TaxTMI 
TaxTMI 
Refusal to renew the recognition of the Magadh Stock Exchange Limited.
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....ng 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 Execut....
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....y 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 08, 2007 the....
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....onths, 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 al....
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....e 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 of SEBI will be realize....
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....dy provided to the members trading through ISS. MdhSEL charged turnover fees @ 0.004% of the total monthly turnover of the members and Rs. 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 facility are being recovered. 3.12 In addition to the above irregularities, several instances were observed where functioning of MdhSEL was contrary to the directives/guidelines issued by SEBI from time to time. Some of these are mentioned as under: 3.12.1 Commencement of trading without setting up of SGF/TGF SEBI vide letter dated June 25, 2002 advised ....
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.... 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 record which includes the show cause notice, replies and the documents submitted by MdhSEL as well as the oral submissions made before me during the personal hearing. 4.2 At the outset, I note that the inspection of MdhSEL was carried out with an objective to ascertain whether the exchange has complied with the conditions /guidelines etc. issued by SEBI / Governm....
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...., stated that the Exchange may reduce the BMC from the existing Rs. 2 lakh to Rs. 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 exchange has to monitor the capital adequacy norms prescribed by SEBI on an ongoing basis. Also, MdhSEL is responsible for carrying out appropriate due diligence with regard to its members' compliance under various applicable laws, rules and regulations and ensure compliance with the same. I note that merely issuing a circular to members asking them to regularize the BMC would not....
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....hange 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 COM of MdhSEL, the COM, was superseded by SEBI under section 11 of SCRA for a period of one year w.e.f. December 8, 1997 and was extended up to June 7, 2000. During this period, due to weak financial position of MdhSEL and on its request, SEBI sanctioned a total refundable financial support amounting to Rs. 12.32 lakh. MdhSEL till date has repaid only Rs. 7.82 lakh to SEBI ....
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....me 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 advised MdhSEL to ensure that it shall not commence trading without establishing the SGF/TGF duly approved by SEBI. This has been the ongoing condition for renewal of recognition since December 11, 2003. However, on the following occasions, MdhSEL commenced trading without setting up SGF/TGF, duly approved by SEBI: (i) November 2003: During the inspection conducted in November 2003, ....
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....e 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 completion of the disciplinary proceedings of MSEA and pending SEBI investigations, Shri C.M. Pandey shall not be allowed to perform any function which has any bearing on the securities market, or with any institution connected with the securities market." Accordingly, MdhSEL had initiated disciplinary proceedings and appointed an enquiry officer. Based on the report of the enquiry officer, the COM has informed that Shri CM Pandey has been dismissed from the services of the exchange. I note that setting up of SGF was a condition precedent for granting renewal of recognition to MdhSEL. From the chronology of events, it is observed that this pre condition has not been satisfied by MdhSEL even after granting several extensions ....
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....d 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 existing staff and officers (read 7 employees) is a big task. Yet, MdhSEL displayed lethargy in recovering outstanding dues from its member brokers as well as the listed companies since 2004-05. MdhSEL has, of-late, launched a vigorous campaign to recover the dues from the members as well as listed companies. However, it is dis-heartening to know that MdhSEL has acted only when told to do so by SEBI and has recovered only a sum of Rs. 4,40,000/- out of the total dues of Rs. 33,22,000/- as per their letter dated January 10, 2007 which is 13% (approx). 4.18 It is imperative to mention that MdhSEL can commence trading only after establishment of SGF by the exchange and duly approved by SEBI. I note that the SGF proposal of M....
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....ving 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 directives, circulars, SCRA and SCRR. Further there have also been non-compliances by MdhSEL of various circulars / directives/ instructions issued by SEBI time and again which displays an apparent disregard for statutory compliance. 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 indicators of a stock exchange functioning in a manner against the interest of the public at large. 4.21 Considering the current capit....