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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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....inistration 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 exercise due diligence in eliminati....
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....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 mechanism (i) The inspection team was in....
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....2. (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 observations made in the SEBI Inspection Reports of 1999-2000, which again ....
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....aid President issuing a letter to the surveillance dept. BMC of the members had been shown to have a capital of ₹ 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 ₹ 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 to be invalid. Further, it was resolved that "the directors of PSE and PSE Securities should ....
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....okers 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 ₹ 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 issued a notice dated August 22, 2002 under Section 11 of the Securities Contracts (Regulation)....
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.... (5). Assuming (without admitting) the following allotment may not be classified in public holding: - Sanjay Agarwal 5,97,000 - Subodh Bhandari 1,30,300 7,27,300 (6). Total issue size 59,90,250 Less : (5) above 7.27.300 52,62,950 (7). % Post issue public holding 21.96% Thus it was clear that even if the applications of Shri Sanjay Agarwal and Subodh Bhandari would not have been considered in the public category, the offeror received subscription to the extent of about 22% from the public. (iii) The task of sorting of applications and ail the incidental work thereto was the responsibility of the Registrars and the overall responsibility of due discharge of the duties of all the intermediaries as per Rules, regulations and guidelines, lay with the Lead Managers. The Stock Exchange had a limited role to play in the whole procedure of the listing of securities and relied on the authenticity of various certificates/declarations made by the Intermediaries. (iv) HTL did not have a public holding of around 3%". The public holding was 25% / 22%. The requirement laid down by SEBI of having 20 shareholders per one lac of share capital was thus satisfied. Hence the observat....
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....ad done the business before the order was executed. The orders are matched by the system. The details of the executed transactions between the counter party brokers were known to the brokers after the execution of the trade. Hence the broker did not have any choice of selecting a counter party broker on the anonymous computerised trading system. (iii) The Exchange provides the trading platform to the members and investors to the trade and does not comment as to why a broker puts a high or low price, unless it is not within the stipulated bands predefined by the Exchange and SEBI. There was no bar for a broker or a client as to why he cannot offer/bid for a higher or lower price in particular scrip. Their role was to see that the trading was within the stipulated price band norms and no abnormal discrepancy was observed in the price movement of the scrip. (iv) The contention that the Exchange had not conducted any enquiry / inspection of books, was not true. Pune Stock Exchange had an online surveillance whereby the scrip movement was monitored by the staff deputed for the said work. No abnormal discrepancy was observed in the price movement of the scrip, hence there was no need t....
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.... were interconnected with other departments, Hence the dealing with the departments near the surveillance department could not be considered as the interference with the surveillance function. As such the brokers / Council members had not interfered with the margins, exposures or knowing positions. (ii) The Council members did not indulge in any interference with the surveillance function of PSE. Hence there was no basis to suggest that the Executive Director had shown a casual approach and attitude towards the Surveillance Department. The Executive Director took care of the responsibility given to him and there was no question of him showing ignorance or a casual approach towards the Surveillance Department. The surveillance function was never hampered at PSE. (iii) The Officiating Executive Director had pointed to SEBI certain instances about the earlier office bearers (President Shri.P.C.Mutha & Vice President Shri.Ashok Oswal) of the Exchange who had given certain instructions to the staff members. The said office bearers had stepped down and the Council had taken note of the same. The exchange ensured that the operations of the Exchange are carried out in a smooth manner and....
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....aintaining the documents required to ensure transparency, objectivity and accountability in the functioning of the said department. Improvements if any needed, would be incorporated on priority. (x) There was no leakage of any information from the departments of the Exchange. (xi) During the period 1/11/1999 to 31/3/2000 there was no trading in the scrips at the stock Exchange where the takeover took place. The monitoring for insider trading activity was looked into by Surveillance Department and the activities of takeover, preferential offers etc. was looked into by the Listing department. PSE flashed relevant BSE/NSE notices as and when received. Other major observations of the inspection (i) The practice of accepting the cheques for margin collection had been stopped. The debit was put directly to the member's bank account and maintenance of BMC is as per circular. Steps had been taken for obtaining the signatures of the members on the F.D. receipts for discharging the F.D's unconditionally in favour of the Exchange. The necessary notice in this behalf had been issued to the members. (ii) The scope and functions of Disciplinary Action Committee as suggested by SEBI ....
