TaxTMI 
TaxTMI 
TaxTMI 
Refusal to Grant Renewal of Recognition to Mangalore Stock Exchange.
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....003, 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 are liquid, which are to be considered towards....
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....ich 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 such action as it considered appropriate under the provision of the Section 4(4) of SC(R)A a....
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.... 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 to her on par with other candidates, and hence her selection should not be construed as having granted her any pr....
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.... 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 resolutions would be moved in the AGM to be held on September 30, 2003 to comply with the requirements and that the composition of the present Board was 6 elected directors a....
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...., 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 to sign the cheques. With reference to the same, it was stated that consequent to the VRS offered by the Governing Board in February 2002, the Exchange did not have any permanent employees, although ....
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....y 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 circumvent the earlier decision of non refund of the amount. The Governing Board stated that the computers were provided solely to facilitate trading on the national grid of the ISE, as the computers that were earlie....
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....g 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 suggestions contained in Part I of the report, for the inspection carried out in the year 2002, on which the renewal of recognition of MGSE was conditional. MGSE has failed to comply with 13 of the 18 suggestions made in the report. The details....
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.... 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. 12) The exchange should draw up a list of approved securities which are liquid and the same may alone be considered towards BMC deposited by the members. Infrequently traded scrips/below par scrips should not be accepted. Not implemented 13) Exchange has to ensure that the member brokers make good their shortfall in BMC within a reasonable period. Members failing to comply with this requirement shall be suspended immediately. Not implemented in time. 14) The Exchange should transfer 50% of the interest earned on 1% Security Deposit to Investor Protection Fund. Not implemented 15) The Exchange should prescribe contribution to IPF from members, based on their turnover as per Gol Directives dated 22.08.1985 Not implemented 16) The Exchange should not under any circumstances stop collecting the contributions from the members towards IPF as the members trade through ICSEIL and should continue to transfer 2% of the listing fees collected to IPF. Not implemented ....
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....Securities and 40% of its funds in the nationalized banks/ Scheduled Banks. 14. Thus, more than 60% of the funds of MGSE, were invested in a private mutual fund, without the prior approval of the Governing Board and in contravention of its then existing investment policies. I think it is pertinent to note that the said investment was ratified only after the investment was made and the investment norms were later amended to ratify such a deployment. I think it is also pertinent to state that there is no record of any discussions on the justification of deployment of such huge funds in one particular mutual fund, on the safety of the funds so deployed, or the analysis of the strength of the said mutual fund etc, being preliminary scrutinies which any prudent management council would have undertaken, for the safety and security of their funds. There is not even any mention in the minutes about the period for which such investment was to be deployed in the fund, quantum of return on the investments etc or any work sheets based on which such decision was taken. Seen in this context, any subsequent justification made by the Governing Board seems inadequate to counter the lack of adheren....
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....d duties as that of an Executive Director, despite the fact that the appointment of the said person had earlier been rejected by SEBI on the grounds of not meeting the requirements of an Executive Director in terms of qualification and experience, MGSE has not only deliberately ignored and circumvented the directions of SEBI in this matter but also exercised favor and bias for a particular candidate. I have also taken note that apart from this, her name, along with that of two other candidates, has once again been sent to seek the approval of SEBI in the matter of appointment to the same post for which she was once rejected by SEBI. I also note that the Exchange had mentioned in its submission that the declining trading activity and crunch in financial avenues were impediments in appointment of a suitable Executive Director. However, not once has the Exchange informed SEBI about the existence of such financial constraints in appointment of Executive Director and it is surprising to note that the Exchange has started facing such financial constraints after the issuance of showcase notice by SEBI. INDIRECT REFUND OF NON REFUNDABLE ONE TIME PAYMENT OF DEPOSITS PAID BY THE MEMBERS FOR....
