under 2(h) of the RTI Act. The Hon’ble Court held that this was irrespective of whether the majority shares were held or controlled by government owned institution. Subsequently NSE went in appeal against the order of the Delhi High Court (WP 4748/07 decided on 15/4/10) which upheld the order of the CIC. Is it surprising that after obtaining an interim order of stay of the order of the single Hon’ble judge who had confirmed the 5-member Bench order of the CIC, the matter has not been decided for the past five years?

18. If the senior officials can use the legal system to escape accountability from the rigours of RTI Act for 8 years, then so can the junior employees game the system to pass on benefits of thousands of crores to corporates like RIL in the most blatant instance of insider trading. Whether they actually did so will be known if the detailed trading data (broker wise) in RPL shares from August – December 2007 is made public. Is it a coincidence that the insider trading, price manipulation took place in the period when NSE was insulating itself from providing information under RTI Act?

19. It needs to be mentioned that the Hon’ble Supreme Court has held Stock Exchanges to be a State for the purpose of the writ jurisdiction of Courts and even SEBI argued at the CIC that NSE was a public authority and hence covered by the RTI.

Direct NSE to submit itself to the RTI Act

20. As one of the PID is an eminent jurist and a former Justice of the Hon’ble Supreme Court, his valuable opinion on whether NSE comes within the purview of the RTI may be sought, or alternatively it may be independently decided by the PID that NSE should submit itself to the provisions of the RTI and the seven year old appeal pending before the Delhi high Court be withdrawn. Is it surprising that NSE is not interested in pursuing the appeal after having obtained a stay in a case which it cannot win? Should it not be alleged that this is being done so that corruption in NSE goes undetected? Does this non-transparent corruption linked agenda of the NSE is in public interest and have the approval of the PID of the NSE? Even the Bombay High Court advised the NSE to be transparent because it is in public interest to dispel allegation of corruption. However, the officials of the NSE are using public funds by going in appeal against the order of the single judge of Bombay High Court in order to prevent investigation into the allegation of corruption against the exchange.

21. The very fact that the majority of the Directors – to whom the letter is addressed- are PID is sufficient for NSE to be covered under section 2 (h) of the RTI Act.

22. People of our generation (I am a senior citizen), including the senior authorities of the NSE have to recognise the merit and the intelligence of the younger generation, and earn their respect by setting an example of good public behaviour. This can only be done by a commitment to transparency and fair-play and not being clever and using the institutional money power for personal ends of not being transparent and accountable.

23. The NSE officials forget that it is the experience of the people of the Country that there is corruption in every institution where there is scope making illegal money. There is no other institution where larger sums of illegal money can be made as easily and without detection as the stock exchange. How can it be corruption free?

24. In fact the Hon’ble Judge, in the order quoted above, even included the Judiciary while stating that institutions face crisis of dwindling public confidence. One wonders as to whether those at the helm of affairs of NSE are so disconnected with reality that they think that illegal money cannot be made in collusion with the employees of the Stock exchange! Fall in Public Institution share-holding in NSE is no reason to failure of accountability

25. SEBI, NSE and the government regrettably have had a hand in preventing the public sector financial institution holding in NSE from falling below 51%. Shares have been transferred at high valuation to entities with conflict of interest, by taking advantage of the Bimal Jalan Committee report. This has been done in order to free NSE from government audit, from being accountable under the RTI Act, and to pay the senior officials crores of undeserved (compared to other similarly qualified persons in government owned financial institution) salary. The incidents of the post privatisation of the NSE shows that it has also resulted in high level corruption (refer the two incidents above), lack of accountability, non-transparency and disproportionate high salaries.

Other instances of failure to prevent undesirable trading

26. The NSE officials have failed the investors as an institution which has been granted recognition under the Securities Contract Regulation Act whose object it is to “Prevent Undesirable Trading in Securities by Regulating the Business Therein…” Undesirable trading, through price manipulation and insider trading is as old as the Stock Market. It was thought that with the advent of a broker free government owned stock exchange with professional management, the same would stop. Regrettably it did not. In the last 15 years of the existence of the NSE, there is not been a single instance in which profits from price manipulation and insider trading has been disgorged, to compensate the investors. Anecdotal evidence of share prices rising and falling prior to the declaration of favourable/unfavourable developments is commonplace.

