India’s NSE scandal comprising a mysterious Himalayan yogi, a “group operating officer” who had never worked in the securities market, and a board that looked the other way shows that it takes only a few key individuals to tarnish even a hallowed institution. But there’s redemption in embracing good governance, writes Georgy Thomas

In February, India’s stock market regulator, the Securities and Exchange Board of India (SEBI), quietly uploaded a 190-page report written by Whole-Time Director Ananta Barua to its website. Its matter-of-fact title, “Final Order Against Ms Chitra Ramkrishna and Others”, may have initially wrong-footed some in the media. But the contents of the report were so explosive that news soon spread like wildfire through social and mainstream media outlets that were forced to play catch-up.

The uproar created by the report has still not subsided. It revealed how Ramkrishna, a former managing director and CEO of the National Stock Exchange (NSE), presided over the bourse in a way perhaps best described as bizarre during her 44-month tenure, which ended abruptly in December 2016.

For Asia Business Law Journal, the reports on the dramatic events at the NSE during Ramkrishna’s tenure provide us with the rare opportunity to contrast each episode of misconduct with governance principles that offer better outcomes.

In the report, Barua describes how Ramkrishna used to regularly take instructions over email from an outsider, revealed to be a Himalayan Yogi — a Siddha Purusha, in her words.

The following exchange reveals the extent to which corporate governance was a casualty at the NSE during her watch:

SEBI investigator: Can you please elaborate as to how the Siddha Purusha was aware about a lot of intricate details on the functioning and hierarchy at the NSE.

Chitra Ramkrishna: Largely, I would have provided that inputs [sic].

The “inputs” she passed on to the Siddha Purusha included the exchange’s five-year financial projections, dividend payout ratio, business plans, and the agendas of board meetings. The SEBI report says she even consulted the mystery outsider, whose email ID is a reference to three of the Vedas, scriptures that form the core of Hinduism – about the performance appraisals of NSE employees.

The report also indicts Ramkrishna for appointing an unqualified person (Anand Subramanian) initially as chief strategic adviser, and later promoting him to group operating officer through the misuse of her authority.

The report’s findings were not the first instance of Ramkrishna being associated with reputational harm to the NSE. In fact, the SEBI stumbled onto the findings when it was probing the colocation (CoLo) scandal at the bourse. A whistle-blower had called out the scandal in January 2015, when Ramkrishna was heading the bourse. The NSE’s CoLo facility allows brokers to locate their servers right next to the exchange, for a fee, to take advantage of reduced latency. The scandal involved a few brokers gaming the facility to beat others into executing buy/sell orders, and profiting from the granular pricing information available to CoLo subscribers.

Long-term damage amid growth

The NSE is no ordinary stock exchange. It is India’s leading bourse, which is among the world’s largest, and has an inspiring origin story. The NSE was set up in 1992 because the then Indian government was convinced its celebrated economic reforms would not attract foreign investment in the existing environment of fragmented and non-transparent stock exchanges where brokers cried themselves hoarse in open pits trying to outbid each other.

When it kicked off operations in 1994, the NSE’s electronic order matching system made trading easy, affordable and accessible across India. It cut out middlemen and broadened the market. Transparent price discovery and ease of use were the NSE’s strong suit as it raced ahead to achieve market leadership.

Last year, powered by record IPOs that raised INR1.1 trillion (USD15.9 billion), the NSE’s consolidated revenues vaulted 60%, from INR38.9 billion to INR62 billion. This success, though, is not new. The NSE was doing well in revenue growth and remained profitable throughout Ramkrishna’s tenure. It’s probable that the apparent successes on the quarterly growth front played a role in turning the focus away from NSE governance failures.

Asia Business Law Journal reached out to corporate lawyers to discuss best practices that can ensure companies do not gloss over governance lapses by directing focus solely on profit and loss (P&L) numbers. Instead of asking them to comment on the specifics of the NSE situation, we asked the experts to talk about fundamental general principles.

Mukesh Butani, founder and managing partner at BMR Legal, recommends a “corporate governance scorecard” and says it can be devised and implemented by independent agencies (outside of the SEBI’s scope). “It could be made a part of the quarterly earnings report and shall give a fair assessment of corporate governance standards of each listed company,” he says.

However, Sherbir Panag, a partner at Panag & Babu Law Offices, wants to move away from “check-the-box compliance” using “correct forms, formats and checklists”. In his view, organisational budgets can get exhausted in getting the policies, procedures and protocols ready so that there is very little of it left for monitoring and control. “Monitoring and review budgets have to increase,” he says, “and monitoring and review have to become multidisciplinary.”


