Ajay Shah, the former consultant to the Finance Ministry between 2004 and 2009 and a key accused in the NSE co-location scam, is under investigation for holding sensitive documents falling under the Official Secrets Act (OSA), sources told BusinessLine. An internal appraisal report of the Income Tax (I-T) department says that Shah was into the business of lobbying and secret government policy decision papers in his possession could have been used for dabbling in stocks. 

The I-T report, which was prepared after raids, search and seizure operations on various entities and provided suggestions and guidelines to the investigators, was submitted to the Central Bureau of Investigations (CBI) team probing the co-location scam.

The report says, “It is important to mention that several secret and privileged documents including cabinet notes etc were also found from the digital data seized from Prof Ajay Shah. He may have been aware of important government policy decisions in advance, which could have had a bearing on stock prices as well. The documents include emails regarding lobbying for the NSE, including favourable policy changes, some privilege communication between DGIT (Inv) Mumbai and Member Investigation CBDT. Further, possession of confidential documents related to search and seizure actions by the I-T department is a violation of OSA 1923.”

Lobbying activities

It simply means that tax officials are likely to have found confidential government documents and even papers relating to I-T raids on others in the possession of Shah, when he was raided, the sources said. The I-T appraisal report, seen by BusinessLine, goes on to present the relevant sections of OSA 1923 that could apply to Shah for possession of confidential government documents.

The nearly 1,000-page I-T report, that appraises the CBI about the role of those in the co-location scam and even some of the big hawala operators and stock market manipulators, has dug out more details on Shah’s lobbying activities and says that he ran it like a business.

Bypassed NSE servers 

The I-T report says that it has found further emails that show how senior NSE official Suprabhat Lala, brother-in-law of Shah, Shah’s wife Susan Thomas and an associate Krishna Dagli and their companies were “involved in commercial software development and discussing latency-based arbitrage for commercial purpose.”

Lala, who handled various senior positions in NSE, is married to Shah’s sister-in-law Sunita Thomas and both are under investigation in the co-location scam. The I-T report says that Dagli was accessing the NSE in an unauthorised manner and Lala knew it well. 

In an email dated 2009, Dagli wrote to Lala, “I’m sorry that I did not take prior permission from you before logging in and using this id since we were mainly logging in and not doing any trading activity. I thought that it would not be required. We did this to check if the CTCL was functioning as normal in the TAP environment.” SEBI investigations have revealed that Shah and his wife collected data from the NSE under the pretext of research and even had authorised password access to NSE systems.

Manipulating TAP systems

TAP is a first level of validation of messages before entry into trading systems and helps in managing traffic to NSE servers. The I-T report says stock broker OPG had manipulated TAP systems and managed to bypass it to connect to the NSE servers and NSE officials confirmed to the tax officials that they had received complaints of TAP manipulation. Despite this, the NSE made no “inquiry or investigation or punish brokers who were indulging in circumventing TAP application or quantifying the unlawful gains made by them,” says the report.

As per the report, Shah and his associates started getting “tick-by-tick” (TBT) data from the NSE since 2006 four years before co-location trading was launched. The report mentions an email exchange in 2006 between Dagli and Shah, when he was still a consultant to the Finance Ministry, wherein both of them are discussing how to use the TBT data. TBT data, on a real-time basis, can give advance knowledge of the entire order book in the share market. Market regulator SEBI made it compulsory for the NSE to share TBT data with all market participants only after 2017 or 2018 until which it was privileged info. 

‘Shah’s software’

“We have gathered a fairly good amount of tick data over a period of nine months. The data contains spot and future prices, and entire MBP (market by price) information and other details along with the timestamp, which is provided by the NSE. We have also started logging in option prices from the last two months. Can you please suggest what kind of things we can do with these TBT data and R,” Dagli wrote to Shah in an email dated February 28, 2006.

The I-T report says that the “R” in this conversation is the software that Shah was developing for algorithmic trading.

In another email dated June 1, 2011, Dagli wrote to NSE official Lala, “I have a TBT line and I am able to process it faster than others. Can we do latency-based arb? Basically, if this is allowed, then I want to work on it so we can create faster systems as well as use that as a product to sell strategies to guys.”

Shah did not reply to emails. Lala said he did not want to comment.