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Rogues abused CSE software snag

Calcutta, Dec. 1: Rogue brokers like Ketan Parekh exploited a rare bug in the Calcutta Stock Exchange’s (CSE) software for close to 15 months, precipitating the payments crisis on the bourse last April from which the exchange has yet to recover.

The peculiar bug in the software upset the calculation of brokers’ margins — the money they have to pay up-front to back their positions at a particular counter. As a result of the bug, the software reported a broker’s margin dues as nil if it exceeded Rs 2.14 crore — 32 multiples of two minus one paise to be precise.

The Joint Parliamentary Committee’s (JPC) investigation into the payment crisis at Calcutta Stock Exchange (CSE) has revealed that brokers like Ketan Parekh knew about the bug in the bourse’s software for calculation of margins and fully exploited it. Investigations by the Securities and Exchange Board of India (Sebi) show that the shortfall in the collection of margins had peaked on March 1, 2001 when it exceeded Rs 50 crore.

The Parliamentary panel’s probe into the scam has revealed that the brokers — including Parekh — exploited it to build massive positions without having to pay the requisite margins. What is more, the JPC has remarked in its draft report that the snag in the software was widely known among brokers and the authorities might have been blind to it.

Kamal Parekh, the president of the bourse at the time of the payment crisis, had initially feigned ignorance. But after “persistent and probing queries” by the members of the panel, he admitted he knew about it.

Ketan Parekh admitted in his deposition to the panel that he and his associates in Calcutta had taken advantage of the bug.

The exchange had officially unearthed the bug during an inspection by the securities market regulator in early April last year. Sebi and the Parliamentary panel were told by it that the bug existed since the middle of December 1999. This implies that brokers took advantage of it for about 15 months.

The exchange authorities and CMC Ltd — the company that had developed the software — have blamed each other for the error. Although the exchange intended to claim damages from CMC, Dipankar Basu, the former chairman of CSE’s management sub-committee, told JPC that the bourse should have conducted some random checks and traced the error much earlier.

The Parliamentary panel has also observed that the exchange authorities ignored the alerts generated by its surveillance software, AWACS (Advanced Warning and Control Systems).

“The alerts generated by surveillance system particularly in case of those volatile and active scrips were either ignored or not pursued seriously,” the panel says in its draft report.

“Even though the facility of finding out members’ matching trade and shifting of positions in circular fashion was available, no proactive role was taken at any time to find out the nature and likely impact of such transactions. There were a large number of matched trades in several scrips, mostly in the volatile ones (like HFCL and DSQ Software).”

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