Source: National Stock Exchange of India

Sandeep Parekh, a founder at Finsec Law Advisors, bats for stricter enforcement of statutory provisions intended to counter governance lapses. In his view, “Without the minimum hygiene of good governance, financial performance can never work beyond a point”.Monkey business, Sandeep Parekh

Rukmini Roychowdhury, a partner at K Law, says sustained profitability of a company is tied to good governance. She points to the rising demand for environmental, social and governance (ESG) audits by investors. “It is in the interest of companies looking for funding from large investors to focus on these aspects of their operations.”

High-risk behaviour

On 13 November 2015, an email sent by the Himalayan Yogi to Ramkrishna bounced, since it was blocked by NSE IT, says the SEBI report, citing an E&Y probe. Six days later, on 19 November, it was Ramkrishna’s turn. An email she sent to her spiritual mentor was not delivered. The mystic then wrote to her the same day: “Unfortunately your company has blocked my ID from your outgoing so your msgs are not being delivered properly by mail from you.”

Apparently, this was enough for Ramkrishna to act. Her verbal instructions prompted an email to go out from a senior NSE IT official: “Please investigate why this ID rigyajursama@outlook.com is unable to send or receive emails to MD.”

The recipient forwarded it internally among NSE IT staff until a resolution was found on priority, the SEBI reports says. At 7:31pm that day, the mystic wrote to Ramkrishna again: “All checked CHITSOM the mail works fine.” It was clear that the NSE IT had apparently resorted to a manual override of its IT policy.

Data loss prevention is central to a reputed bourse like the NSE. One way that NSE IT addressed it was by setting up alerts on its email servers to block email sent outside the organisation with attachments containing sensitive keywords, the SEBI report says.

Incidentally, E&Y discovered that Ramkrishna had sent a document named “NSE 5 Year Projections Sheet” to her mentor on 9 October 2014. Ramakrishna herself later told the SEBI that the guru may have passed the sensitive NSE data on to others: “Primarily, I had clarity on issues that I sought. Who else and whom he would correspond with was outside my purview. He may have corresponded with any others too [sic].”

The incidents highlighted by the SEBI point to compliance and risk management violations on an epic scale. It is made worse by the fact that Ramkrishna was a member of the team that set up the NSE in 1992, and worked there continuously in various decision-making roles until she was made CEO in 2013.

This appears to be a rare instance of someone who oversaw the setting up of an organisation’s risk management turning rogue and violating those same policies. According to another report, Ramkrishna was herself part of the team that drafted the SEBI Act of 1992, which created India’s stock market regulator – which makes it worse.

Given this context, ABLJ raised another governance question. Would periodic assessments of CEOs and directors on compliance and risk management capabilities help?

Butani notes the impracticality of continuing assessment processes, since they tend to become subjective and mere compliance exercises. Parekh says there are provisions in the Companies Act, 2013, and the SEBI (Listing Obligations and Disclosure Requirements [LODR]) Regulations, 2015, that call for periodic review of performance (not just financial) of the boards and leadership of listed firms. According to him, the nomination and renumeration committees (NRCs) of companies could refer to them to frame the criteria for such assessments.

Panag suggests three steps for better compliance and risk management. “No. 1, we need to get over the CEO halo complex. No. 2, there has to be independent monitoring. No.3, a significant portion of CEO compensation needs to be linked to governance and compliance.”

Superficial separation of roles

Throughout the tenure of Ramkrishna as MD and CEO, the NSE had a supposedly independent board headed by a chairman (SB Mathur initially, and then Ashok Chawla from May 2016). The board also had a vice chairman in former CEO Ravi Narain during the period. The presence of public interest directors – independent directors of stock exchanges – added to the board’s outward heft.

Yet, as per the SEBI report, the same board met on 11 August 2015, and delegated substantial powers similar to that of the CEO to Anand Subramanian. The decision followed his re-designation as group operating officer with effect from 1 April 2015. By then, many senior NSE functional heads, including its chief people officer, chief marketing officer and CEOs of subsidiaries, were reporting to him. But the NRC of the board did not ask why his re-designation was not placed before it for approval, even though Subramanian’s position was in substance that of key management personnel (KMP).

Throughout, his legal status was of a consultant on contract. The NRC would later find that Subramanian’s previous employment with a container leasing firm was irrelevant to his role at the NSE. The SEBI report observes that he had apparently never worked in the securities market before. The NSE also did not have any of his educational or experience certificates on record.