The role of price manipulation in generation of black money also figures prominently in the SIT report on black money. Synchronised trading at artificial prices to launder black-money is stamped with the authenticity of a contract. Switching of trades in another person’s name to launder black money is another form of undesirable trading taking place. Trading based on leakage of price sensitive information (margin, circuit % and spot, promotion and demotion of shares from F&O and change in composition of shares in the Index etc.) before the information becomes public, also takes place. The pump (the price) and then dump the shares on the unsuspecting investors is another common abuse of the trading on the Stock Exchange. Cartels of brokers operating in shares of select companies with low floating stock is yet another instance of undesirable trading.

27. It appears that just as the stock exchanges of the past were said to exist for the benefit of the brokers, NSE now exist for the benefit of its employees and its shareholders. The lofty ideals of Dr R H Patil, the founder of the Exchange (who never earned the salaries of crores that the present incumbents are earning) have been given a go by.

Rs 50 lac cost to be paid by NSE employees

28. NSE filed a hundred crore defamation suit in order to cover up the alleged corruption within the organisation. The Hon’ble judge saw through the game and correctly subjected the exchange to a cost of Rs. 50 lakhs. The advice regarding functioning in a transparent manner has not been complied with. Such is the arrogance of these crorepati officials, that instead of being transparent, it has been decided to appeal against the order at the expense of the coffers of the exchange. NSE cannot behave in a manner in which other corporates behave when involved in scam.

29. As the NSE has not been transparent in its functioning, it will be only in order that the concerned employees who decided to file a defamation suit in order to cover up for the alleged corruption should be made to pay the Rs. 50 lakh cost imposed by the court.

Refer the matter for CBI investigation

30. If the trading data of the period along with the trading data of OPG Securities is not made public, then the matter be referred to the CBI for investigation and let the employees of NSE get a clean chit from the CBI.

31. The undersigned has independently verified the complaint from a knowledgeable person who has confirmed that OPG Securities during the relevant period was one step ahead of the rest of the algo-traders! Whether it was on account of his professional competency or because of his having gamed the system in collusion with the employees of the NSE needs to be investigated. As these were done on an electronic platform, there is an electronic trail which can reveal as to whether the system was gamed at the NSE level. If the matter is beyond the competency of the state investigators then private cyber labs with requisite competency can be engaged.

32. Further, if it is a problem for the NSE that the complaint published in Moneylife was from an anonymous source, then my name can be appended at the bottom of the complaint and the matter be investigated. As stated above I am depositing Rs. 5 lakhs for the information in the two cases.

33. Regarding the other issue of corruption relating to price manipulation of RPL shares by the brokers of RIL, I have already lodged a complaint with the CBI and will be taking up the matter at the next appropriate forum.

Public listing of NSE shares

34. NSE, according to newspaper reports, wants to go public and have their shares listed on their own exchange. This is against the recommendation of the Bimal Jalan Committee Report. Though this part of the report was not accepted, those responsible for not accepting the report and differing with the sagacity of the ex-RBI Governor did so to benefit MCX and will be ruing their decision. MCX took advantage of SEBI overriding the recommendation and had their shares listed on the stock market. An impartial investigation will show that the decision of overruling the Jalan Committee on listing of Stock Exchange was done to benefit MCX. Driven by the greed for profit and higher valuation resulted in a fraud of over Rs. 5600 crores which the investors will never be able to recover. It may be mentioned that the shares of MCX were placed with government-owned public financial institutions at a price of over Rs. 1000 per share having a par value of Rs. 10 at the time when the shares were not even listed!

