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TMI BlogRefusal to Grant Renewal of Recognition to Mangalore Stock Exchange.X X X X Extracts X X X X X X X X Extracts X X X X ..... g on the 8th day of September 2003, subject to the condition that all the suggestions made in Part I of the report on inspection of MGSE, conducted during August 2002, be complied with, by MGSE, within 2 months from the date of notification of the renewal. 3. Subsequently, an inspection of MGSE was conducted from August 6-9, 2003, in order to determine whether the exchange should be granted further renewal of recognition, after expiry of the renewal granted till September 08, 2003. During the course of the said inspection, the status of compliance of the suggestions made in the previous inspection report were specifically looked into and it was observed that MGSE had implemented only 5 suggestions completely, while the following 13 suggestions had not been implemented: i) Setting up of the Settlement Guarantee Fund, as advised by SEBI Circular dated 09.06.1997. ii) Filling up the post of Executive Director immediately, by a suitable competent person with professional qualification in the area of finance, adequate post qualification experience in the financial sector or Capital market with a proven track record. iii) Drawing up a list of approved securities which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s resources and inadequate provisioning of software for T+3/T+2 trading system etc, which can have serious ramifications on the functioning of an exchange. This non compliance of suggestions on which the renewal of recognition was conditional and deficiencies/flaws in the management of the affairs of the Exchange is in violation of the provisions of SC(R)A, the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as the 'SC(R)R'), 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 Bye laws of MGSE. 5. Hence, SEBI issued a notice dated September 8, 2003, under Section 4(4) of SC(R)A, to the Governing Board of MGSE, calling upon them to show cause as to why the request for renewal of recognition of MGSE should not be refused. SEBI advised them to reply to the notice within 15 days from the receipt of the same. They were also advised that in case they failed to reply to the said show cause notice, SEBI would be constrained to presume that the Governing Board has nothing to say in the matter and SEBI would be free to take suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owers to her which were such as could be exercised and discharged only by an Executive Director of an Exchange. In response to the said charges, the Governing Board submitted that as per the directive of SEBI, sincere attempts had been made to appoint an Executive Director from amongst the applicants, while also keeping in view the financial impact on the Exchange, the declining trading activity and the crunch in the financial avenues of the exchange. Defending their appointment of Ms. Pais, it was submitted that among all the applicants, she was found to be suitable by the Selection Committee for appointment as Executive Director. Since SEBI turned down the said appointment, a fresh attempt was made for selecting the Executive Director of MGSE. While seven candidates responded to the advertisement, only four candidates turned up for the interview and out of these, the names of the three candidates, which included the name of Ms Pais, were forwarded to SEBI vide letter dated June 02, 2003 along with the report of the Selection Committee dated May 31, 2003. It was submitted that as Ms. Pais was one of the candidates who had turned up for the interview, an opportunity was granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had had no trading in the last four years, the members of MGSE were trading only through ISE, and the substantial expenditure expected to be incurred on the modification of existing software or procurement of new software to meet with the T+3 settlement requirement, the proposal to modify the software had been postponed. However, steps were now being taken to update the trading software to meet the said requirement by November 15, 2003. 7.9 Byelaws relating to arbitration : As regards the amendment of the byelaws relating to arbitration, it was stated that necessary steps had been taken to amend its Byelaws on the lines of the new Arbitration Act. 7.10 Amendment of Article / Byelaw for treatment of claims of investors at par with those of member brokers as per SEBI directive: It was stated that the required changes had been effected for the said purpose, through a resolution passed at the Board Meeting held on November 04, 2002. 7.11 Failure to maintain the composition of the Council of Management and the Statutory Committees in the prescribed ratio of 50:50 and 60:40 respectively: With reference to the same, it was initially submitted that necessary resolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Board, at its meeting held on August 23, 2003, had taken a decision to transfer ₹ 18 lakhs from J. M. Mutual Fund to RBI Relief Bonds and had also decided to withdraw ₹ 20 lakhs, which were held in Fixed Deposits in private sector banks, and invest the matured amount in RBI Relief Bonds. Thereafter, the Governing Board, at its meeting held on September 20, 2003, passed a resolution to reduce the exposure to a single mutual fund. The Exchange has submitted during the personal hearing that the minutes on the issue of investment in J M Mutual Fund were not fully recorded and hence, did not include the discussions on the said subject. 7.15 Temporary employees authorized to sign cheques: The Governing Board had conferred the power to sign cheques, on behalf of the Exchange, to three temporary staff members, contrary to the directive issued by SEBI vide circular dated December 20,2001, to the effect that only authorised executives of the Exchange should be authorized to sign cheques upto such amount as may be decided by the Board and for amounts above the specified limits, the office bearers of the Exchange, including the Executive Director, should be authorized t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir office and the Exchange, was a contingency pool arrangement available to all their members. No extra or special facilities had been extended to Shri Lobo. On the day of the Inspection, the back-up facility had been extended to him only upon his request, as his terminal had lost connectivity. It was also stated that transaction fees were collected from all the members trading though ISS, based on their turnover i.e. ₹ 3 per every lakh and in slabs thereof. 