TMI BlogOrder In The Matter Of Superseding The Board Of Directors Of Pune Stock Exchange Limited Under Section 11 Of The Securities Contracts (Regulation) Act, 1956.X X X X Extracts X X X X X X X X Extracts X X X X ..... that the 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together constituted around 79-80% of 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 clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary to their claim of having introduced direct debit of member 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t maintained in exposure/ margin collection. Different exposures were permitted by the said President 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 ₹ 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wanted to trade as sub-broker with it and the same was thereafter reduced to ₹ 25,000/- for some of the members. (vi) There was 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.39.61.000 Offered to Public - 25% i.e 59.90.250 (i). Categories - Less then 1000 shares More then 1000 shares 50% of (3) 29,95,125 29,95,125 (ii). Subscription received (after rejection) shortfall transferred to next category 6.53.900 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 observation in the show cause notice that the company was required to raise non-promoters' holding was not based on correct facts/records. There were hundreds of the companies on the BSE in which entire capital is held by promoters and their associates till date and there is no public holding. (v) The Letter issued by SEBI on 18th May, 2001 regarding the Code of Ethics for Directors and Functionaries of Exchanges required that the President and Directors should not interfere in the day to day functioning of the Exchange and should limit their role to decision making on policy issues and to issues that the governin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to impose special margins, putting the scrip on spot basis, suspension of trading in the scrip, etc. Exchange did carry out the inspection of selected brokers through an independent auditor and the said details / information were also submitted to SEBI. Inspection was carried out on a sample basis and for a selective period of time. Out of the three names mentioned in the SEBI notice, inspection of M/s.Shobha Investments was carried out by the Exchange office. As per the practice, the surveillance and monthly development reports are submitted by the Exchange to SEBI wherein the details of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsibility 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 within the rules and regulations stipulated by SEBI. SEBI is already looking into the complaint matter of the Off. Ex. Director against the office bearer separately. Hence they did not express their comment on the subject matter. (iv) They had already clarified that the trading was within the rules and limits permitted by SEBI and that the Exchange had monitored the scrip movements and taken due care in monitoring the trading activity of the shares of HTL. There was no clear definition as to what is the definition of circular trading in exact terms. In absence of the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 were in the process of being implemented on a priority basis. (iii) The Executive Director resigned w.e.f. 31/7/2001.There was no full time Executive Director w.e.f. 1/8/2001 The Exchange was at an advanced stage of recruitment of the Executive Director and the delay was on account of resignation of members of the Committee and approval of reappointment of new members on the Committee, by SEBI from time to time. (iv) PSE Securities Ltd. Had collected an amount of ₹ 2.00 lacs from each sub broker towards the paid up cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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.Trimbake, a sub-broker had contributed ₹ 1.00 lacs as the equity contribution as against ₹ 2 lakhs and the same was also reflected in the balance sheet of the company in 2000 - 2001 and his application was not forwarded to SEBI for the sub-broker registration. There was no time limit prescribed in the Companies Act for the forfeiture of the partly paid share amount. However the sub-broker paid the balance contribution during the year 2002 - 2003. (v) The current Council of Management had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormal 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 stated that the Council came into power subsequently while all acts of omission and commission were observed prior to 31/8/2001. (iv) It was reiterated that there was no interference in surveillance. It was just a case where they were sharing the floor and other departments were adjoining the surveillance. Hence there was some movement near by the surveillance department. (v) It was stated that although the PSE did not have a stock watch system, an alternate offlin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 complied with within a period of 3 months. Exchanges were moving towards demutualization, which would ensure that interference would be minimal. It was also submitted that the spirit of the exchange had always been one of compliance and not of defiance and therefore they should be given an opportunity for improvement. 8. Consideration of the issues: - I have taken into consideration the facts and circumstances of the case including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pursuant to the personal hearing held before me. (iv) I have also noted that the scope and functions of the Disciplinary Action Committee of the exchange have not yet been finalized despite suggestions given by SEBI in the inspection report of 1999-2000. I have also noted that PSE has failed to maintain a separate account for the implementation of arbitration awards as required by SEBI Circular no. SMDRP/POLICY/CIR-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 exchange in checking the price rise in the scrip of HTL and the manner of functioning of the surveillance department, is bound to lead to the inevitable conclusion that the surveillance department is not independent and the non-interference with the surveillance mechanism has not been ensured. Further, from the failure to carry out several statutory requirements like ensuring proper functioning of Disciplin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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