In fact, the contrived designation “group operating officer”, which misleadingly sounds like “chief operating officer”, was a misdirection played on the NSE by the Himalayan Yogi, Ramkrishna and Subramanian. The SEBI report notes that the intention was to confer executive authority to Subramanian while dodging the KMP requirement.

The Yogi’s email to Ramkrishna, on 19 February 2015, gives the game away:

“So in order to have a mix of all and not precipitate the contract entered into, and also maintain status on hierarchy, and considering legally the terms of reference in TITLE NOT AS KMP and still get an executive authority, I propose with love and abundant blessings that you will be called from 1 April 2015 as ‘GROUP OPERATING OFFICER & ADVISOR TO MD’ at the same level as group president of the company [sic].”

The events at the NSE bring into picture the recent SEBI move to drop its push for mandatory separation of CEO/MD and chairperson roles at listed entities from 1 April 2022. The decision followed pushback from listed companies, with only 54% complying despite extending the initial rollout date by two years. The SEBI clearly finds merit in splitting the roles, but does it help with governance?

Butani says the SEBI was guided by the recommendations of the Uday Kotak Committee on Corporate Governance. The separation of roles remains a pivotal aspect of the governance framework, despite the SEBI decision to make it voluntary. Butani hopes the regulator will not relax the requirement any further.

Parekh admits the decision is a step back for good governance, but he sees a silver lining. “The SEBI may consider introducing a ‘comply or explain’ rule, where companies will be required to comply with the separation requirement or justify the reasons for failing to do so.”

Sairam Bhat, a professor of law at the National Law School of India University in Bengaluru, says mere compliance on paper is not enough. He notes how companies failed to uphold the spirit of the push for gender diversity. “While there are exceptions, in a majority of the businesses the role of the women directors and similar other provisions have proven to be mere rearrangements of the board composition to include one or more family members or known affiliates to show or prove diversity.”Sairam Bhat, Monkey business

Panag says there’s no need for the regulator to be prescriptive about such things. In his view, what’s important is that “boards should be able to succinctly and clearly identify to all relevant stakeholders, including regulators, about how their structures enable relevant independence”.

Roychowdhury, who prefers voluntary compliance, says some companies may prefer to combine the roles due to brand or business complexity reasons. She says in such instances, companies may establish other measures to avoid conflicts of interest. “The CEO could be made subject to re-election annually, which will ensure greater accountability.”Sherbir Panag, Monkey business

A tale of three related parties

The SEBI report reveals that the NSE was a web of conflicts of interest during the tenure of Ramkrishna as CEO. She admitted to the SEBI of knowing the Siddha Purusha for about 20 years, and was taking his guidance on personal and professional matters. Subramanian, too, confessed that he knew the mystic for some 22 years. So Ramkrishna, Subramanian and the Yogi were all interconnected. Subramanian’s wife, Sunitha, a “good friend” of Ramkrishna who was already serving the NSE as a consultant, continued in that position with a new contract during the period, says the SEBI report.

Subramanian joined the NSE as chief strategic adviser on 1 April 2013, the same day Ramkrishna took office as MD and CEO. No advertisements were issued to hire for the position filled by Subramanian. No recruiters were involved. He was interviewed by Ramkrishna, and no one else. There was no other candidate, the SEBI report says.

His joining salary of INR16.8 million per annum for working just four days a week was an increase of 11 times compared to his last drawn salary of INR1.5 million. He then went on to bag five back to-back salary hikes in a span of three years, which saw his pay rise to INR42.1 million. One of the hikes was given two months after the previous one. Another after just a month. Sunitha also received four pay hikes during the period, the report says.


Source: SEBI report

On 1 April 2015, Subramanian was redesignated as group operating officer, which required him to work five days a week. Ahead of this, his salary was raised by 44%. This included a pro rata (proportional) hike for the increased number of weekdays.

But the Himalayan Yogi, the architect of the redesignation, made it clear in an email that the revision to five days a week would be only “for paper and emoluments”, and Subramanian needed to work only for three days. The mystic, though, demanded that Subramanian withdraw and surrender to him the pro rata hike, given as “gratitude”.

Barua describes this as a “money-making scheme” that involves Ramkrishna and Subramanian with the unknown person. Accordingly, Ramkrishna would increase the compensation granted to the group operating officer, and he would then pay the mystic from such increased compensation, the report says.

The players in the NSE web of conflicts of interest were not promoters. They were either employees or consultants on contract. Even then, it took lots of prodding from the SEBI for the NSE board to finally act against them.

It isn’t far-fetched to visualise situations where boards may find it difficult to act against promoters or their related parties, were they to indulge in such egregious conduct. Not surprisingly, the SEBI considers regulation of related party transactions (RPTs) as a central plank in its push for good governance.

