Exactly two days after the scam-hit National Stock Exchange submitted a forensic audit report from Ernst & Young and Indian School of Business to the Securities and Exchange Board of India, Income Tax sleuths started nationwide raids, creating a ripple impact on the country’s financial markets.

The I-T raided premises of former and current top NSE officials and its brokers, seizing Rs 11 crore along with some laptops, storage devices and confidential documents. A senior I-T official called the cash hidden in sofa sets and pillow covers as “just the tip of iceberg”, hinting the trail could expose many powerful people, as the Enforcement Directorate (ED) was roped in to widen the scope of the investigation.

“This is a serious one, the I-T officials have landed on scores of documents,” quipped BJP spokesperson Narendra Taneja. The preparations for the raids, it is reliably learnt, were done for over a year.

I-T officials say one name that has repeatedly cropped up during the raids is that of Ajay Shah of National Institute of Public Finance and Policy (NIPFP). The news is rocking Delhi’s powerful circles, possibly because of Shah’s reported proximity to former Finance Minister, P. Chidambaram and a blue-eyed bureaucrat, K.P. Krishnan.

The overall scam in NSE’s High Frequency Trade, claim I-T officials, could be in the range of Rs 50,000 crore. It all happened when a whistleblower in 2015 blew the lid on how NSE decided to offer colocation facilities, without taking any approval from SEBI in 2010. The colocation facility allowed preferential access to select brokers for the trading system, wherein they could get split-second faster access to the data feed of the exchange, indulging in a widespread market fraud on millions of investors at the cost of few brokers.

One of the alleged key conspirators of the scam, Ravi Narain, has been accused of allowing the fraud to happen under his reign as the MD & CEO of NSE. Narain put in his papers and the chief architect of the complex algorithm programs specifically designed for the colocation scam—Ajay Shah fell into the I-T net. A senior NSE official said Narain and Lala would not offer any comment as the case is sub-judice. Repeated mails and text messages to Shah did not yield an answer.

The whole colocation scam was reportedly hatched when those associated with high frequency trade (HFT) teamed up and worked in tandem for a little over five years, bypassing rules and regulations set in place by SEBI, the market regulator.

Shah, claim I-T officials, worked in tandem with his wife Susan Thomas and sister-in-law Sunitha Thomas (wife of Suprabhat Lala, the then trading head of NSE). In the garb of research, they got full granular time series data from NSE—none others had this exclusive data—and created algorithmic programs to game the market through brokers like OPG, Alpha Grep etc. Thanks to the data, a band of brokers is said to have stayed ahead of the rest in the market to gain what I-T officials claimed as “illegal gains”. The I-T officials admit that they have gathered reconstructed order books with cash being transmitted to tax havens (preferred by FIIs) like Cyprus, British Virgin Islands, Mauritius, Hong Kong—wherever Advantage Strategic Consulting, OPG, etc., had access.

I-T officials maintain that Shah developed the algorithm for the company OPG Securities, whose promoters Sanjay Gupta and others were also raided by the I-T and Rs 11 crore seized from them. Repeated efforts to reach Gupta through text messages proved futile. From the data, analysts and investigators say, Omnesys was apparently given preferential treatment by both Narain and Chitra Ramakrishna (who succeeded Narain as CEO and MD of NSE). In short, from algo to software, which were used by OPG Securities, were supplied by InfotechSolution and Chanakya among others, which were promoted by Sunita Thomas, wife of Lala. In case of Omnesys, what is more interesting is the fact that NSE acquired 26% stake and Ramakrishna was on the board of Omnesys Technologies, despite the fact that the parent of Omnesys was a broking firm of NSE.

One of the alleged key conspirators of the scam, Ravi Narain, has been accused of allowing the fraud to happen under his reign as the MD & CEO of NSE. Narain put in his papers and the chief architect of the complex algorithm programs specifically designed for the colocation scam—Ajay Shah fell into the I-T net. The whole colocation scam was reportedly hatched when those associated with high frequency trade teamed up and worked in tandem for a little over five years.

“This issue had been going on for quite some time and brought to light only after a whistle blower raised a storm. NSE should have resolved it on its own and not allowed such preferential treatment to a handful of brokers. If research is mis-utilised to manipulate markets, then it’s dangerous,” says Gopal Aggarwal, head, BJP Economic Cell. I-T officials, who spoke on conditions of anonymity, claim Shah and his wife (Susan) got hefty royalty every year from the turnover of Nifty trading, which is 80% of the total turnover of NSE. This, they claim, is in violation of the standard industry norm, where a one-time payment is given to designers and researchers for any of the market indices.

What, claim I-T officials, is more unprecedented and stunning is that a percentage of trading on NSE and its earnings was said to have also been given as royalty to Shah and his wife, associated as professors at National Institute of Public Finance and Policy (NIPFP) and Indira Gandhi Institute of Developmental Research (IGIDR), respectively. I-T officials are also investigating whether Shah influenced FIIs and Participatory Notes (PN) activities on NSE. After all, he had profit sharing contracts with OPG Securities, Alpha Grep and Omnesys.

“What is damaging is that such a crucial piece of information was suppressed from the Red Herring prospectus of NSE’s on-hold IPO,” claim I-T officials, adding it was his proximity with a senior minister in the UPA and his obedient bureaucrats that helped Shah bag Rs 1 crore annual project for NIPFP for a decade. As per current estimates, OPG Securities alone had traded over Rs 6,000 crore on NSE, using colocation facility. While details of other 15 entities that have been named in the I-T reports are being probed, huge amount of such trading is likely to surface soon. Market observers claim if a detailed probe is carried out in the order book that was exported to FIIs or FPIs, it would expose the actual amount of illegal gains.

“NSE should have played as per the rule book, but it is clear it did not. The raids and subsequent actions by other revenue intelligence agencies have opened a Pandora’s Box. It remains to be seen if SEBI agrees to the consent route,” or dares to follow the trail to the top, says seasoned market analyst Dhirendra Kumar.

Worse, several market pundits have termed the Deloitte, E&Y and ISB forensic audit reports as a “total eyewash” because of clear conflict of interest issues. For the records, Narain, as MD & CEO of NSE, was also the head of the sub-committee, which chose Deloitte for the forensic audit of NSE, despite being fully aware that Deloitte was doing a huge project for NSE’s disaster recovery centre (DRC). This, again, was never disclosed by both NSE and Deloitte.

I-T officials, who spoke on conditions of anonymity, claim Shah and his wife (Susan) got hefty royalty every year from the turnover of Nifty trading, which is 80% of the total turnover of NSE. This, they claim, is in violation of the standard industry norm, where a one-time payment is given to designers and researchers for any of the market indices.

But NSE did set aside the Deloitte report. When SEBI again asked it to appoint another auditor, this time NSE chose E&Y, along with ISB. “Again, this was another case of conflict of interest,” claim the I-T officials. Like Deloitte, E&Y also has huge financial interest from NSE in the form of large projects. Similarly, NSE paid some crores of rupees to ISB to set up a trading innovation lab.

With Enforcement Directorate stepping in, the probe against the NSE colocation scandal is expected to offer some more names, some of them with some direct, indirect and solid links with some powerful politicians.

The ED could soon be roped in by the I-T officials, who will continue the raids across India.