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....ncy and other conditions prescribed therein are fulfilled. In the present case, the AGM expressly passed the resolution to the effect that the vacancy may not be filled up and at the same time it was also resolved that the Board may fill the vacancy as they deemed fit. (ii) Initially there were delays in issuing the contract notes, since applicability of the requirement of contract notes was not clear, and PSES itself on its own account was prohibited to trade. Only sub-brokers who necessarily were the members of the Exchange and authorised to issue contract notes, were allowed to trade. Simultaneously they were downloading the soft copy of the contract notes to the sub-brokers terminals through the system. The errors were rectified and the company was now issuing the contract notes in time. Shortly the digital signature concept also would be rectified, which would totally eliminate the error for delayed delivery of contract notes. (iii) In some cases, a single trade was shown twice mainly on account of software error. The matter had been taken up with the software vendor SDG Software Technologies P. Ltd. and the error has been rectified even before inspection. (iv) Shri.A.P.Tri....
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....issions be also considered. He stated that being a small stock exchange, PSE was helping to spread the equity cult in the western region. PSE also has a subsidiary with NSE, where 80 sub-brokers were operational. The following submissions were further made during the hearing. (i) With respect to Home Trade, it was submitted that it had a high pitched ad-campaign. It was an offer for sale and the money was to go to the offerers. It was submitted that the PSE had complied with the normal requirements of Rule 19(2) (b) of the SC.R at the time of listing. The company's share price did not hit the circuit filter and the price was commensurate with the market. The settlements were smooth and there were no defaults. The charge that Home Trade had public holding of only 3 % was refuted and it was submitted that HTL had a holding of 22%. (ii) With respect to the issue regarding the allegations against the Ex-President and Ex-Vice President, it was submitted that they were no longer the Directors of the Exchange. As SEBI had already initiated action against both of them, they did not wish to make any comment in the matter. (iii) With respect to surveillance related functions, it was s....
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....e smooth functioning of stock exchange, had been observed even after the governing board had taken charge on 29/9/2001, it was submitted that the Board had ordered an inspection into Home Trade by an auditor. The report had been submitted to the BSE and SEBI, but nothing untoward was observed. It was further submitted that it was not the role of the Board to check the day-to-day activities of the Exchange. (x) As regards the issue of complaints made by the staff of the exchange regarding interference in the functioning of the surveillance of the exchange by the office bearers, the same were vehemently denied. It was submitted that steps such as segregating the surveillance department, depositing margins directly into the banks and the deployment of staff to the subsidiary had been taken. (xi) As regards the issue that the Board has failed to perform its job properly or that the SEBI directives had not been adhered to, it was submitted that systems were in place. There were no major defaults or complaints. In view of the same, the extreme measure of super cession was too strong. It was submitted that on behalf of the Board that all steps would be taken to ensure that lapses were c....
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.... opinion that the surveillance functioning of an exchange should be independent of other functional organs of the exchange. Strict restrictions should be in place for entry and access into the surveillance room. It is also imperative that the staff manning the surveillance department be adequately trained for carrying the surveillance activities properly. In view of the fact that the surveillance mechanism of the exchange has been found to lack these aspects, there has been a blatant violation of the SEBI circular LKS/236/2000 dated May 25, 2000. (iii) I also believe that collection of margin money and maintenance of base minimum capital are required to ensure that the transactions in the exchange take place safely without any defaults and without causing any loss to the investors who trade through the exchanges. Despite the same, I have noted that the exchange has been found to collect margin money by way of cheques. Further, the base minimum capital has not been maintained as per SEBI SMD Circular no. 19 dated July 2, 1999. The circular issued by the exchange on September 20, 2002, with respect to the direct debit of members account for the purpose of margins, has been done only....
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....ied out against the interest of the investing public and in a manner which is adverse to the interest of the investors, brokers and the public; the same is bound to result in the lack of protection of the interest of the investors. I have noted that the subsidiary of the exchange i.e. PSES which has been promoted by PSE itself, does not maintain the Customer Grievance Register in a proper manner such that there is no proper format in which the grievances are written in the register. Thus, the exchange has failed to exercise due diligence in respect of PSES, which is apparent in the deficiencies noted in the subsidiary. 11. The failure of the exchange to ensure proper governance and implementation of the provisions of the SCRA, Bye-Laws of the Exchange and the SEBI directives, could erode the confidence of the investors in a transparent and impartial working of the stock exchange. The reported instances of interference from the elected directors and brokers in the day-today functioning of PSE are bound to make it difficult for the exchange to function in accordance with the byelaws of the exchange and the SEBI directives. The failure on the part of the surveillance mechanism of the....