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....her established by the fact that on comparison of the list of members who had paid the said ₹ 30,000 (which is about 52), and the list of members who had received the PCs (which is around 40), the latter list contains only the names of those members who had earlier paid the said sum to the Exchange. The Exchange has, in the process, incurred a total cost of ₹ 8 lakhs to benefit a select group of members only. I find that providing of personal computers to some select members, who did not trade in the Exchange for the last three years, allegedly for the purpose of enhancing their capacities and that too, at a time where financial condition of the Exchange was not sound and had also ceased to record any trades for more than three years, defies any logic. Furthermore, I have noted that there has been no increase in the members getting registered as sub brokers to trade through ISS so far, thereby raising doubts about the need to give PCs to members who were allegedly not trading either on MGSE or ISE. UTILISATION OF THE INFRA-STRUCTURE AND STAFF OF THE EXCHANGE BY THE ELECTED DIRECTORS FOR THEIR DAILY TRADING ACTIVITIES IN ISS 19. I have noted from the records that some ....
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....o a few non-members having trading relations with them. It is to be noted that a member of an Exchange who trades through the subsidiary of his Exchange, can only do so as a sub-broker. SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 do not permit a sub-broker to in turn have a sub-broker or permit his clients to act as a sub-broker. Despite the Regulation, the said arrangement was present in the Exchange. There have been instances of elected directors and members indulging in the act of utilizing the services of the staff of the Exchange on a daily basis, especially the EDP staff, in routing their trade orders through the Exchange terminal. It was noticed that the EDP staff of the exchange performed the duty of executing orders for the members, especially for Shri Lobo. It is distressing to note that the elected directors were found to misuse their powers and abuse their position in the Exchange and also cause erosion of the resources of the Exchange, for their own commercial needs and benefits. 21. The Governing Board of an exchange is entrusted with the duty of implementation and administration of the Rules and Regulations and directives of SEBI in the Exchange, so as to....
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...., on records. Going by the various instances of questionable acts and decisions of the Governing Board, which do not meet the requirements of law and ethics as detailed above, it is clear that the Board had acted as an authority unto itself, throwing to winds, the norms and ethics to be followed in running an exchange, while still keeping itself outside the purview of any financial accountability and responsibility. I have noted that little has been done to rectify these shortcomings. An exchange with such vulnerabilities can pose a systemic threat to the entire securities market. 24. It also appears that MGSE is not interested in reviving trading on the exchange, which, as per SEBI's advice in June 2002, can commence only after upon establishment of SGF by the exchange. However, MGSE is yet to initiate any concrete and realistic action towards the realization of the said condition. If MGSE was serious about reviving trading on the exchange, it would have prepared itself by setting up a SGF, modified the software to meet the current requirement of the latest trading and settlement cycle system, established connectivity with the depository etc. I have also noted that the electe....
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....ons carry significance even though 'MGSE' has not recorded any trading for the past few years, as certain issues like maintenance of BMC, submission of audit reports, collection of contributions from the members towards IPF etc are requirements which have to be complied with, by the members, at all times during their period of holding membership in an exchange, irrespective of whether they trade or not. Admittedly, the operational management is weak, if not virtually absent. In addition to these shortcomings, there are other factors such as the presence of 44 companies listed on the MGSE as on date, out of which 26 are listed in the 'MGSE' as regional companies. I find that almost all the companies are in compulsory demat mode for trading, whereas "MGSE" does not even have depository connectivity as on date. I also find that almost all these scrips are listed in either NSE or BSE where they are traded even as on date. I have also taken note of the fact that during the current inspection, about 7 companies had opted for voluntary de-listing from the Exchange. 28. Thus, it is evident that there is a huge gap between the resources currently available and the requireme....
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....f the absence of any realistic efforts on the part of the Governing Board for the revival of the exchange. If MGSE 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 also erode the confidence of the investors, which would in turn compromise the orderly development of the securities market. 31. When the activities of an exchange are carried out contrary to the interest of the investing public and in a manner which is adverse to the interest of the investors, members and the public; the same is bound to injure and damage their interests. Moreover, the failure of the Governing Board to ensure proper governance and implementation of the provisions of the SC(R)A, Bye-Laws of the Exchange and the SEBI directives, circulars etc could erode the confidence of the investors. The functioning of the 'MGSE' has created uncertainty and insecurity amongst the investors. 32. SEBI is mandated to ensure that there are adequate systems, procedures and effective management in an Exchange, which shall protect the interest of investors and develop the securities market. On a cumulative analysis of....