Governance breakdown

News: Recently, the Securities and Exchange Board of India (SEBI) has issued the final order on the “Algo scam” at the National Stock Exchange (NSE).

The article reveals the multiple layers of the scam in the securities market and suggests that the regulator must ensure that scams like this should never occur.

What is the “algo scam”?

The regulator has formally accused five individuals and the NSE of several violations and acts of misgovernance. The entities received price information in advance using co-located servers on the NSE premises and profited by front-running. There were multiple violations of the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012.

This happened between 2013-16, with the first whistleblower complaint in 2015. SEBI indicted the then managing director (MD), then vice-chairman, then executive director in charge of compliance, group operating officer and adviser to the MD, and then chief regulatory officer.

The NSE board has also failed to inform SEBI of the governance issues. Hence, SEBI has fined the NSE and barred the stock exchange from launching any new product for six months.

What does the case reflect?

It shows that India’s premier financial exchange, which is one of the largest in the world and host over $3 trillion worth of listed companies, lacks internal checks and balances.

The board was aware of the exchange of confidential information, but decided to hide the matter. It shows a complete collapse of governance at the exchange, which had the potential to risk financial stability.

Source: This post is based on the article “Governance breakdown” published in Business Standard on 15^th Feb 2022.