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TMI BlogRefusal to renew the recognition of the Magadh Stock Exchange Limited.X X X X Extracts X X X X X X X X Extracts X X X X ..... nce trading only after obtaining final approval from SEBI for establishment of the Settlement Guarantee Fund. 1.2. MdhSEL vide letter dated September 26, 2006 submitted an application for renewal of recognition under Section 3 of SCRA. Subsequently, Securities and Exchange Board of India (hereinafter referred to as SEBI ) conducted an inspection of MdhSEL on October 30-31, 2006 in order to determine/examine whether MdhSEL has complied with the conditions of renewal of recognition, the instructions, guidelines, etc. issued by SEBI/Government of India from time to time, whether its organization, systems and practices were in accordance with the framework of the SCRA and whether MdhSEL provides a fair, equitable and growing market to the investors. 1.3. During the inspection, it was observed that MdhSEL had several deficiencies in its functioning. Some of the deficiencies observed in this inspection were also pointed out in the previous inspection conducted on November 24-25, 2003. This indicated that MdhSEL failed to rectify certain major deficiencies although 2 years have elapsed from the previous inspection. Some of the deficiencies comprise : i. Failure to appoint an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006. They were also advised that in case they failed to reply/appear for the personal hearing as aforesaid, SEBI would be constrained to presume that MdhSEL had no reply to offer and accepted the charges as alleged and the matter shall be proceeded ex-parte on the basis of the material available on record. 1.7. In response to the said show cause notice, the COM made its submissions vide letter dated December 04, 2006 wherein they requested SEBI that the date of appearance be extended by 2 months. Accordingly, SEBI vide letter dated December 18, 2006 informed MdhSEL that the personal hearing has been rescheduled to January 10, 2007. 2.0 Personal Hearing and Reply of MdhSEL to the Show Cause Notice 2.1 As authorized by the COM of MdhSEL in its meeting held on January 6, 2007, Wg. Cdr (Retd.) Narendra Kumar, broker member and Shri Abhay Kumar, Manager cum Administrative Officer appeared for a personal hearing before me on January 10, 2007 and made their submissions. Pursuant to the hearing MdhSEL submitted its written submissions vide letter dated January 17, 2007 and e-mail dated April 24, 2007. Further, MdhSEL also informed vide its letters dated March 15, 2007 and May 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of such members with inadequate BMC was to be forwarded to the COM for further action. However, the latest compliance status as on April 18, 2007 submitted by MdhSEL indicates that the exchange has issued a circular only on April 10, 2007 to all members regarding regularization of BMC as per the decision of COM meeting dated April 2, 2007. 3.3 List of below par scrips contribute towards Base Minimum Capital. MdhSEL failed to prescribe the list of shares to be accepted as securities component of BMC of the members and has also failed to periodically value the securities. MdhSEL submitted that the concerned members whose BMC contribution included below par scrips have been advised and given three months time to comply with the BMC norms and replace these scrips with those listed in Group 1 or with cash. If such members failed to comply with BMC norms even after this period of three months, the list of such members with inadequate BMC shall be forwarded to the COM for further action. However, the latest compliance status as on April 18, 2007 submitted by MdhSEL indicates that the exchange issued a circular to rectify the position only on April 10, 2007 to all me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... listing fee, the exchange is not able to refund the SEBI dues. In view of the same, MdhSEL has made the request either to part waive the amount of SEBI dues, or, if part waiver is not possible, to dilute the payment terms spread over 5 years. 3.8 Non-payment of annual registration fees by sub-brokers. SEBI vide its several letters dated August 7, 2003, January 23, 2004 and March 4, 2005 had directed MdhSEL to take up the matter of non-payment of annual registration fees by 3 registered sub-brokers to SEBI. However, it was noted that the Exchange has not pursued the matter with the sub-brokers for payment of registration fees due to SEBI. MdhSEL submitted that out of the three sub-brokers/brokers 1. M/s Shivam Securities, sub-broker of Shri Krishna Kumar Rungta has paid the sub-broker fees. 2. The account of the affiliated broker i.e. M/s Rajat Shares Stock Brokers Pvt. Ltd. is being debited for realization as per final notice dated April 10, 2007. served on him 3. As M/s GSP Financial, the affiliated broker has been declared a defaulter on October 8, 1988; no assets are lying with the exchange, however, while auctioning its membership ticket such dues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued to members. Since there is no trading activity in MdhSEL from December 2004, the companies do not find any interest in paying the listing fees to MdhSEL. Eight companies have been de-listed by MdhSEL for non-compliance and nonpayment of listing fees. MdhSEL has also filed complaints in regard to recovery of listing fee arrears. 