Why did the Enforcement Directorate arrest former NSE chief Ravi Narain?

The case pertains to hiring private firm iSec Services to allegedly tap the phones of NSE employees

The Enforcement Directorate (ED) on Tuesday arrested Ravi Narain, former chief of the National Stock Exchange of India (NSE), in connection with a money laundering case involving the appointment of a private firm that allegedly tapped phones of the country's top bourse’s employees.

What is the case?

Narain’s arrest by the ED is based on an FIR filed by the Central Bureau of Investigation (CBI), which has already booked former Mumbai police commissioner Sanjay Pandey and Narain’s successor at the NSE Chitra Ramkrishna in the matter pertaining to alleged phone tapping at NSE. A private firm iSec Services, which allegedly is connected to Pandey’s family members, was roped in by NSE to conduct an audit during Narain’s tenure. The phone tapping is alleged to have been done illegal, and took place between 2009 and 2017.

Long-serving NSE executive

Narain is the longest serving managing director and chief executive officer (MD & CEO) of the NSE. He served in the post from April 1994 to March 2013. Immediately after his term ended on March 31, 2013, he was appointed vice chairman of NSE in a non-executive capacity. He resigned as vice chairman in June 2017 after he was issued show-cause notice by the capital market regulator Securities and Exchange Board of India (Sebi) for his alleged role in the “colocation scandal”.

The colocation scandal refers to the alleged misconduct that took place at NSE between 2011 and 2014 when certain brokers obtained unfair access to the exchange’s colocation facility.

Took NSE to top spot

After receiving an MBA from Wharton School, Narain had the option of taking up a comfortable job in the US. Instead, he opted to return to India and a few years later joined state-owned IDBI. Subsequently he moved to the newly-set up NSE. Narain is among the few who can take credit for breaking the dominance of the Bombay Stock Exchange (BSE), which was then led by brokers. In quick time, NSE overtook BSE and cemented its lead over the age-old bourse. Narain was also instrumental in setting up the National Securities Clearing Corporation, which guarantees trade settlements to buyers and sellers and depository services. Narain was among those who helped make derivatives trading a success, which pivoted NSE into becoming a top bourse not just in India but also one of the top markets globally. During his stint, Narain was part of several committees that helped reform India’s capital markets.

Sebi wrath in 2019

In April 2019, Sebi issued orders against NSE and several other entities for their alleged involvement in the colocation scandal. The regulator had directed NSE to disgorge Rs 625 crore, along with an interest of 12 per cent annum since 2014, for lapses at its colocation facility that allowed unfair access to certain brokers.

In its orders, Sebi had come down heavily on Narain and Chitra Ramkrishna — who were at the helm when the exchange servers were exploited. The regulator asked Narain to disgorge a fourth of his salary drawn from financial year 2010-11 (FY11) to FY13. Sebi also barred him from associating with a listed company or market intermediary for a period of five years. Narain’s gross remuneration between FY11 and FY13 stood at Rs 24.3 crore. Sebi’s orders were immediately challenged before the Securities Appellate Tribunal (SAT) by NSE and others, including Narain. The tribunal is yet to pronounce its verdict.

Tryst with agencies

After exiting NSE, Narain’s role there came under constant regulatory scrutiny. Earlier this year, he was questioned by the Central Bureau of Investigation (CBI), which in 2018 had filed a first information report (FIR) in the NSE colocation scandal.

Narain’s image also took a beating when Sebi issued an order against him over alleged governance lapses at NSE over appointment and promotion of Anand Subramanian as group operating officer of NSE. In the order issued earlier this year, Sebi imposed a penalty of Rs 2 crore on Narain.