NSE colo case: CBI books Sebi, NSE officials for defrauding exchange

Claims iSec did not have expertise to audit the brokers, exchange

The Central Bureau of Investigation (CBI) has filed a case of cheating and criminal conspiracy against some officials of the Securities and Exchange Board of India (Sebi) and the National Stock Exchange, two brokerages, and iSec Services, a firm associated with former Mumbai police commissioner Sanjay Pandey, for allegedly defrauding the bourse and causing huge losses. 

This is the third case filed by the federal investigation agency in the NSE colocation case, related to allegedly allowing certain broking firms differential access, thus giving them an undue advantage. 

The agency named SMC Global Securities, Shaastra Securities Trading, and iSec and its executives Naman Chaturvedi, Anup Narayan Shende, and Mayak Sahu, among others, in its latest first information report (FIR). However, it didn’t reveal the quantum of losses they caused to the NSE. 

In the fresh FIR, the agency said that the 11 accused “entered into a criminal conspiracy” to “defraud and cheat” the NSE by way of submission of the system audit reports in violation of Sebi’s system audit framework, causing “wrongful gain to private parties and corresponding loss to the NSE”.

System audit certificates were bogus as they were issued without carrying out an actual audit. Those were based on the input of a person who was not authorised to carry out such an audit, the CBI report said. 

The report highlighted that Mumbai former police commissioner Sanjay Pandey's firm iSec Securities did not have the expertise to audit the brokers asked by the NSE and it subcontracted the process to small-time audit firms or CAs and paid them around Rs 5,000 each to carry out the audits. 

Pandey's firm was allegedly paid Rs 12.5 crore by the NSE’s former brass -- Chitra Ramkrishna and Ravi Narain -- to audit the bourse. The amount included Rs 4.45 crore, which was paid for allegedly “snooping on its employees”. In connection with these allegations, the CBI has filed the fresh case in the matter. Earlier two FIRs were for illegal snooping and in connection with OPG Securities over the same matter.

CBI said that iSec had audited SMC and Shaastra during 2013 and 2019 which, according to the agency, belonged to high-risk categories of brokers. 

“There are instances that auditor had issued audit certificates on a date which was prior to the date of site visit by iSec. It raises doubts on the merit and genuineness of the audit,” the FIR stated. 

The CBI alleged that Chauturvedi, who had frequently visited the two brokerages, was not qualified to carry out such an audit as he did not possess the requisite qualification as prescribed by the market regulator.

Citing Sebi’s guidelines, the agency said that the auditor should have a minimum of three years' recognised certification to conduct such work. It added that several provisions of the Sebi guidelines were violated while carrying out the so-called audit.

Notably, in March 2001, Sanjay Pandey incorporated iSec- which conducted a security audit of NSE around the time when co-location irregularities allegedly took place.