35. No doubt the employees of NSE (barring key employees who are not eligible) too want ESOPs worth hundreds of crores and be freed from control post listing. The employees know that the value of the ESOP will increase if they are higher profits. All types of instruments will be allowed to trade on the exchange and there will be higher volumes in the speculative section in order to generate more profits. These are bound to put the financial system in jeopardy and create financial instability in the future. The country cannot afford to have the shares of NSE listed in order to appease the greed of the employees and the shareholders.

36. The public service that is carried out by a government owned National stock exchange is far too important for the economy of the country then the petty profits that the individual players are out to make by having the shares of the exchange listed on the exchange. It is forgotten that India is a land of stock market scams.

37. Due lobbying from interested quarters, SEBI accepted that part of the Bimal Jalan report that stated that the maximum ownership should be limited to 5% of shares but the stocks should not be listed. The first part was accepted by SEBI but not the second part. This was done to enable MCX to list. This has been used by the existing shareholders of NSE to divest to private players (and not to govt FI) at huge premium. Some of them are in conflict of interest situation and are now out to book their profits on the privately placed shares.

38. Any investor with some experience of IPO will tell you that the best results are produced before the company goes public. Is it then surprising, or just a familiar coincidence, that the profits of the NSE have doubled in the first half of this year when compared to last year? Higher profits will lead to higher EPS and higher valuation at the time of proposed disinvestment of shares by the shareholders! And also for the ESOPs allotted before the IPO. There is nothing National left of the NSE anymore and one seriously wonders if the NSE will be allowed to use the word National anymore!

39. Representation in this regard is being made to the government to utilise its investment in the tobacco company ITC for the purpose of buying the shares of NSE so that it remains a national asset, nationally owned in national interest. NSE is a vital institution in the economy of the country. It has to be seen as an unbiased organisation preventing undesirable trades on the stock market and existing for the benefit of the investors and not for the employees and the shareholders. The Public Interest Directors are requested to make their recommendation regarding the privatisation of the NSE in light of the recent incidents of blatant frauds and non-transparent functioning of the exchange.

Public Interest Directors requested to use their power of majority for public good and not to allow their good name to misused

40. The views of Public Interest Directors are sought on the sanitised agenda that is put before them at the Board meeting by the full-time Directors of the NSE. Fraud committed by the employees cannot and will never be an agenda item as the NSE officials believe that they are beyond corruption.

41. As it is the NSE officials have downgraded the Public Interest Directors as Independent Director as is obvious from this heading from the NSE website:

Annexure A-2
Criteria /Norms under SEBI Regulations applicable to Public Interest Directors (who are essentially Independent Directors)

After downgrading the PID to Independent Directors, without realising that PID are appointed by SEBI under SEBI regulation (SECC Regulation), the Authorities take them granted without correctly advising them on the allegations of corruption and the lack of transparency.

42. Under the SECC Regulations the appointment of all Directors are to be approved by the SEBI and the PID are to be in a majority. In other words it is the PID, appointed with the approval of SEBI, who are supposed to be in in control of the Board. One wonders as to how can NSE not submit to RTI and not function in a transparent manner, more so when allegation of corruption are leveled?

43. The Code of Conduct for Public Interest Directors under SEBI Regulations states: Public interest directors shall meet separately, at least once in six months to exchange views on critical issues.

The issues of corruption in the two matters brought to the specific notice of the Public Interest Directors, transparency, loss of confidence of investors in NSE, corruption, NSE going public are certainly matters of public interest which in the opinion of the undersigned important enough to merit a separate meeting of the PID. Restoring the credibility of the NSE is far more important than the questionable reputation of the individuals at the helm of affairs who file defamation suits and fail to report RIL insider trading and refuse to be transparent.

Yours sincerely

(i) PID Downgrade d
(ii) Cheque for 5 lacs

(Arum Kumar Agrawal)

(Arun Agrawal is the author of the book Reliance: The Real Natwar. The opinions expressed by the author and those providing comments are theirs alone, and do not reflect the opinions of Canary Trap or any employee thereof)