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TMI BlogWithdrawal of the recognisition of Saurashtra Kutch Stock Exchange Limited.X X X X Extracts X X X X X X X X Extracts X X X X ..... ter no. MIRSD/DPS III/PJ/70646/2006 dated June 30, 2006. 1.2. Securities and Exchange Board of India (hereinafter referred to as SEBI ) had conducted an inspection of SKSE during June 07-10, 2006, which focused on the overall management, monitoring of the working of the subsidiary by SKSE and the financials of SKSE. An inspection report was forwarded to SKSE by SEBI vide letter dated June 30, 2006 and SKSE was advised to place the report before its Council of Management (hereinafter referred to as Council ) and send an initial point-wise compliance report to SEBI on the observations made in the inspection report, within 21 days from the date of the receipt of the letter. SKSE was also advised to submit the quarterly progress on the compliance of the observation in the report, beginning from quarter ending September 2006, within 15 days of the end of each quarter, after placing the report before its Council. 1.3. SKSE furnished the initial compliance report to SEBI, vide letter dated July 24, 2006. A meeting was convened by SEBI with the representatives of the Council on August 23, 2006 to discuss the functioning of the Exchange and also the level of rectification, with resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd SKSE Securities Ltd. instead of delegating the same to OED. iv. SKSE failed to appoint a representative from the registered investor association in the IPF Trust. v. Created a post of General Manager to favor a particular individual. vi. Indulged in fraudulent transfer of shares worth ₹ 30 lakh belonging to two clients from the DP of SKSE Securities Ltd. to Matalia Stock Broking (P) Ltd. DP Stockholding Corporation Ltd, during the month of December 2006. 1.7. SEBI Nominee Director also expressed his displeasure on the manner in which issues were being handled by SKSE during board meetings and decisions were being taken without proper representation of Government Nominee Directors. 1.8. It is further observed that the Council approved payment of gratuity to the exemployees of SKSE without having any such provision in Employee Service Regulation of SKSE. 2.0 Show Cause Notice, Reply and Hearing 2.1 The above deficiencies were in violation of the provisions of SCRA, SCRR, the SEBI Act, 1992 (hereinafter referred to as the Act ), the Rules and Regulations made there under, the circulars/directives issued by SEBI and the Rules, Regulations and B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name the said SPF as SGF. 3.2 Failure to appoint Executive Director: It was observed that SKSE failed to appoint an Executive Director for the Exchange since September 2004. Further, SKSE resorted to strange means to fill the post of Executive Director by violating various SEBI directives. SKSE had appointed Shri Satishkumar Nedungadi as Executive Director who did not posses the requisite qualification as prescribed in the advertisement for the said post. In response to the above, SKSE submitted that Shri Amitkumar Bhalodi was acting as OED since February 14, 2007 in terms of the resolution adopted by the Council in its meeting held on February 13, 2007. After the resignation of Shri Nedungadi the incumbent OED of SKSE, it was imperative to entrust the day-today functioning and administration of SKSE and its subsidiary to someone so that normal working (i.e. pay-in/pay-out at NSE/BSE, margin collection from subbrokers/clients, DP activities, etc.) is not affected. Further, it is also submitted that the Council in its meeting dated February 13, 2007 reconstituted the CEO Selection Committee. Subsequently, the Committee interviewed the candidates on February 24, 2007 and F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of BMC above ₹ 1 lakh was never acted upon and has since been rescinded / withdrawn by passing a resolution at the Council meeting on March 7, 2007. Further, the Council was not aware of several reminders of SEBI as the same were not placed before the Council by the OED. 3.5 Financial powers exercised by broker directors It was observed that the Council at its meeting held on August 25, 2005 resolved that a committee of two broker directors to look after overall administration of the Stock Exchange as well as its subsidiary in violation of SEBI circular dated March 4, 2003 read with January 10, 2000. Further, the said committee was also vested with financial delegation of powers indirectly by authorizing them to sign vouchers of expenses of ₹ 5,000/- or more in violation of SEBI directives and which curtailed the operational freedom of the Executive Director. SKSE submitted that the Council adopted a cautious approach in view of the past experience wherein certain instances of abuse of such power was noticed. It was therefore, considered view of the Council that experienced Directors of the Council be associated with the approval process in respect of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per SEBI Guidelines to start online trading. It is also submitted that they already have necessary software, mechanism etc. for implementing T+2 RSS and T+2 RSS would be implemented as and when trading takes place on the exchange. 3.8 Non-recovery of dues to drain of Exchange resources It was observed that an amount of approx. ₹ 27.95 lakh was outstanding from brokers on various counts of which several brokers were also indicated to be active on the subsidiary. Moreover no effort has been taken by SKSE to recover the outstanding dues from the members other than resolving to render such members ineligible for voting at AGM. Further no efforts have been taken to recover outstanding dues amounting to ₹ 136.57 lakh from around 195 companies towards listing fees payable to SKSE. SKSE submitted that against ₹ 27.95 lakh dues from the brokers, about ₹ 20 lakh has been recovered on account of continuous follow up. For recovery of the balance amount, final reminders have been sent. It further submitted that SKSE deducted outstanding annual membership fee from base minimum capital of those brokers whose outstanding fee was ₹ 6000 or more. The broker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Audit Reports even after issuing notice, such matters will be placed before the Council and penalty may be imposed as decided by the Council. 