TaxTMI 
TaxTMI 
Withdrawal of the recognisition of Saurashtra Kutch Stock Exchange Limited.
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....06 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 respect to the deficiencies pointed out i....
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....e 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 Bye-laws of SKSE. Hence, SEBI issued a notice dated February 27, 2007, to the Council under Section 5(1) of SCRA, read with Sectio....
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....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 February 27, 2007 and submitted its report along with the recommendation to the Council on March 2, 2007. The Council in its meeting held on March 2, ....
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....ther, 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 major payments so as to ensure some kind of internal control. It was a well intentioned decision taken collectively by the Council in the interest of the Exchange. Howev....
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....s 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 brokers whose BMC has become insufficient as a result of deduction of outstanding fees have been advised to fulfill the requirement. It further informed the brokers that in case of their failure to f....
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....ed 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 the inspection report and the functioning of the Exchange. SKSE submitted that certain mischievous elements were spreading rumors and orally communicating incorrect information relating to the working of SKSE and its subsidiary....
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....ready 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 the SKSE as well the submissions made before me, during the personal hearing. 4.2 I note that the inspection conducted during June 07-10, 2006, focused on the overall management, monitoring of the working of the subsidiary by SKSE and the financials ....
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....f 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 Nedungadi to relinquish the post of Executive Director immediately which was relinquished by him on January 10, 2006. It is pertinent to note that Shri Nedungadi was considered for the post of Executive Director without fulfilling the basic educational....
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....n 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.) of the subsidiary. 4.7 I note that SKSE is not able to appoint a Chief Executive Officer (CEO) for its subsidiary since August 2005. I note that SKSE vide their letter dated October 14, 2005 recommended a person by the name of Shri Tarang Mehta as CEO for its subsidiary. However SEBI did not approve the name of Shri Mehta as CEO of the subsidiary and vide its letter dated November 04, 2005 advised the Exchange to re-commence the process of appointment of the CEO. However, SKSE vide letter dated December 24, 2006 once again recommended the name of Shri Mehta for the CEO of the subsidiary whose name was rejected by SEBI. Subseq....
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.... 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 member broker directors on the Governing Board shall not be eligible to sign cheques on behalf of the Exchange. I find that the Exchange has resorted to an ingenious manner of obviating the stipulations of SEBI with regard to financial powers exercised by broker directors which is in violation of SEBI Circulars dated March 4, 2003 and August 12, 1999 wherein in it has been mandated that the ED should be vested with adequate financial powers and that broker directors not to be authorized to sign any cheques or operate any bank accounts on behalf of the stock exchange. 4.10 I have noted that the Executive Director has not been extended adequa....
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....tc. 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 letter they have not even mentioned the details of the supplier/vendor of the software, the cost at which the same was procured, etc. Moreover, the various parameters of the software has to be validated, tested and confirmed in accordance with the various circulars of SEBI with regard to trading, settlement and risk management. Foremost among them is SEBI circular dated February 23, 2005 on the Comprehensive Risk Management Framework for the Cash Market. In terms of the said circular, the Stock Exchanges are required to put in place the necessary systems to ensure the operationalization of the comprehensive risk management framework with effect from M....
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....ng 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 nature; however SKSE by levying a penalty of only ₹ 50 towards non compliance has rendered it as ineffective. 4.16 SEBI vide circular dated February 11, 2003 has stipulated that the subsidiary shall have its own staff none of whom shall be concurrently working for or holding any position of office in the parent exchange. However, I note that most of the staff of SKSE is working concurrently at the Exchange and its subsidiary. SKSE has submitted that necessary steps have been taken to optimize the services of manpower and for better operational convenience and there is proper segregation of staff between SKSE and its subsidiary. 4.17 It was observed th....
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....ing 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 recognized stock exchange has to be in the interest of the trade and investors. However in the present case, I find this objective to be deficient as is evident from the current inspection. 4.21 Apart from the irregularities mentioned above, I have noted that SEBI has been receiving complaints about fraudulent transfer of shares worth ₹ 30 lakh belonging to two clients from the Depository Participant (DP) of SKSE Securities Ltd. to Matalia Stock Broking (P) Ltd., DP of Stockholding Corporation of India Ltd, during the month of December 2006. SKSE has submitted that a FIR was lodged with the police authorities immediately, and the culprits have been arrested. It is also....
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....n 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 the exchange. It is equally shocking to know that the exchange did not deem fit necessary to impose fine/penalty or any other disciplinary action on its members. 4.25 Knowing fully well that listing fee is an important source of income for an exchange, it is impossible to believe that the exchange has not put in efforts to recover outstanding dues amounting to a huge sum of ₹ 136.57 lakh from around 195 companies on the pretext that since there is no trading, companies are reluctant to pay listing fees. 4.26 SEBI has time and again impressed upon the stock exchanges the necessity to have an independent management devoid of any broker influence. However, I find that th....
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....tives/ 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 indicators of a stock exchange functioning in a manner against the interest of the public at large. 4.29 Considering the current scenario of the capital market, where only those institutions, which are capable of adapting to the rapidly changing market structure, alone can survive, SKSE with the aforesaid inadequacies even in the basic requirements to exist as a stock exchange, would only find itself redundant, especially in view of the absence of any realistic efforts on the part of the Council for the revival of the exchange. If SKSE is allowed to function in the present manner without any immediate remedial action, it would not only lose its relevance as a public institution but als....