By Chidambaram N
While former managing director (MD) and chief executive officer (CEO) of National Stock Exchange (NSE) Chitra Ramkrishna and her deputy Anand Subramanian have been blamed for the mismanagement at the stock exchange, it now appears that the then board members of NSE were made aware of the transgressions in 2016 itself by SEBI, says a detailed report.
In September 2016, then SEBI chairman UK Sinha and whole-time member Rajeev Agarwal summoned some NSE board members to SEBI’s Mumbai headquarters and revealed to them the misdeeds of Ramkrishna and a few SEBI officials. This was documented in the minutes of the meeting, says the report, quoting top sources. “The board members were apprised of her mismanagement and omission of duty that led to the co-location scam and the illegal appointment of Anand Subramanian.” However, she was given a clean chit by the NSE board along with a ‘dignified’ exit, praised for her governance of the bourse and handed out nearly Rs 50 crore as severance pay and other dues for three years when she headed the NSE.
Also, the NSE board was extraordinarily lenient and very considerate which led to non-mandatory but essential clawback clause normally incorporated in the agreement that senior company officials are made to sign when they leave in controversial circumstances. It may be recalled here that when ICICI Bank MD and CEO Chanda Kochhar stepped down in December 2016, she was made to execute a ‘claw back agreement’ which entitled ICICI Bank a return of the variable pay paid or deferred variable pay if any gross negligence or integrity breach by her.
Just two months before Ramkrishna resigned, SEBI had ordered the NSE board to fix individual responsibility for the collocations scam. NSE’s in-charge of market regulations department Agarwal, who was briefing the NSE board members told them that glaring facts had come out in the regulator’s investigations by the cross functions team. Agarwal even asked the exchange to get another forensic audit conducted. In less than two months, after this high-power meeting, Agarwal, who was looking into the crucial co-location case as in-charge of market regulations department, was ‘not’ given an extension and had to leave SEBI in November 2016.
But before Agarwal left, he had told the NSE board that the exchange should deposit profits earned from the co-location trading into an escrow account, the sources said. Under Sinha and Agarwal, SEBI had also ordered a probe into the NSE’s trading architecture designed by IIT-Mumbai and the then head of the investigations, Ashok Jhunjhunwala, had given a scathing report. SEBI had passed the finding of the CFT and IIM to the NSE board. But former SEBI officials say that some NSE board members, who were part of the NSE fact finding committee, gave a clean chit to Ramkrishna arguing vigorously in her favour in SEBI meetings.
While some of the crucial investigations that nailed the NSE and the top management for lapses in the co-location infrastructure were conducted during the time of Sinha and Agarwal, the adjudication process mainly started when the incumbent chairman Ajay Tyagi took charge. Though Ramkrishna was caught passing off confidential information, financial details to an unidentified person outside the exchange, no charges of fraud, insider trading or criminal breach of trust have been leveled against her by the exchange or SEBI till date.
Detailing on the post-scam changes in the NSE, former SEBI chairman M Damodaran said that there is now a new dispensation at the exchange and therefore investors, including their foreign counterparts need not worry. The spate of governance failures at the country’s largest bourse National Stock Exchange, made public by SEBI on February 11, was ‘unlikely to significantly damage’ the equity markets nor will it end up disturbing foreign portfolio investors’ interest in India, he added. He, who left SEBI 14 years ago, asserted that foreign investors are ‘intelligent enough’ to understand that there is now a new dispensation in the exchange and several corrective steps have been taken in recent years, after the exit of the scamtainted Chitra Ramkrishna in December 2016. Retail Indian investors, however, seem to be coming to the market in large numbers re-establishing their confidence.
Damodaran said that he was ‘disagreeably shocked’ at the revelation in the latest SEBI order, and said that what happened at NSE till the year 2016 were not lapses, but much more than that. He focused the practice of packing a board with people who had distinguished themselves in the past, having ‘flower vase’ directors that grace boardrooms will not help.
“You need people who can perform in your board. Public interest directors in NSE did not clearly do what was expected of them. You cannot have a system of peaceful coexistence between board and management. This NSE case seems to be a matter of peaceful coexistence,” he said.
He highlighted that NSE’s reputation has been damaged by the recent unravelling, and that the current NSE management should be more communicative so as to ‘signal to a much larger audience’ as to how the situation has improved, and thereby bring more investor confidence in them.
“You think the rest of the world is happy that NSE has grown to become the largest derivatives exchange in the world. They are not happy. They would like body blows to be administered to such institutions that threaten the once famous institutions in this area. Therefore, we need to address the reputational damage. There is clearly some reputational damage. I don’t think it is going to go away. To the extent possible, you need to fix it very quickly. There is no escape,” he said.
He also said that SEBI needs to ask itself if it has the right number of people and the right kind of people in three areas — surveillance, investigation and enforcement. SEBI is not a regulator that only has to police the market, it has to focus on developing the market as well besides regulating the market.
“SEBI must arm itself with the right kind of people with right experience and skill sets to be on top of the job”, he said. Damodaran said there was a need for a system where young qualified people can get attracted and give the kind of energy levels that an organisation is in need. “If energy levels in an organisation are sapped, it does not matter what kind of expertise lies in it,” he said.
Damodaran also highlighted that the same two persons (Chitra Ramkrishna and Ravi Narain) had run NSE for nearly two decades, leading to concentration of power. This should not have been allowed and ensured that it is not Contamination of Rivers… repeated.
J N Gupta, Founder and Managing Director, Stakeholders Empowerment Services, a proxy advisory firm, suggested that there is a need to keep SEBI away from the appointment of public interest directors (PIDs) in stock exchanges. He felt that PIDs should be appointed by a third party. Gupta’s contention was that if SEBI were to appoint PIDs and if some governance failures were to occur due to lapses of PIDs, then it could always be argued that SEBI was equally responsible for the situation as it had appointed the PIDs.
Gupta also felt that it would not be right to paint everything black and pointed out that NSE had in recent decades grown to be a large institution. “Our exchanges are world-class. Systems we have are better than the NYSE. We have to learn to distinguish between individuals and institutions.”
He also highlighted the culture aspect which prevented board members, who mostly owed their existence in boards to company promoters, from being vocal or raising issues at boardrooms. Except for one or two cases, one rarely saw independent directors or other nominee directors coming out to talk or convey the governance lapses of their companies in which they are performing their role as directors, he noted. If the identity of any such whistleblower is known, then they would find it difficult to get a board seat in the remaining listed companies’ universe, he added. [* File contains invalid data | In-line. (IPA Service)