Every once in a while, there occurs an event in the life of institutions that shakes up carefully built reputations and raises questions on their governance and integrity. National Stock Exchange of India Ltd (NSE) managing director and chief executive officer Chitra Ramkrishna’s resignation was one such moment. That it came close on the heels of the publicly unknown, yet forced exit of the NSE group’s chief operating officer, Subramanian Anand, adds to the mystery.Despite these high-profile exits, conflicts of interest continue to plague the exchange, which is preparing for a mega initial public offering that could value it at $2-3 billion. Set up in 1992 to check the near-monopoly of the Bombay Stock Exchange, which was hit by a share scam, the NSE hides governance failures that may even have put market integrity at risk. An allegation that the exchange gave preferential access to highfrequency traders is yet to be disposed of.ET spoke to a number of people at the NSE, including current and previous directors. The story that emerges reeks of hubris, favouritism, disregard for corporate governance and a casual approach to institutional processes.Minister of State for Finance Arjun Meghwal told the Parliament on December 9 that markets regulator Securities and Exchange Board of India ( Sebi ) had found the NSE to have given some stock brokers preferential access to its servers."Preferential access was given to stock broker(s), wherein it was possible for a stock broker to log into multiple dissemination servers through multiple internet protocols assigned to him," said Meghwal, quoting from the Sebi report. The market regulator had probed the allegations after the NSE absolved itself in its own investigation.An insider who read the NSE inquiry report called it "perfunctory." Sebi then asked NSE to appoint an independent entity. It chose Deloitte India to conduct a forensic inquiry. Deloitte submitted its report to the board on December 13. Ravi Narain was present in the board meeting and did not recuse himself from the discussion even though allegations refer to a period when he was managing director and CEO —a clear conflict of interest.Narain did not respond to ET’s queries. "Neither the complaint nor the report attributes anything to Mr Ravi Narain. As such there is no bar on his participating in the board discussions relating to the matter," an NSE spokesperson wrote to ET.NSE also appears to have overlooked a conflict of interest in the appointment of Deloitte as forensic auditors. Two NSE officials told ET on condition of anonymity that Deloitte had just completed a business continuity project for NSE, which required them to go through the same systems that it subjected to forensic audit The second stage of the project—for ISO certification—had been kept on hold. "Big institutions like NSE deal with multiple management consultants for different purposes from time to time. Each such agency has its own Chinese wall concept and conflict management mechanism. In the current case too, there were checks to ensure there are no conflicts in respect of appointment of the forensic agency," said the NSE spokesperson. It did not respond to ET’s question whether the management informed the board of Deloitte’s previous assignment.A board member said it had not. NSE started offering co-location to algorithmic traders or high-frequency traders in 2010. High frequency traders use sophisticated computer algorithms to exploit minute price differences that flash past in fractions of a second. That also means traders whose servers are located close to the exchange’s have a minuscule time advantage over others located farther as price information takes that much more time to travel over communication networks.In January 2015, a whistleblower wrote to Sebi and financial journalist and editor of MoneyLife magazine Sucheta Dalal describing how NSE was giving preferential treatment to some traders by helping them connect to its servers ahead of others.On October 5, 2012, at 9.50 am, the NSE’s 50-share index Nifty crashed over 900 points. The crash was later attributed to a "fat finger" or an erroneous data entry by a trader who punched in the volume instead of the price. But the fall in the index automatically triggered the circuit breakers and the market was shut down. Sebi regulations require that such a shutdown should remain for two hours. NSE, however, started trading in about 15 minutes.After the market shut, the then finance minister, P Chidambaram, called Narain on the phone and soon after, the exchange reopened. "The goal was always to resume trading after a short shutdown. Everyone was on the same page," Chidambaram told ET via a text message. When ET pointed out that it violated Sebi guidelines, he replied that the Sebi chairman was on board. Sebi chief UK Sinha did not respond to calls and text messages to his mobile phone seeking comment.Sebi’s investigation into the incident did not find any communication between the exchange and the regulator. In an October 2014 order, it censured NSE for endangering the market. Wholetime member Prashant Saran wrote that stock exchanges were not at liberty to assess the situation and act according to their assessment. "It is already observed above that there is no material to indicate that NSE consulted Sebi to cut short the market halt duration and re-open the cash market at 10:00:22.Similarly, there are also no records to show that NSE informed BSE of this. I find that by not bringing coordinated trading halt in all equity and equity derivative markets nationwide, NSE had violated the Sebi Circular and thereby put the securities market at a serious systemic risk," Saran wrote.A former NSE board member said, "That is the problem. Non-written communication is much faster and there is no audit trail." He said the exchange felt stopping trade would cause more damage.Sometime in August this year, the board of directors of the National Stock Exchange — including its new chairman Ashok Chawla and managing director and chief executive (MD-CEO) Chitra Ramkrishna — called on Sebi chairman UK Sinha. The NSE board had just been reconstituted with three new public interest directors—Manipal Global Education Services chairman Mohandas Pai, Dhruva Advisors’ chief executive Dinesh Kanabar and former corporate affairs secretary Naved Masood.As the meeting ended, Sinha flagged an issue that had been bothering the regulator for a while—the appointment and conduct of group COO Subramanian Anand.The regulator as well as NSE’s board members had been receiving anonymous complaints about Anand, whose appointment itself was a mystery. Sinha asked the board to investigate thoroughly. It was also formally communicated to them by the regulator.The board then launched a probe headed by its audit committee chairman, Dinesh Kanabar, a no-nonsense tax expert and former deputy chief executive at KPMG India. What Kanabar unearthed was disturbing, according to three people who have direct knowledge of the probe.Anand first joined