7.17 Indirect refund of non refundable one time payment of deposits paid by the members for registration in ISE : It was observed that fifty two members had paid a one time entry fee for participating in trading through ISE. Subsequently, some of the members who had not taken up trading in ISE, had requested for refund of the said sum. However, the Governing Board, in its meeting held on September 22, 2001, decided not to refund the same as it was a one time entry fee for obtaining trading rights on ISE. However, subsequently, the Governing Board provided PCs worth ₹ 30,000/- to all those members who had submitted the one time entry fee to obtain trading rights at ISE. This appears to be an act meant to ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture was being used to log on to ISE by a non member, which was illegal and unauthorized. In reply to the same, it was contended that ISE had allowed its sub brokers to have as many trading terminals as one required, after seeking its prior permission. In the said case, Shri Lobo had taken the permission and authorization from ISE to have four terminals, each to be operated by authorized persons and thus Shri Pujari and Shri. Prakash had been authorized to operate two of his terminals. 8. In addition to the above, it was also submitted by MGSE that although there was no trading on the floor of MGSE, a number of services were being offered to and availed of, by the local investors and hence, the proposed action under section 4(4) of the SC(R)A be dropped and the recognition of the exchange be renewed. 9. I have taken into consideration the facts and circumstances of the case and the material available on record, which includes the show cause notice, replies and the documents submitted by the Governing Board as well as the submissions made before me, during the personal hearing. 10. I find that there is substantial non-compliance by MGSE with respect to the various sugge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a proven track record. implemented 8) The Exchange should take necessary steps to amend its bye-laws with regard to Arbitration on the lines of the new Arbitration Act. Being implemented 9) The Exchange should amend its articles/bye-laws to provide for treating the claims of investors at par with those of member brokers as per SEBI directives. Proper time frame should be fixed for processing and settlement of claims and the same should be strictly complied with. Being implemented 10) The exchange should ensure that the sub brokers affiliated to the member brokers of the Exchange enter into the revised agreement as prescribed by SEBI vide letter dated May 23, 1997. The arrears of registration fees from the sub brokers concerned should be collected at the earliest and remitted to SEBI. Not Implemented 11) The Exchange should expedite setting up of Settlement Guarantee Fund, as advised by SEBI Circular dated 09.06.1997. Not implemented in time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been complied within the time frame specified by SEBI, at the time of granting renewal of recognition. The Exchange appears to have been negligent and casual in its approach towards the implementation of these suggestions. Even if the delay in implementation of the suggestions was to be condoned, I find that the current inspection has revealed several other serious irregularities in the conduct of the affairs of MGSE, some of which are in breach of even the basic requirements of law and ethics, as expected of a Governing Board of an Exchange. INVESTMENT POLICY 12. In this context, I have noted the fact that during the course of Inspection in 2002, MGSE was found to have invested about 90% of its total funds, amounting to ₹ 1.06 crores, in scheduled commercial banks like Vysya bank, Karnataka Bank and Global Trust Bank and the balance 10 % was deployed in a mutual fund i.e. JM High Liquidity Fund. 13. However, the Governing Board, in its meeting held on May 31, 2003, ratified the decision to invest an amount of ₹ 37.50 lakhs in JM Income Fund and ₹ 15 lakhs in JM High Liquidity Fund and while doing so, it also modified its earlier investment policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been pointed out that MGSE had appointed an Executive Director without complying with the stipulated directives/Rules and procedures required to be followed in the matter and also without the prior approval of SEBI. Since no prior approval was sought from SEBI for appointment of Executive Director, the incumbent so appointed was directed to relinquish the office immediately, vide our letter dated August 26, 2002 and the Exchange was directed that steps should be taken afresh for the appointment of a new Executive Director. I find that the Exchange has subsequently forwarded the name of the same incumbent for the post of Executive Director, for SEBI's approval. The Exchange was informed vide letter dated September 20, 2002 that the incumbent did not satisfy the minimum requirements with respect to an Executive Director of a stock exchange, in terms of experience in Capital Markets / Securities Market etc and was directed to call for fresh names for the post of Executive Director. 16. However, I am distressed to note that although the incumbent resigned from the post, she was re-appointed immediately as a Chief Manager and such duties and powers were assigned to her whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Governing Board reiterated that such a sum could not be refunded. However, in the meeting of January 28, 2002, one of the sitting elected directors, Shri N M Shenoy, requested the Governing Board to consider throwing open trading on ISE/ISS to all members without insisting on the initial payment of ₹ 30,000/-, given their improved financial position and the need to improve the volume of trading by the members, through the newly formed subsidiary of ISE. Subsequently, in the meeting held on March 02, 2002, the said director once again proposed that it would be necessary to provide all members of MGSE with a PC to enhance their capacities at a cost of ₹ 30,000/-each and agreeing to the suggestion, PCs were provided by MGSE to its members. 