National Stock Exchange ‘scam’: CBI files closure report in one case, court accepts

In the present case, the CBI said the firms had failed to adhere to Securities and Exchange Board of India (SEBI) guidelines, but the investigation has not yielded sufficient evidence of “actual compromise of trading system arising out of such audit lapses”.

Special Judge Gagandeep Singh of Rouse Avenue Court, in an order dated August 25, said, “… the data available… does not establish any trading pattern of the trading members which is worthy of reporting to SEBI with reference to price volume market abuse like circular trading, pump and dump, or any sort of price volume manipulation, etc.”

“In view of the above-said conclusion drawn by the investigating team of NSE, the conclusion reached by the investigating authority (CBI) in filing the final report of closure seems to be the logical conclusion. The closure report is accordingly accepted,” he added.

The current case relates to the involvement of two brokers, Global Securities Ltd and Shaastra Securities Trading Pvt. Ltd; one auditing firm, ISEC Services Pvt Ltd; five system auditors; and an employee of ISEC who had allegedly violated SEBI guidelines by submitting fake audit reports.

As per the CBI, the accused persons had violated a set of guidelines issued by SEBI in 2013 and 2014, which had prescribed audit guidelines for stockbrokers. Among these guidelines was an audit every six months for traders using the co-location facility; auditors to have a minimum experience of three years; and a maximum of three consecutive audits by one auditor.

The CBI had claimed that the accused had indulged in multiple violations. Firstly, ISEC (the auditor) had allegedly conducted more than three audits, which it was ineligible to do. Secondly, one of the system auditors was ‘paid’ for signing three audit reports despite never having visited the premises of the companies, claimed the agency.

As per the agency, ISEC had visited stock brokers despite lacking the required qualifications. In some instances, claimed the CBI, the audit date was mentioned before the site visit.

After a court order dated December 5, 2023, which directed further investigation, the CBI filed a fresh closure report.

“Rather, it is concluded that the NSE failed to establish a robust mechanism for verifying the authenticity of the said reports and lacked the mechanism for strict implementation of SEBI guidelines. The stock brokers planned with M/S ISEC to evade third-party audits with the intent to conceal their irregular activities; however, due to a lack of material, it is not possible to conclusively determine the precise nature of said unlawful activities,” the CBI said in its closure report, according to the court order.

“Thus, the investigation established a violation of SEBI circulars, but there is an absence of sufficient material to establish criminal intent on the part of the accused persons. The NSE was also not aware of any such violation of SEBI guidelines. It is, thus, concluded that no complicity of officials of NSE or SEBI in willfully allowing the brokers to submit inadequate audit reports is found,” the CBI had submitted.

Under cases of the co-location “scam”, the NSE was earlier facing allegations that some brokers got preferential access through the co-location facility at the stock exchange, early login, and ‘dark fiber’, which allowed traders a split-second faster access to data.

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