NSE on April 1, 2013 as chief strategic advisor to the MD-CEO at an annual fee of about Rs 1.7 crore. Till then, he had been employed in Chennai at logistics firm Transafe Services, a joint venture between the state-owned Balmer Lawrie and the ICICI group at an annual pay of a little over Rs 14 lakh. As CSA to Ramkrishna, who, incidentally, took over as MD-CEO on the same day, he occupied a cabin next to hers. NSE officials say it was made clear that he was practically the no. 2 in the organisation.Anand also had a peculiar arrangement as he worked from both Chennai and Mumbai, where NSE is headquartered, even after he was elevated to group COO exactly two years later, on April 1, 2015. In the letter appointing J Ravichandran (current MD-CEO in charge) as group president and Anand as COO, Ramkrishna wrote, "I propose to use the facility of our chief strategic advisor to reduce my burden." She went on to re-designate him as group COO and advisor to the MD.He was given charge of people management, new business, corporate communication, marketing, business excellence, research and development, pricing, strategic planning and subsidiaries—IISL, DOTEX, NSE Tech and NSE IT. According to a source, the letter was not even made available to company secretaries SN Ananthasubramanian and Co (SNA) for audit. The management is said to have claimed that it was an internal communication.The NSE’s audit committee inquiry found his appointment irregular and him abusing his powers — which one insider termed as "akin to a managing director’s" — delegated to him by the board. "NSE is not just another company. It is a regulator. It should not only behave like one, it should set an example for others," said a governance expert who did not want to be named. "NSE’s compliance was apparent compliance, which means only on paper," he said.He was a non-executive director on several group companies. Yet he was not designated as a key management personnel (KMP) in the company’s annual report and his remuneration—Rs 4.25 crore per annum which was second only to Ramkrishna’s salary of Rs 4.78 crore—not disclosed.SNA red-flagged the issue in October 2015 asking why Anand was not recognized as a KMP even though he was designated the group COO. The management replied that he was not a KMP because his was a contractual appointment as a consultant. Former NSE board chairman SB Mathur told ET in an interview at his Delhi residence that none of the secretarial reports placed before the board were qualified and hence there was no reason to suspect anything amiss.Asked whether they qualified secretarial audit report of 2015 and 2016 regarding the COO’s position in the organisation, SN Ananthasubramanian, senior partner at SNA, told ET that they did not. "During the course of our audits, we had raised queries on certain issues, including the one referred to by you, to which the management responded adequately," he said in an email to ET.In its annual report published in August 2016 NSE again omitted Anand as a KMP. This time, the company secretaries wrote to the company saying that Anand being the group COO with executive powers had to be treated as an employee and a KMP. Consultants are generally appointed on contract for specific purposes or for a fixed tenure, with specific powers which could also include executive powers of management. When deviations are made from this, such an appointment could be construed as employment in substance and will require compliance with the requisite laws," Ananthasubramanian said in his email.The NSE board met in the third week of October over video conference to review the enquiry report. The verdict was unanimous. He had to go. The board met again the next day where Chitra was also present and was told in unambiguous terms that Anand had to leave, instantly. Within an hour the group COO of NSE foreclosed his contracts and left office.ET could not reach Anand for comments and left a questionnaire for him at his Chennai home. There was no response at the time of going to press. ET interviewed NSE chairman Ashok Chawla at the India Habitat Centre office of TERI where too he serves as chairman. Chawla declined to discuss Anand’s exit, merely saying that he left on his own. He also said that Ramkrishna and Anand leaving will not materially affect NSE’s IPO process. NSE’s audit committee chairman, Dinesh Kanabar, who conducted the probe, declined to comment.In an email reply to ET’s questionnaire, Ramkrishna wrote, "The pointers in your questionnaire are baseless and do not warrant any comments from me. These pointers have already been the subject of speculative pieces in the last week and may I add only end up distorting the image of a prestigious organisation that I hold very high and close to my heart."In October 2012, days after the "fat finger crash," Ravi Narain, then MD-CEO of NSE, informed the board that he intended to quit at end of March 2013. The board suggested starting the process of looking for a new chief but Narain insisted there was no need to look outside as there could not be a more qualified person than Ramkrishna. "We brought up the issue of succession planning several times but the management never did (plan)," SB Mathur, former chairman of NSE board told ET in an interview at his Delhi residence.On November 6, 2012, the board constituted a four-person selection committee with Narain also as a member. It decided that an internal candidate was best suited for the job. The organisation was so sure about Ramkrishna that it did not even advertise for the job. Incidentally, NSE wrote to Sebi seeking approval for the appointment on December 13, 2012, the same day that the regulator issued a circular on ownership and governance of exchanges. It required them to issue advertisements inviting candidates for the position. Sebi approved Ramkrishna’s appointment because NSE had already completed the selection.Almost immediately, MD-CEO in waiting Ramkrishna appointed Anand as CSA with effect from April 1, 2013, the day she would take over the reins from Narain. "In hindsight, we could have done better (in terms of process). But there were no two opinions that Chitra was the best choice," former chairman Mathur said.NSE then proposed to appoint Narain as a public interest director (PID) and vice-chairman of the exchange even though there was no such position. SEBI received several complaints as well as a legal notice opposing the plan. Only PIDs are allowed to chair board committees. NSE then changed the proposal to vice-chairman and director representing shareholders, which SEBI cleared.Ravi Narain and Chitra Ramkrishna as well as J Ravichandran, who is currently MD-CEO in charge, were part of NSE’s founding team. Narain occupied the chief executive’s chair after RH Patil, NSE’s founding chairman. Within a few years, NSE, with its electronic trading platform overtook BSE. The exchange now enjoys a near complete monopoly in stock derivatives trade. It ranked fourth globally on number of trades executed in calendar year 2015.