3.11 Subsidy provided to the members trading through ISS. MdhSEL charged turnover fees @ 0.004% of the total monthly turnover of the members and ₹ 500 per month per terminal on members trading through ISS. However, it was observed that from December 2005 onwards, the members trading through the various segments have stopped making the aforesaid payment to the Exchange and that there was no decision by the COM for waiver of such charges on the members. MdhSEL submitted that the COM has already decided to recover the turnover charges from the members and is expected that by March 31, 2007 the entire amount will be collected. Further, the members who are availing of trading facility provided by MdhSEL will be requested to bear the expenditure incurred by MdhSEL. MdhSEL has also submitted that the dues arising out of ISS trading facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of normal administrative functions and procedural delays at ROC office. However, MdhSEL approached SEBI for grant of extension of time and the scheme was implemented within the extended time given by SEBI. 3.12.3 Inadequate Manpower and Infrastructure: MdhSEL does not have the basic platform for trading and settlement such as clearing house, a separate bank a/c for pay-in/pay-out, separate demat account for clearing and settlement, licensed and tested trading software, etc. Apart from the above, MdhSEL has very meager manpower (i.e. only 2 officers and 5 staff members) and has no identified staff exclusively to take care of the surveillance functions in MdhSEL, etc. MdhSEL submitted that its income has not increased due to various reasons including restrictions on trading imposed by SEBI, present national capital market scenario and even the payment of salary to the existing staff and officers was difficult. It assured that the moment there is an adequate income, manpower and other infrastructure will be strengthened and improved. 4.0 Consideration of Issues 4.1 I have carefully considered the facts and circumstances of the case and the material available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the name of Shri Narendra Kumar for the post of ED, for approval. I observe that Shri Narendra Kumar voluntarily offered his services for a token amount of Re. 1/- p.m. only. It is a preposterous idea to appoint a broker member of the exchange as ED particularly when he represented the COM for the personal hearing. 4.4 SEBI vide its circular dated June 18, 2003, stated that the Exchange may reduce the BMC from the existing ₹ 2 lakh to ₹ 1 lakh and refund the excess of BMC to the members on receipt of NOC from SEBI. Further, in terms of SEBI circular dated October 21, 1993, BMC is required to be maintained by the member brokers in the prescribed ratio. However, it is observed that compared to the previous inspection report of 2003 wherein only one member had less than the minimum prescribed BMC, during the current inspection of 2006 that number has substantially increased to 10 members. Moreover, 10 members had Nil BMC which is not acceptable. Further, the number of members not maintaining the BMC in the prescribed ratio has increased from 2 members to 7 members. I note that maintenance of minimum BMC is essential requirement for the member brokers and stock exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ensure that the funds in the IPF are well segregated and that the IPF is protected from any liabilities of the Stock Exchange. 4.8 SEBI, in exercise of powers conferred under the Act periodically issues circulars to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. However, I observe that the exchange has failed to comply with the circulars/directives/guidelines issued by SEBI from time to time. One such instance is failure to inspect the books of accounts of its broker members. I note that the Government of India vide circular dated January 29, 1983 required the stock exchanges to inspect the books of accounts of at least 10 % of their active members every year. The exchange has submitted that since no broker member of the exchange has been doing business on the floor of the exchange, it was not considered necessary to inspect the same. Even though, the exchange has informed that steps have been taken to rectify this irregularity till date no report of such compliance has been received from the exchange. 4.9 I note that due to breakdown of internal administration and persistent malfunctioning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members trading through ISS. These members were allowed to trade in the work stations of the Exchange and use the infrastructure facilities of the Exchange. For the year 2006-07, MdhSEL incurred a net expenditure of ₹ 6,32,157/-. It was observed that there is a huge gap between the expenditure incurred by MdhSEL to facilitate trading for few members in other segments and the income received from such members of MdhSEL. It indicated that few members of MdhSEL enjoy huge subsidy from the parent exchange for their trading at the cost of the resource of MdhSEL. I find that MdhSEL is in the process of recovering dues from its members arising out of ISS trading facility; however, the actual amount of dues recovered from members has not been mentioned. 