Former Finance ministry consultant probed under Official Secrets Act
Ajay Shah has been accused of using government policy information to dabble in stocks
The former consultant to the Ministry of Finance, Professor Ajay Shah is being investigated for holding sensitive documents falling under the Official Secrets Act (OSA).
As per the report of the Income Tax Department, Shah, a key accused in the National Stock Exchange co-location scam that occurred between 2004 and 2009, was allegedly involved in lobbying and possessing secret government policy decision papers that could have been used for dealing in the stock market.
The report, prepared after the raids, search, and seizure operations on various entities provided suggestions and guidelines to the investigators. It was subsequently submitted to the Central Bureau of Investigation (CBI) team probing the scam.
The report read, “It is important to mention that several secret and privileged documents, including cabinet notes, etc. were also found from the digital data seized from Prof Ajay Shah. He may have been aware of important government policy decisions in advance, which could have had a bearing on stock prices as well.
“The documents include emails regarding lobbying for the NSE, including favorable policy changes, some privilege communication between DGIT (Inv) Mumbai and Member Investigation CBDT. Further, possession of confidential documents related to search and seizure actions by the IT department is a violation of OSA 1923.”
It implied that during the raid, IT officials found confidential government documents and papers relating to the raids on others in Shah’s possession.
The IT department’s 1,000-page report appraised the CBI about the role of others in the scam. It dug out more details from big hawala operators and stock market manipulators on Shah’s activities mentioning that he ran it like a business.
The report stated that certain emails proved how a senior NSE official Suprabhat Lala, the brother-in-law of Shah, Susan Thomas, Shah’s wife, and an associate Krishna Dagli and their companies were “involved in commercial software development and discussing latency-based arbitrage for commercial purpose.”
Lala, who held various senior positions in NSE, is married to Shah’s sister-in-law Sunita Thomas. Presently, both are under investigation in the co-location scam. The report also said that Dagli was accessing the NSE in an unauthorized manner and Lala was aware of it.
In a 2009 email, Dagli wrote to Lala, “I’m sorry that I did not take prior permission from you before logging in and using this id since we were mainly logging in and not doing any trading activity. I thought that it would not be required. We did this to check if the CTCL was functioning as normal in the TAP environment.”
The investigation of the Securities and Exchange Board of India (SEBI) revealed that Shah and his wife collected data from NSE under the pretext of research and authorized password access to NSE systems.
The report said that the stockbroker OPG had manipulated the TAP system, which is the first level of validation of messages before entry into the trading systems and helps in managing traffic to NSE servers. It bypassed connecting to the NSE servers and NSE officials confirmed to the tax officials that they had received complaints of TAP manipulation.
However, despite this, the NSE made no “inquiry or investigation or punish the brokers who were indulging in circumventing TAP application or quantifying the unlawful gains made by them,” the report stated.
It also reported that Shah and his associates started getting “tick-by-tick” (TBT) data from the NSE since 2006, four years before the co-location trading was launched. There was also an email exchange in 2006 between Dagli and Shah, (when he was still a consultant to the Finance ministry), wherein both discussed how to use the TBT data.
(The TBT data, on a real-time basis, can give advance knowledge of the entire order book in the share market. The market regulator, SEBI, made it compulsory for the NSE to share TBT data with all market participants only after 2017 or 2018 until which it was privileged info.
A February 2006 email by Dagli to Shah read, “We have gathered a fairly good amount of tick data over a period of nine months. The data contains spot and future prices, and entire MBP (market by price) information and other details along with the timestamp, which is provided by the NSE. We have also started logging in option prices from the last two months. Can you please suggest what kind of things we can do with these TBT data and R?”
The report said that the ‘R’ in the conversation was the software that Shah was developing for algorithmic trading.
In another email in June 2011, Dagli wrote to Lala, the NSE official, “I have a TBT line and I am able to process it faster than others. Can we do latency-based arb? Basically, if this is allowed, then I want to work on it so we can create faster systems as well as use that as a product to sell strategies to (the) guys.”