Investigations into the National Stock Exchange (NSE) scam, revealed in a Securities and Exchange Board of India (SEBI) order and reported first by this newspaper on February 12, seem to be finally making some headway with the arrest of Anand Subramanian, one of the key protagonists, by the Central Bureau of Investigation (CBI) . Amid all the speculation on the salacious aspects of the story, it is important to separate the personalities involved in this seven-year-old scam from the institution they belonged to. Despite capture of power by a few individuals and the governance infractions they indulged in, few can dispute that the National Stock Exchange (NSE) has served Indian financial markets extremely well in the three decades of its existence. Its state-of-the-art electronic platform and reliable trading and settlement systems have ensured that there were no systemic failures through the worst of upheavals. It is therefore critical for the government and the regulator to get to work on fixing the loopholes in the governance structures at the NSE so that such infractions don’t recur.

The facts of the case point to the need for three distinct sets of measures to ensure that Market Infrastructure Institutions (MIIs) are not hijacked by the whims of a few. One, as former SEBI Chairman M Damodaran pointed out in a webinar organised by this newspaper, persons occupying key management positions at important institutions, even if professionals, should be rotated at reasonable intervals. Allowing an individual to turn into a permanent fixture as CEO or MD is a bad idea. It is improper for an outgoing CEO/MD to continue on the Board. And it is worse if this happens when the ex-CEO’s deputy assumes charge as the new CEO. Not only can this create situations of nexus, it can also tie down the successor from initiating a clean-up of legacy structures. Two, the Chief Regulatory Officer (CRO) should be empowered to escalate complaints directly to the Public Interest Directors and the MII’s board, bypassing the CEOI. Three, as it was a whistleblower letter that alerted SEBI to the irregularities at NSE, MIIs must be asked to put in place well-defined employee whistleblower mechanisms, where complaints can be lodged directly with the CRO or PIDs. The identity of the whistleblower must be strictly protected to prevent vindictive action.

Unfortunately, SEBI also does not come out of this saga smelling of roses. The regulator’s own order shows that it took an unconscionably long time to initiate investigations into whistleblower complaints, and treated NSE with kid gloves even after forensic audits by Deloitte and EY brought to light serious irregularities. That NSE had the gall to ignore queries from the regulator for months together and finally respond in a perfunctory manner, shows that SEBI was not feared. Despite being armed with exceptional powers among financial regulators to summon market participants and to search and seize evidence, SEBI failed to show the intent fo get to bottom of the scam while the trail was still hot. Clearly, the regulator needs to introspect on its actions both in the colocation and ‘yogi’ scams, and learn from the mistakes.

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