4.13 Vide circular dated June 9, 1997, SEBI had advised all Stock Exchanges to set up clearing house/clearing corporation or Settlement Guarantee Fund (SGF) to ensure timely completion of the settlement. Vide the said circular, all the stock exchanges were also advised to submit the relevant information in the prescribed format to SEBI for its examination and approval for setting up of SGF. SEBI vide letter dated June 25, 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication made by a broker on the very same day. It was also observed that the shares were allowed to be traded in the permitted category on the platform of the exchange by Shri CM Pandey Executive Director (Officiating) in contravention of the conditions of renewal of recognition and in complete violation of the undertaking submitted by MdhSEL. Accordingly, vide ad-interim ex-parte Order dated August 19, 2005 SEBI interalia directed that:- (i) MdhSEL which acted as unrecognized stock exchange as above shall not assist, regulate or control the dealings in securities in any manner whatsoever until further directions or pending completion of final proceedings, whichever is earlier. (ii) Shri C M Pandey, Executive Director (Officiating) is hereby suspended from acting as a OED or in any capacity in MSEA or in any other institution related with the securities market, till further orders. The above directions were confirmed vide order dated December 6, 2005. In addition to the above, MdhSEL was also directed to initiate disciplinary proceedings against Shri C.M. Pandey as per the applicable laws for imposing major penalty. MdhSEL was further directed that till the comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers, and monitor the functioning of its subsidiary. MdhSEL is a public institution that regulates the dealings in shares and securities, incorporated under the SCRA, guided not only by its own Rules, Bye-laws and Regulations but also by the directives issued by SEBI/Govt. of India from time to time. On perusal of the compliance reports, I find that MdhSEL had substantially not complied with the observations stated in the inspection report. I note that stock exchange being first level regulator; a duty is cast upon them to continuously comply with the various statutory Acts, Rules, Regulations, Byelaws, etc. of the stock exchange. By their above actions, I find that MdhSEL was lax in complying with the observations stated in the inspection report. 4.16 In spite of the fact that there is no trading on MdhSEL since 2004, it is incumbent upon a stock exchange to supervise its trading members comply with the Rules, Bye-laws and Regulations of the exchange at all times during their period of holding of membership of the exchange irrespective of whether they trade or not. 4.17 I also note that MdhSEL is facing an acute financial crisis wherein even the payment of salary to the exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mprehensive risk management framework for the cash market in order to successfully and efficaciously address the market risk. However, the efficacy of the same will be dependent on efficient monitoring, surveillance and timely collection of margins by the Stock Exchange. Apparently, I note that there are only 7 employees in the exchange which includes only two in the officer cadre which according to me is totally inadequate to run a stock exchange which is a Self Regulatory Organization as well as first level regulator to its members / listed companies. Moreover, there is a prolonged vacuum at the top management wherein MdhSEL has failed to appoint a full-time Executive Director since April 2001. Mere existence of a stock exchange without having the basic requirements to function as a stock exchange would not serve any economic purpose towards trading, listing of companies, protection of interest of the investors. Moreover, the continued existence of the exchange is a regulatory burden on SEBI. 4.20 Apart from the serious irregularities observed in the inspection report, I find that there are lapses in the basic functioning and administration of the Exchange in terms of the SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es a trading platform nor serves any public interest in my view, it has ceased to perform the basic economic function for which it was set up. 4.24 In view of the above facts and circumstances, and in exercise of the powers conferred upon me under Section 19 read with Section 11 of the Securities and Exchange Board of India Act, 1992 and Section 4(4) of the Securities Contracts (Regulation) Act, 1956, read with the Government of India Notification number F. No. 1/57/SE/93 dated September 13, 1994, I hereby refuse to renew the recognition granted to MdhSEL. This Order shall come into force after 15 days from the date of the Order. 4.25 In view of this Order, since MdhSEL shall cease to be a recognized stock exchange, it is imperative to pass necessary directions in the interest of investors/shareholders of the listed companies at MdhSEL and in the overall interest of the securities market. I, therefore, in exercise of powers conferred upon me under Section 19 read with section 11 of SEBI Act, 1992 and section 4(4) of SCRA pass the following directions: 4.25.1 The money available in the Investor Protection Fund and Investor Services Fund of MdhSEL lying un-utilized shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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