TaxTMI 
TaxTMI 
Order In The Matter Of Superseding The Board Of Directors Of Pune Stock Exchange Limited Under Section 11 Of The Securities Contracts (Regulation) Act, 1956.
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.... general functioning and administration of PSE, by the governing board which took over on September 29, 2001 was not carried out in accordance with the provisions the Securities Contracts (Regulation) Act, 1956 (for brevity's sake referred to as the Act) and the Rules made there under. It was also observed that the various circulars / directives/ instructions issued by SEBI under the provisions of the SEBI Act 1992, (hereinafter referred to as the SEBI Act) had not been complied with by the PSE. Further the inspection of the PSE Securities Limited (hereinafter referred to as PSESL) which is the subsidiary of PSE, was conducted in March 2002. The inspection revealed serious irregularities and interference of members of governing board of PSE in finding of PSESL. 2. The serious irregularities / lapses found during the said investigation and inspection are briefly mentioned below: In the matter of the listing of the securities of Home Trade Ltd. (i) The offer for sale of the shares of Euro Asian Securities Ltd. (name subsequently changed to Home Trade Ltd.) did not receive the minimum public subscription of 25% of post - issue paid up equity capital. (ii) PSE failed to....
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....the total purchase as well as total sell transactions in the scrip in PSE, which indicated that only a few brokers mentioned above were actively transacting in the scrip of HTL on the PSE. Thus there was neither a significant number of market participants on the exchange nor was there the possibility of true discovery of price in the scrip. (iii) Several instances of counter-party matching system were noticed between the above mentioned brokers. It was noted that, these brokers put buy orders at rates which were higher than the prevailing market price or last traded price in the scrip at the time of entering the orders. It was also seen that the price had moved up significantly with very low volumes (iv) Enquiries conducted with PSE revealed that PSE did not take any risk containment measures such as imposition of special margin, putting the scrip on spot basis, suspension of trading in the scrip, indefinite suspension to curb/check this artificial price rise, etc. PSE did not conduct any inspection of books of any of the aforesaid brokers, with a view to ascertain the genuineness of the transactions of the brokers and their clients in the scrip of HTL. Surveillance mec....
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....accounts for margins vide circular dated September 20, 2002. (ii) Maintenance of Base Minimum Capital was not as per SEBI SMD Circular no. 19 dated July 2,1999. The Fixed Deposits were not fully discharged. Instead a "no objection certificate" of the member was required before the same could be realised by the PSE. As a result the PSE only had a piece of paper, in the event of a member refusing to give the "no objection certificate". (iii) PSE did not monitor the compliance by the various companies as regards the conditions for continual listing on account of the lack of staff. (iv) There was sharing of staff with PSE Securities Ltd. (subsidiary of PSE). The staff was withdrawn from vital regulatory functions of PSE such as margin collection, monitoring of the compliance by the companies with the conditions of the listing agreement, inspection of members' books and the follow up action thereto. These staff of exchange were deployed for the work of PSESL. Thereby compromising with the regulatory role of the Stock Exchange. (v) The scope and functions of the Disciplinary Action Committee had not been finalised. PSE had failed to implement the suggestions and observati....
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....ident to different brokers on an arbitrary basis. (ii) Trading limits had been fixed by said President issuing a letter to the surveillance dept. BMC of the members had been shown to have a capital of Rs. 1 lakh, though the said capital had not been actually brought by the member. The exposure limit of different members had been arbitrarily fixed. (iii) Directions were given by the President to the effect that margin need not be collected from the members of the PSE Securities Limited. The exemption, upto Rs. 10,000/- towards the mark-to-market margin was granted vide note dated July 6, 2001. For the allegations against the Ex-President mentioned above, a separate show cause notice was issued vide SEBI letter dated September 27, 2001, and the same is being processed, separately. MAJOR OBSERVATIONS OF THE INSPECTION OF PSE SECURITIES LTD, SUBSIDIARY OF PSE (hereinafter referred to as PSESL): (i) A resolution was passed to the effect that the retiring directors be not re-appointed and the vacancies thus caused may be filled by the Board of Directors as they deem fit. The validity of the above resolution, in light of the provisions of the Companies Act, 1956 was found t....