18. Even though this decision of the Governing Board, read in isolation, would appear as a normal and development oriented decision, when the same is linked to the earlier series of discussions regarding the refund of non refundable portion of ₹ 30,000/- paid by the members, it can be inferred that the decision to provide each PC at the cost of ₹ 30,000/, was only an act to circumvent the prohibitive decision taken e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the other terminal was being used by the remaining members. Similarly, an exclusive ISDN line had been provided to one of the other directors, Shri Norbert Morris Shenoy, trading in the name of M/s Arunanjali Securities. The entire fixed cost of providing the VSAT, ISDN lines, servers, exclusive terminals was borne by the Exchange and there was no express provision or arrangement with the ISE or ISS for that matter, for the Exchange to provide such facilities to its members. In addition to this, the Exchange also had to bear the recurring cost of providing such facilities, e.g telephone charges, electricity charges, charges towards maintenance of the servers, terminals etc. I have noted from the inspection report that till recently, the Exchange was not collecting any charges from the members. The exchange has recently started collecting very nominal charges which is allegedly far lower than the cost that was actually being incurred by the exchange. Thus, an arrangement existed, whereby enormous subsidy was offered to some members causing a drain on the resources of the Exchange. Of the 8 brokers who accessed the ISS through the Exchange's server, three were found to be prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his power on 3 staff members of the Exchange, who were not even in the permanent employment of the Exchange but were employed only on contractual terms and on assignment basis, which is akin to casual employment. It is apparent that any casual or temporary employee would not have any accountability or responsibility for their acts of omission or commission, if any. These employees, without the necessary authorization, were also being asked to look after various works pertaining to operations and administration, which included market surveillance, accounts, EDP, legal, listing, underwriting and investor grievances, in the absence of any permanent employees in the exchange. I have noted that without the necessary discretion to issue any cheques, these temporary employees were issuing cheques on a regular basis and had even authorized the transfer of huge funds of the Exchange to a private mutual fund, without the express approval of the Board, based solely on the instructions of a single director. Even the annual returns of the Exchange to be filed with the RoC/DCA were signed only by one of these contractual employees and not by any directors, while the notice of EGM had been issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est. However, in this case, this objective seems to have been undermined, as is evident from the findings of the current inspection. 26. Apart from the irregularities mentioned earlier, I have noted that the total number of members in the MGSE has been reduced from the previous 80 to 69, as on the date of inspection, with not even one of them being active on MGSE. Out of this 69, 12 are trading through ISS of ISE, as on date. This state of affairs is indicative of the fact that the existing members are not interested in reviving the trading in MGSE. Moreover, as mentioned above, the Governing Board has not taken any effective steps for the revival of the exchange. I have also noted that MGSE has not recorded any turnover during the last four years (from 2000-01 till date) and the current trading and settlement system is available only on paper in the exchange. Further, without setting up of SGF as per the SEBI circular no SMD/POLICY/Cir 13/1997 dated June 9, 1997, the exchange cannot begin trading on its floor. Even though Exchange had submitted that there was a Broker Protection Fund created for similar purpose, it is pertinent to note that no proposal for such a fund was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading, no fresh listing and above all there are companies seeking voluntary delisting. 29. Thus, apart from the serious irregularities noted in the running of the MGSE, there are lapses in its basic functions and instances of non initiation of effective steps for the general functioning and administration of the Exchange in terms of the provisions of SEBI directives, Circulars, SC(R)A and the SC(R)R. There have also been non compliances by MGSE of the 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 case of MGSE, the deficiencies elaborated above are indicators of a stock exchange functioning in a manner against the interest of the public at large. 30. Considering the current scenario of the capital market, where only those institutions, which are capable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to MGSE. This order shall come into force after 3 weeks from the date of the order. 34. In view of this Order, MGSE 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 MGSE 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(1) of SEBI Act pass the following directions:- 1) The money available in the Investor Protection Fund and Investor Services Cell of MGSE shall be utilized only for the purpose for which these funds have been created, as per the Articles of MGSE. Any pending claims of any investors should not be appropriated for any other purpose or for payment to the members/shareholders of MGSE. 2) MGSE shall set aside sufficient funds in order to provide for settlement of any claims, pertaining to pending arbitration cases, pending non-implemented arbitration award, if any, liabilities/claims of contingent nature, if any, and unresolved investors complaints/grievances lying with the exchange, on the date of this order. 3) The companies which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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