In its final report, the central agency has said there were violations of SEBI circulars regarding audits of brokers– SMC Global Securities Ltd and Shaastra Securities Trading Private Limited– conducted by ISec Services which was founded by Pandey, but there was “absence of sufficient material to establish criminal intent on the part of the accused persons”.
No complicity of officials of National Stock Exchange (NSE) or Securities and Exchange Board of India (SEBI) in willfully allowing the brokers to submit inadequate audit reports was found during the investigation, the agency said.
The CBI had registered the FIR against ISec Services on a reference from the Enforcement Directorate. The FIR had red-flagged several violations of SEBI norms by the firm in conducting system audits of stock brokers involved in algorithmic trading using the co-location facility.
Under the co-location facility, the NSE allowed brokers to place their servers in the NSE’s data centre for a charge, enabling them to have faster access to the price feed distributed by the stock exchange.
The alleged abuse of the facility is being probed by the agency in a separate case in which former NSE MD and CEO Chitra Ramkrishna was also arrested. She is now out on bail. The FIR regarding alleged audit lapses said that ISec Services had conducted audits of two “high risk brokers”, SMC Global and Shaastra, in a fraudulent manner when the co-location ‘scam’ was going on. Pandey had founded the company in 2001 and had quit as its director in May 2006. His son and mother later took charge of the company. The central probe agency had submitted its closure report in the case in 2023 too, but the special court had rejected it and directed the agency to conduct further investigation in the matter.
After conducting further investigation, the CBI recently filed its closure report, stating that the stock brokers planned with 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 the unlawful activities, the agency said.
The CBI did not find “sufficient prosecutable evidence” of actual compromise of the trading system arising out of audit lapses, particularly in the absence of any resultant price-volume market abuse, like circular trading and pump and dump.
In the closure report, the agency stated that NSE failed to establish a robust mechanism for verifying the authenticity of audit reports and lacked a mechanism for strictly implementing SEBI guidelines.
The failure to comply with the strict SEBI guidelines and submitting audit reports, which were only a paper exercise, “cannot be categorised as an offence of cheating or forgery”, it said.
The agency said the NSE and SEBI did not place adequate safeguards to ensure compliance with the circulars, which have been violated in the process.
It has given recommendations to the SEBI chairman to ponder upon.
Due to time lag and absence of correct contemporaneous system audits, evidence is not sufficient to establish beyond a reasonable doubt the precise nature of lapses, it said.
On the directives of the special court to conduct further investigation in 2023, the CBI undertook the analysis of trading data and call logs of the relevant period of the trading firms- SMC Global and Shaastra- audited by the ISec.
The probe faced limitations because the SEBI circular, which directed brokers to preserve call records for three years, was issued on March 26, 2018. However, during the period under investigation, from October 1, 2013, to September 30, 2015, no such legal mandate existed for SMC Global.
In the case of Shaastra, there was no question of maintaining client call logs because it was a proprietary trading firm, the agency said.
It is SEBI’s “bounden duty to protect the interest of common investors” in the securities market as well as promote and develop the securities market, and it is hoped that they will perform their statutory duty with real intent, Special Judge Gagandeep Singh said while accepting the closure report on Monday.
Their acts should not merely remain on paper; rather, strict implementation iswarranted, he said.