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....s no formal system of changing the trading/exposure limits of the sub-brokers. The sub-brokers directly deposited the cheques for additional capital with the Surveillance Department for which no record was maintained. (vii) It was observed that no margin was collected in case the margin obligation was upto Rs. 1.00 lakhs. Margins were collected by way of cheques also. There are instances wherein cheques had been dishonoured and the amount was yet to be collected. (viii) No formal procedure was in place for intimation of the securities paid in before the settlement day to the surveillance department for release of the margins. The early pay-in statement was sent to the surveillance department on a plain paper without any authorization/signature of the concerned official. (ix) In case of default where the obligation was between the sub-brokers themselves there was no system of auction. PSES followed a practice of closing out the deal between the sub-brokers at the highest price for the scrip as on the day of the auction, i.e. the settlement day. This process did not automatically penalize the defaulting sub-broker. 3. In view of the irregularities mentioned above, SEBI is....
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.... 29,95,125 (ii). Subscription received (after rejection) shortfall transferred to next category 6.53.900 23,41,225 23.41.225 53,36,350 (iii). Allotment made 6.53,900 53,36.350 (4). % of Post-issue public holding 25% The shares of Home Trade Ltd. (HTL) were also listed on Bangalore Stock Exchange (BgSE) and BgSE pursuant to the grant of listing permission to the HTL. Public Holding includes, holding by individual Indian public and the private co....
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....e Council is limited to exercising overall control over the smooth functioning of the organization as a whole. It is the duty of the council to authorise a qualified and experienced person to supervise and comply with the formalities related to different functions of the working of the stock exchange. The routine matters of the exchange such as listing of a particular company were carried out by the designated officers and were generally not referred to the council. The concept of "Management by exception" was observed by the PSE and the decisions taken in respect of delegated authorities were only reported to the council. Investigations into the price rise off HTL (i) During the period between Nov 1999 to March 2000, out of an average 80 active brokers, 26 brokers were trading in the scrip of HTL i.e. almost 33% brokers of the Exchange were dealing in the shares of HTL (during the period 15/11/1999 to 31/3/2000). The rise in the scrip of HTL was commensurate with the market trend, in as much as it was a free market where brokers and clients placed orders at their will and price rise was neither suspicious / abnormal considering the prevailing trend of the stock market. (i....
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....estors for non receipt of shares purchased by or non receipts of payment for the shares sold. The investors interest has been duly protected and no investor suffered any loss. Accordingly, there was no substantiation as regards the charges related to non-inspection of books and related adverse observations. (v) Major observations of the surveillance inspection (i) The contention by SEBI that the inspection team was informally informed that the Council Members indulged in daily interference with the surveillance function was not correct. Since the Surveillance Department, MoP department and Systems department were on the seventh floor, the surveillance of PSE and PSESL was looked after by the staff in the said department. At times, due to some technical problems to the brokers, such as then inability to see their exact trading position on their terminal, or their desire to square up the position at the fag end of the day if there was a power failure, or if their machines got logged off / closed, for other reasons like taking the reports, loading the trading software on their machines, depositing letters/cheques etc, members did come to deal with the departments like MoP or sys....
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.... the pay-in pay out had been automated and due to online trading, all the utilities were available at a touch of figure on the machine. Further in the last couple of months, the trading turnover at the local segment of the PSE, had become minimal or almost nil. Exchanges and the departments at the Exchanges should be compared with the Exchanges of the size of PSE. (vi) On account of the the surveillance department and market operations (MoP) department adjoining each other, member brokers visited the department for giving the cheques for margins and increasing the capital. This practice had been stopped and now the direct debit authority letters were taken from the members. (vii) Upon enquiry with BSE and NSE as to whether they conducted surveillance training, they were informed that no such training module was designed by BSE and NSE for giving training to the surveillance staff of other Exchanges. In view of the same, the Exchange couldn't send the staff members for training. (viii) The Exchange had implemented the SEBI circular dt.25/5/2000 and informed SEBI vide letter No.PSE/121/2000/2770 dt.31/5/2000 that the Exchange has installed Stock Watch System at a cost of....
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....ent Council of Management has already rectified and put into place a transparent model system for collecting mark to market margin, VAR margin, allowance of gross exposures, early pay-in etc. on the lines of MABC concept which was implemented by NSE. In fact the operations of PSES were being run as a mini NSE and would be a model for other subsidiaries of the Exchange. These initiatives had been taken even before being pointed out by the inspection team. Allegations Against The Ex-President Shri.P.C.Mutha The Council stated that both the ex-president and ex-vice president were no longer the Directors of the Exchange and since separate show cause notices had been issued to them directly by SEBI, they wished to refrain from making any comment in the matter. The current PSE Council of Management was constituted on 29/9/2001. In terms of the principles of double jeopardy, the council could not be held responsible for acts of omission and commission of the previous office bearers who were served separate show cause notice by SEBI. Major observations of the inspection of PSES (i) Section 255 and 256 of the Companies Act provides for the retirement of directors by rotation and....
