Before coming out with its final investigation report on the NSE co-location scam, market regulator SEBI will first have to come clean on the role of its own officials, experts say.

The Central Bureau of Investigation on Wednesday registered a case under the Indian Penal Code, the Prevention of Corruption Act and under Section 66 of the Income Tax Act in the NSE co-location scam.

The probe agency has accused SEBI officials of collusion with a stock broker who along with NSE officials indulged in fraud, criminal conspiracy and destruction of digital evidence.

After this development, legal experts say, SEBI will have to first probe who are these officials within its own office who may have colluded with those involved in the scandal at the NSE. SEBI being the stock market regulator and holding quasi-judicial powers has the mandate to investigate cases related to market frauds and keep an eye on exchanges.

The scam first came to light when a whistle-blower alerted SEBI in 2015 to the rigging of high-frequency trading systems at the NSE. The alleged manipulation occurred between 2010 and 2014. The whistle-blower highlighted the full modus operandi through several letters it wrote to SEBI. At least a two-year delay by the market regulator in probing the allegations led the CBI to swing into action.

The NSE has so far denied these allegations. SEBI also had initiated a probe but it has not arrived at a conclusion. Internally, SEBI was working on putting out its findings and pinning down the accused in the scandal before its next board meeting on June 21. The regulator has issued show cause notices to 13 officials from the NSE and a few stock brokers. The CBI has named Delhi-based broker OPG Securities among the key conspirators.

“SEBI’s impartiality in investigating the scam will be questionable now that CBI says it own officials colluded,” said YP Singh, IPS officer turned lawyer. “As per procedure, any CBI case is registered based on orders from competent officers who are senior in rank. Lot of due diligence is involved before the CBI can register a case. It is a bit surprising that CBI has not named the SEBI official who they believe colluded but that may not have any legal bearing.”

“SEBI’s investigation report on the NSE now will be inconsequential until CBI concludes is probe,” said Bhushan Bahal, another senior lawyer based in Mumbai. “Even if SEBI gives out its findings, they should be kept in suspension until it is clear whether or not officials accused by the CBI of collusion were part of the investigation in any way. In fact, SEBI may have to come up with fresh findings after the CBI concludes.”

According to the CBI, in order to ensure a favourable report from SEBI in the inquiry carried out by it against the role of OPG in the misuse of the TBT (tick by tick) architecture of the NSE, Sanjay Gupta of OPG, “influenced unknown officials of SEBI”.

“Since the investigation by the CBI is already going on in the matter, and going by the information in the public domain, some officials are also suspected of some kind of involvement, it is incumbent upon any regulatory authority to proactively identify if any wrongdoing is there on part of its officials,” said Vinay Chauhan, Partner, Corporate Law Chambers India.

“In case of solid findings, the regulatory authority must isolate the said officials and ensure that they do not participate in the ongoing investigation being conducted by the regulatory authority so as to maintain its credibility.”

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