Two Lessons From The Scandal At NSE

India's governance structure for stock exchanges has an inherent conflict of interest, and while limited State involvement in the financial sector has unleashed innovation, it has failed to stop malfeasance

The bad news seems never ending for the National Stock Exchange (NSE), India's largest bourse. After NSE's former chief executive Chitra Ramkrishna was accused of taking decisions under the influence of a "Himalayan yogi" by the market regulator, she faces fresh allegations about snooping on NSE employees with the aid of a former Mumbai top cop.

This marks a dramatic turnaround in fortunes for both Ramkrishna and NSE. Ramkrishna and her former boss, Ravi Narain, now in the crosshairs of multiple investigating agencies, were widely seen as the saviours of Indian finance once. Both were part of NSE's founding team led by the legendary economist and institution builder RH Patil.

When Patil set up NSE in 1992, India desperately lacked a professionally run bourse. The economic reforms of 1991 had awakened global interest in India, but the lack of a fast and transparent trading platform was widely viewed as a major impediment to foreign fund flows. The century-old Bombay Stock Exchange (BSE) was run by a close network of stockbrokers, who were indifferent to victims of stock price manipulation and forged share certificates.

Officials at the finance ministry and at the newly established market regulator Securities and Exchanges Board of India (SEBI) agreed that the only way to break the BSE cartel's stranglehold was to incubate a new exchange. Patil led this mission, setting up the country's first automated screen-based trading platform that could be accessed by terminals across the country. Electronic settlement eliminated the need for paper certificates, bringing down fraud.