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....ely stopped. The sub-brokers bank account was now first debited, and after ascertaining that the bank had transferred the amount to the company's account, the sub-brokers trading limits were thereafter increased. A specific system, had been implemented which was on the basis of NSE's MABC (Margin Adjustable Base Capital) concept. (vii) SEBI's allegation that no margin was collected was incorrect. Margin was collected on T + 1 basis from the sub-broker / member, if the loss was less than Rs. 1.00 lacs. Where the Member-to-Member loss exceeded Rs. 1.00 lacs, the sub-broker / member was required to pay the Margin on the same day itself. This was mainly due to the late reporting by the UTI Bank Limited and had been rectified. 6. The Governing board of Pune Stock Exchange (PSE) represented by Shri Manish Rangari, ED (Officiating), Directors -Shri Mahajan, Shri Paresh Mehta, Shri Sanjay Shah, Shri Narendra Palrecha, Shri Sameer Gandhi, Public Representative - Shri Kadlaskar, Advocate - Shri J.J. Bhatt, attended the hearing held on September 16, 2002 7. Shri Bhatt, who made most of the representations, submitted that the show-cause notice was mainly issued in the back....
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....ses of printing of contract notes etc. might have taken place but no punishment ought to be issued for the same. Adequate care had been taken to implement the MABC system - an NSE based system. PSE was the only subsidiary to adopt the system and they had moved a step ahead of T + 1 basis, that of pre-paid system. There had been no defaults and only as few arbitration matters were filed. (viii) As regards the issue of HTL, and the issue of the exchange enforcing the listing norms when a company failed to comply with the same, it was submitted that at the time of listing, no harm was caused to the exchange or to the public and most of the issues had been raised only post facto. As regards the issue of whether the stock watch system was potent enough to detect abnormalities, since an amount of Rs. 2000 crores was at stake, the issue of 99% trading on the scrip and concentration of trades by a few brokers, it was submitted that the issue was discussed by the Governing Board. All the technology shares at that time were skyrocketing. 26 brokers out of 80 active brokers were trading in the scrip. The concentration of trading in the scrip, if any was not unusual. The normal distribution....
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....tal of the company. Further the exchange failed to carry out due diligence in eliminating applications made by the promoters i.e Shri Sanjay Agarwal and Shri Subodh Bhandari in the public category, although Shri Sanjay Agarwal had been shown as a promoter in the prospectus, holding 10 shares and who had signed the listing agreement on behalf of HTL with the PSE. It is apparent that the Exchange has failed to rectify this irregularity or take appropriate action for the wrong declaration made by the company. (i) I have noted the price rise in the scrip of HTL during the period between December 10, 1999 to January 20, 2000 wherein the price of the scrip increased from Rs. 320/- to Rs. 720 in a span of 40 days i.e. i.e. during 27 trading days in six settlements of PSE. I have noted that several brokers had put buy orders at rates which were higher than the prevailing market price or last traded price in the scrip at the time of entering the orders. The significant price rise despite very low volumes clearly indicates that the exchange had failed in effecting appropriate surveillance measures in order to check whether the rise was on account of a true discovery of price in the scrip ....
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....nly a few such irregularities. 9. It is thus clear that the exchange has committed serious irregularities and that there have been several lapses in the matter of listing and surveillance functions. Effective and preventive steps as regards the general functioning and administration of the exchange have not been carried out in terms of the provisions of SCRA and the rules made thereunder. The various circulars /directives/instructions issued by SEBI under the provisions of the SEBI Act, 1992 have not been complied with by the exchange. Apart from a non compliance of SEBI circulars, there also appears to be a disregard for complying with the same. This is apparent in the areas of the regulation of the broker members and the exchange. I believe that it is imperative that an exchange should not only comply with the SEBI 's directives and the provisions of law , but also ensure that in the smooth functioning of the exchange, the risk management should be carried out smoothly in accordance with law and in tune with the securities market. However, instances of permitting brokers to have easy access to the surveillance department, not monitoring the steps or having a desired stock ....