Investigations into the National Stock Exchange (NSE) co-location scam by various agencies showed that Dubai was being used as a key conduit for hawala operations and funneling money to other global stock exchanges in China, the States United States, United Kingdom and Western Asia for trade.

Brokers were found to have deployed illegal means to establish trading links between the NSE, MCX, BSE and other global exchanges such as SHFE Dalian (China); CME, ICE and CFD (United States); DGCX (Western Asia); and LME and CFD (Europe). Their target was derivatives trading which gave them a large volume pool and an arbitrage opportunity to generate profits or losses in a way that can dodge taxes in India, documents reviewed by BusinessLine show.

Brokers were found to have deployed illegal means to establish trading links between the NSE, MCX, BSE and other global exchanges such as SHFE Dalian (China); CME, ICE and CFD (United States); DGCX (Western Asia); and LME and CFD (Europe). Their target was derivatives trading which gave them a large volume pool and an arbitrage opportunity to generate profits or losses in a way that can dodge taxes in India, documents reviewed by BusinessLine show.

Illegal in India

Using return money to trade on Indian stock exchanges, which is camouflaged as foreign portfolio or institutional investments, is illegal in India. Yet the investigations revealed that the exchanges were routed through third-party servers in India and therefore the foreground Internet Protocol addresses belonged to those data centers.

There are dozens of high-frequency traders in major Indian stock and commodity exchanges that have a declining subsidiary in India, with parent entities in the United States, Mauritius, and other investment-friendly jurisdictions. tax. Entities linked to Indian brokers registered in the British Virgin Islands (BVI) were also found. The surveys found that the point-to-point latency (trading speed) is lowest between Dubai and Mumbai at around 26 milliseconds, with a setup cost of around ₹18 lakh for some of the merchants who were surveyed. of an investigation. The same between China and Mumbai was around 200 milliseconds at a similar cost of ₹18 lakh. Singapore to Mumbai was 54 milliseconds at ₹22 lakh, London-Mumbai 109 milliseconds and cost between ₹20 lakh and ₹22 lakh, and CME-Mumbai was around 200 milliseconds at a cost of ₹30 lakh.

According to the documents, most traders registered their offshore companies in Dubai as there were nearly 20 free zones, the most famous of which is the Dubai Multi Commodities Center (DMCC).

Why Dubai?

The money was sent via hawala to Dubai and redirected to all jurisdictions from there. Sources claim that once connectivity is established, traders could even transfer money on the exchange for someone in India to any desired destination through simple transactions.

Such trades are made in out-of-the-money call and put options, where there is no liquidity and orders can be matched at any price, and profits/losses can be displayed as appropriate, depending on the tax payable. In this method, huge sums of black money can be transferred to India as profits on the books of a broker who already has a loss and no or very little tax liability after adjustment. The technique is also used in reverse to send money abroad.

“Dubai Free Zone offers the advantage of no taxation, privacy and 100% ownership. These arbitrage firms create in-house trading applications using exchange APIs (application programming interface), locate their servers in third-party data centers and take point-to-point leased-line connectivity from foreign exchanges to third-party data centers.

Then they route local exchange streams to the same third-party data center. Transactions in foreign jurisdictions and India are triggered from the third-party data center at the same time, giving merchants an arbitrage advantage,” the survey report states.

The foreign companies were found to be undisclosed entities on the books of various brokers in India with ties to brokers in other jurisdictions. Many third-party data centers are managed from Mumbai and Delhi.

APIs or trading software were sold to brokers by high-level NSE insiders, as investigations by market regulator SEBI earlier showed. “Facts regarding connectivity between various exchanges were also discussed in the emails of two NSE employees,” the investigation report said.

The investigative report, which also named the two NSE officials, said the modus operandi of “international arbitration” was exemplified, according to the email between the two officials with the subject “offshore arbitration”, and that NSE was aware of these Activities. The investigation report also states that said email was part of post-research investigations and retrieved from NSE servers and not brokers.

Published on

June 26, 2022