As per the SEBI LODR (Sixth Amendment) Regulations, 2021, based on the recommendations of the SEBI working group, all persons or entities belonging to the promoter or promoter group are considered related parties. Promoter/s or the promoter group exercise control over a company irrespective of the extent of ownership, says the SEBI ICDR regulations of 2018.

The amended regulations on RPTs went into effect from 1 April this year, braving hectic lobbying by industry groups. In particular, the rule on the materiality threshold faced considerable flak. If the RPT exceeds 10% of the company’s turnover or INR10 billion, whichever is lower, listed firms will now have to secure shareholder approval.

ABLJ asked the experts to identify a few best practices to ensure a healthy balance between ease of doing business and good governance while framing RPT rules.

Roychowdhury says several measures in the amended RPT rules do promote ease of doing business. For instance, they exempt “transactions entered into between two wholly owned subsidiaries of the listed holding company … from the ambit of the regulatory framework governing RPTs. Further, certain transactions like preferential allotment, which are subject to … other regulations, are already exempted from the purview of the RPT framework.”

She notes that the amended rules exempt acceptance of fixed deposits by banks/non-banking financial companies from the purview of RPTs subject to disclosing such transactions, along with the half-yearly report to stock exchanges.

Butani says: “The focus should be on self-compliance and periodic reporting of technical lapses which the regulator should deal with as mere compliances, and not treat as having committed a breach of law.”

Panag argues for the strict regulation of RPTs. “I think our whole space of RPTs has to become the one place where overt regulatory prescription is necessary as opposed to less, because we have found significant creative ways to move around it.”

Allowed a graceful exit

The dramatic events at the NSE during the tenure of Ramkrishna continued right up until the exit of the individuals at the centre of the crisis. On 4 October 2016, the NRC of the NSE met, following a letter from the SEBI, and decided that legal opinion be taken on the appointment of Subramanian as group operating officer.

On 21 October the board met again. Initially, the CEO was kept out. She was later summoned and informed that the group operating officer should quit immediately. And thus, the stage was set to bring down the curtain on Subramanian’s infamous stint at the NSE.

Ramkrishna remained for two more months. By then, Deloitte had submitted to the NSE chairman its inquiry report on her sharing of sensitive information with an outsider. Despite this, the NSE, at its board meeting on 2 December, accepted her offer to resign with immediate effect. It also recorded an appreciation about her “sterling contribution to the growth of the organisation”, despite being aware of the grave irregularities she had committed.

The regulator would later issue a show-cause notice to the exchange, its board and its NRC for not recording the lapses relating to Subramanian’s appointment in the minutes of the 26 October meeting. It also demanded an explanation for recording an appreciation of Ramkrishna’s contributions. The SEBI also singled out the public interest directors for not appraising the regulator of the above irregularities.

It’s not just at the NSE, though. The SEBI has pulled up independent directors elsewhere, too. Recently, it ordered a freeze on the demat accounts of independent directors and the compliance officer of a company for failing to arbitrate in the “interest of the company in situations of conflict between management and shareholder interest”.

These actions don’t come as a surprise, since the SEBI wants independent directors to play a central role in governance by upholding shareholder interest. The SEBI Listing Obligations and Disclosure Requirements require that at least half the board of directors be independent for listed companies having an executive director as board chairperson, and at least one-third for companies with a non-executive director as chairperson.

From 1 January this year, both appointment and removal of independent directors has to be done through a special resolution of shareholders. In addition, the independence of NRCs has been enhanced, with two-thirds required to be independent directors.

So, what benchmarks can independent directors follow to decide if management interests are not in the company’s best interest?

Panag lists two. “First and foremost, independent directors have to have sound financial, structural and business knowledge. Second, in situations of conflict they must have a budget for professional advisers who can help them, can review large volumes of data, and come back to them to discuss key elements.”

He adds: “In many global companies, an internal audit, or the function that handles whistle-blower complaints, would report directly to the audit committee without any dotted or other reporting line to management.”

According to Butani, there are three crucial benchmarks: (1) any conflict of interest, howsoever remote, must be disclosed by the directors/key managerial persons before each board/audit committee meeting; (2) an interested director/key managerial person should not remain present when the said matter is discussed; and (3) not just the conflict of interest, but the debate among non-interested directors should be recorded in the minutes of the audit committee/board meeting.Mukesh Butani, Monkey business

As part of actions into this lapse, the SEBI, at the time of going to press with this story, announced the formation of a six-member panel to review governance norms at market infrastructure institutions like the NSE.