NSE: The Union Carbide of Indian financial system

National Stock Exchange (NSE), the keystone of the Indian capital market, has been in the news for all the wrong reasons. In mid February, mind-boggling details of former NSE CEO, Chitra Ramkrishna and an unknown "Himalayan Yogi" shocked India and the entire financial world for their astonishing improbability.

As NSE MD & CEO, Chitra was being guided at every step by the Yogi with whom she shared confidential company information. She had also appointed the inexperienced Anand Subramanian, as a chief strategy officer, and later as group operating officer, at an exorbitant salary, higher than everyone else but Chitra.

Vigilance, security, and an untarnished reputation should be imperative to NSE, a company functioning in a high-stake financial technology environment. And yet the grievous offences and blatant abuse of power by Chitra indicate that the exchange didn't adhere to any of those ground rules during her tenure.

Chitra abused her power from 2013 to 2016. Her alleged malfeasance was brought to light by NSE's external auditor SNACO, and enquiries and complaints by Nomination, Remuneration and Compensation (NRC) committee, a body comprising non-executive board members of the NSE.

Chitra's office along with other executives at NSE then misled NRC and, later, SEBI upon enquiry. It is pertinent to note that the then autocratic culture at NSE, upon questioning, activated the company's management to conceal the wrongdoings rather than correct them.

The then NSE board comprised illustrious names such as Justice BN Srikrishna; former LIC chairman, SB Mathur; Ravi Narain, the NSE CEO and MD who had passed on his baton to Chitra; NSE chief regulatory officer, VR Narasimhan and more. And yet, SEBI only held the company, NSE, responsible for both, hiding Chitra's misdeeds from the regulator and serving false information during the investigation. Ravi Narain and Narasimhan were held guilty of the same offences too.

NSE's board had asked Chitra to resign when the entire board was informed that an unknown person was using Chitra as a conduit for making decisions for NSE, and she was sharing confidential company information with that person. Despite knowing that Chitra was leaking crucial information, instead of preserving evidence for proper enquiry, the company considered it as an e-waste and chose to destroy her laptop.

Had NSE not destroyed evidence, the authorities may have uncovered the other people involved in Chitra's misdeeds. Who benefited, and how much they benefited from Chitra's offences would have been crucial to transform Chitra's case from regulatory offence to financial crime.

Has NSE committed a corporate crime?

In law, companies are considered as legal persons with rights and duties. However, in practical situations, companies act through individuals. Generally, criminal liability of a company involves two approaches, 'vicarious liability' and 'lifting of corporate veil'.

Under the vicarious liability approach, the company is held liable for the commission of offences by its agents while they were performing their duty towards the company. However, a company is held liable only when it is proved that the offence was committed at the behest of the company, or during performance of company duty.

In the approach of 'lifting the corporate veil', law identifies the person or persons of the company who were responsible for commissioning of an offence, prima facie done by the company. Again, due to fluid and complicated organisational structures, it is often hard to find the actual perpetrator through this approach.

Since these approaches often do not work because of the complexity of corporate structure and the flux of its human resources, a new concept of 'corporate liability' has evolved that scans the corporate culture to consider liability on the organisation. Under this model, rather than the corporation being liable for the acts of individual offenders, a corporation is liable because its 'culture', policies, practices, management, or other characteristics encouraged or permitted the commission of the offence.

An unethical culture is a conducive breeding ground for intelligent sociopaths who have both, the intelligence, and the unencumbered value-system, to commit white-collar crimes.

In Chitra's case, the key officials of NSE and its board let her abuse power for years. SEBI's demand for explanations was answered with misleading facts. Abuses of regulations were concealed by the persons who were supposed to be the watch-dogs for the regulator. Evidence that could have revealed Chitra's accomplices, the beneficiaries of her transgressions, and the monetary value of financial crimes perpetrated during Chitra's tenure was destroyed. No individual, but the NSE through various employees, board and other members committed these offences against the regulator, capital market and the people of India.

Toxic corporate cultures prove costly for India

When a company's culture promotes a healthy disregard for law, profiting even at the cost of the society, or covering up its faults instead of mending its flaws, its employees forget that the aftermath of their actions can cause terrible damage to the society.

For instance, Bhopal gas tragedy was the consequence of the culture at Union Carbide that created an environment of disregard towards the graver consequences of the company's actions.

The Union Carbide plant was not even up to the minimal safety standards - large quantities of Methyl IsoCyanide were unwisely stored in a heavily populated area with its refrigeration unit deliberately kept off to save $40 per day in costs. Its safety systems were non-existent, and the alarm was turned off. This happened despite the same plant having already suffered accidental release of deadly nerve agent phosgene, in the past.

In the Bhopal gas tragedy, no individual could be pointed out as the actual perpetrator of the crime that killed thousands.

In case of NSE, the company and its management know how crucial it is to the Indian capital market. There are very few entities that would be able to garner the funds, talent and infrastructure to start an exchange, and even fewer would attain the size and scale of NSE.

In a way, NSE may have been the Union Carbide of the Indian financial ecosystem, a tragedy waiting to happen.