3.11 Failure of the subsidiary to have its own staff It was observed that most of the staff of SKSE is working concurrently at the Exchange and the subsidiary which is in violation of circular dated February 11, 2003. SKSE submitted that at present the subsidiary has about 35 employees. In view to optimize the services of manpower, operational convenience and better utilization of manpower the staff of SKSE was used. However now there is proper segregation of staff between SKSE and its subsidiary. 3.12 Failure for valuation of shares at VaR basis It is observed that the valuation of securities given by the members towards BMC is done twice a month keeping a hair-cut of 30%, in violation of our aforesaid circular. SKSE has submitted that the Council in its meeting held on March 7, 2007 resolved to start valuing shares on a daily basis as per the rates of BSE/NSE. 3.13 SKSE convened a press conference on July 27, 2006 presided over by the OED and attended by two broker members of the Exchange to discuss the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities immediately, and the culprits have been arrested. So far, the Court has not sanctioned bail of the persons arrested in this case. It is also submitted that the financial loss is ₹ 12 lakh for which an insurance claim has already been filed. The police are investigating the matter and because of the pro-active action and dexterity shown by the Council, further loss was avoided. 3.16 In addition to the above, it was observed that the Council had approved the payment of gratuity to the ex-employees of SKSE without having any such provision in Employee Service Regulation of SKSE. SKSE submitted that it is well within the inherent powers of the Council to pay exgratia to senior employees as a mark of gratitude when they leave the organization after putting a number of years of service and especially when salary levels are comparatively low in this region. It is also submitted that the practice of payment of ex-gratia has since been discontinued. 4.0 Consideration of Issues 4.1 I have taken into consideration the facts and circumstances of the case and the material available on record including the show cause notice, replies and the documents submitted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circular is concerned. It will not be out of place to record that the exchange has desperately tried to improve upon and somehow fill up the glaring deficiencies and lacuna by arriving at such a na ve decision with regard to changing the name of SPF to SGF. I therefore conclude that SKSE has failed to comply with the aforementioned circular. 4.4 I note that SKSE did not have a full time Executive Director since almost two years. Further the Exchange has been resorting to strange means to fill the post of Executive Director in violation of SEBI directives. I find that the Council in its meeting held on November 18, 2004 had constituted a committee for the selection of the Executive Director without obtaining prior approval of SEBI in violation of SEBI circular dated January 10, 1996. Shri Satishkumar Nedungadi had worked in SKSE since July 1993 to September 1998 as a Manager (Market Operations), OED and Deputy General Manager. Shri Nedungadi was considered for the post of Executive Director of SKSE and was appointed without approval of SEBI on January 4, 2006. In the light of the above irregularity, SEBI vide letter dated January 6, 2006 advised the Exchange to advice Shri Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nedungadi was given charge of CEO (Off.) of subsidiary from Shri Bhalodi December 27, 2006 6. On resignation of Shri Nedungadi on February 13, 2007, Shri Bhalodi was given charge of OED of SKSE and CEO (Off.) of subsidiary February 14, 2007 I note that SKSE appointed Shri Amitkumar Bhalodi, aged only 23 years as OED of SKSE on February 18, 2006 He does not possess the requisite experience for the said post considering the complexity of the functions/market. Such an arrangement is inappropriate particularly since the subsidiary is active and an experienced person should have been considered for the said post. The entire series of events as narrated above smacks of some sort of collusion between the office bearers of the exchange/subsidiary and the Council of the exchange. Such a flip flop to fill the post of OED/CEO (Off.) is not appreciable all the more when the candidates are not professionally qualified nor have adequate experience. From the chronology of events, it is evident that the Exchange has been resorting to very strange means to fill the important post of OED of the exchange/CEO (Off.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf demonstrates its ill intention and respect to the directives of SEBI. 4.8.2 In another similar incident of violation of SEBI directives, the Council in its meeting held on March 22, 2005 had resolved to continue with existing Executive Director selection committee despite being brought to the notice of the Council by the then OED that SEBI had advised for reconstituting the Committee. Further the Council in its meeting held on January 04, 2006 resolved to form a committee comprising solely two broker directors in violation of SEBI circular dated January 10, 2000 to look after overall administration of the Stock Exchange and to take necessary decisions as may be required. 4.9 I find that the Council had authorized a committee comprising two broker directors to look after overall administration of the Exchange despite forming a Management Committee for ensuring smooth functioning of the Exchange as advised by SEBI. I note that SEBI vide circular dated March 4, 2003 (read with directions vide SEBI circular dated January 10, 2002) had categorically reiterated that no broker of the stock exchange shall be office bearer of an Exchange. The circular also made it clear that the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no trading at the Exchange since 1997-98 and therefore the Exchange did not adopt T+2 Rolling Settlement System and the Exchange would adopt the same at the time of starting trading. Further, SKSE also indicated that the circulars relating to trading settlement shall be implemented as and when trading activity commences on the floor of the Exchange. However, SKSE vide letter dated May 31, 2007 has informed that the exchange has started SKATE (Saurashtra Kutch Stock Exchange Automated Trading Environment) as per SEBI guidelines to start online trading. It is also submitted that the exchange already has necessary software, mechanism, etc. for implementing T+2 Rolling Settlement System and the same would be implemented as and when trading takes place in the exchange. I note that during the oral and written submissions, SKSE did not indicate of trading software being developed by them which would be in tune for implementing the T+2 Rolling Settlement System. The pace at which SKSE started SKATE to start online trading within a span of two months cast a doubt on the readiness and the ability of the exchange to implement the trading software. Further, in their instant lett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk management of the subsidiary company and shall set up appropriate mechanism for the supervision of the trading activity of subsidiary company and that such mechanism inter-alia shall include conducting of half yearly inspections of the subsidiary and 20% of its subbrokers and placing such reports before the Governing Board of the Exchange. It was observed that the Exchange did not conduct any half yearly inspections of its subsidiary. Further, Exchange has also not set up or followed appropriate mechanism for the supervision of the trading activity of its subsidiary as specified in the aforesaid circular. SKSE has submitted that Council in its meeting held on March 7, 2007 has appointed a Chartered Accountant to conduct the inspection of the subsidiary. I note that SKSE has admitted the lapse on their part that they had so far not conducted any inspection of its subsidiary. 4.15 Apart from the above, I note that for the financial year 2004-05, as much as 317 brokers of the total 399 brokers did not submit their auditor s reports to SKSE. Further for this non-compliance, SKSE levied a meager penalty of ₹ 50/-. I find that any penalty would generally be deterrent in na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorized vide Council resolution dated August 25, 2005 to look after overall administration of the stock exchange as well its subsidiary and to take necessary decision as required, in the same meeting the broker directors were also authorized to exercise financial powers over expenses of ₹ 5,000/- or more. There are also instances of financial irregularities wherein an amount of ₹ 25,000/- was debited to donation account but there was no supporting papers attached to the said voucher. It has also been observed that the fact relating to accounting and record keeping practice being followed by the exchange is not appropriate. I note that stock exchange being a public institution is expected to ensure proper record keeping of documents. The donation made without proper approval/documents is not appreciable and cast doubt on the handling of funds of the exchange. 4.20 From the material on record, it is apparent that the affairs of the Council of Management of SKSE are not being managed and conducted in a free and transparent manner but are being managed by couple of elected directors, who have misused and abused their position. The purpose of establishment of a recognize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27, 2007, I find that SKSE had substantially not complied with the observations stated in the inspection report. However, pursuant to the show cause notice dated February 27, 2007 SKSE convened a meeting on March 7, 2007 and adopted certain resolutions in conformity with some of the observations of 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, Bye-laws, etc. of the stock exchange. By their above actions, I find that SKSE complied with the observations stated in the inspection report only after a regulatory action was cast upon them. 4.24 In spite of the fact that there is no trading on SKSE since 1998, 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 an exchange irrespective of whether they trade or not. However, I find that certain observations like submission of audit reports, maintenance of BMC, collection / recovery of outstanding dues from the brokers etc. are not complied with by the members of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of interest of the investors and public at large as well as development of the capital market as a whole. It will not be out of place to record that SKSE has ceased to perform the basic economic function for which it was set up as there is no trading since 1998 and no fresh listing of companies. Moreover, the continued existence of the exchange is a regulatory burden on SEBI. 4.28 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 directives, circulars, SCRA and SCRR. Further there have also been non-compliances by SKSE of various circulars / directives/ instructions issued by SEBI time and again which displays an apparent disregard for statutory compliance requirements. I believe that it is imperative that an exchange should not only comply with the directives issued by SEBI and the provisions of law, but also ensure the smooth functioning of the exchange in accordance with law, business ethics, corporate governance etc and in tune with the developments of securities market. However, in the instant case, the deficiencies elaborated above are indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Securities and Exchange Board of India Act, 1992 and Section 5(1) 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 withdraw the recognition granted to SKSE. 4.33 In view of this Order, SKSE shall cease to be a recognized stock exchange and therefore, it is imperative to pass necessary directions in the interest of investors/shareholders of the listed companies in SKSE 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 5(1) of SCRA pass the following directions: 4.33.1 The money available in the Investor Protection Fund and Investor Services Fund of SKSE lying un-utilized shall be transferred to SEBI Investor Protection and Education Fund within 15 days from the date of notification of the order. 4.33.2 SKSE shall set aside sufficient funds in order to provide for settlement of any claims, pertaining to pending arbitration cases, pending nonimplemented arbitration award, if any, liabilities/claims of contingent nature, if any, and unresolved i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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