MO/1/MRD/08/2003
SECURITIES AND EXCHANGE BOARD OF
ORDER IN THE MATTER OF SHOW
CAUSE NOTICE ISSUED UNDER SECTION 11 OF THE SECURITIES CONTRACTS (REGULATION)
ACT, 1956 READ WITH SECTION 11 OF SEBI ACT, 1992 TO BANGALORE STOCK EXCHANGE
LTD.
1.0
BACKGROUND :
1.1
The Securities and Exchange Board of India (hereinafter referred to as
“SEBI”) conducted an investigation into the alleged irregularities / lapses in
the listing and price-manipulation of securities of M/s. Home Trade Limited
(formerly known as M/s. Euro Asian Securities Limited) [for brevity’s sake
referred to as 'HTL']. SEBI also carried out the annual inspection of the
Bangalore Stock Exchange, (hereinafter referred to as ‘BgSE’)
and its subsidiary Bangalore Stock Exchange Financials Ltd (BGSEFL) during
March 2002.
1.2
The investigations and inspections interalia
revealed that out of total offer for sale of 59,90,250
shares of HTL, a total number of 7,27,300 shares i.e. about 12.14% of shares
were allotted to the promoters of HTL viz. Shri Subodh
Bhandari and Shri Sanjay Agarwal,
in violation of Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957
[hereinafter referred to SCRR].
Therefore, the “offer for sale “ did not meet the requirement of minimum
offer of atleast 25% of the securities to the public
for subscription as contemplated under Rule 19(2)(b) of SCRR.
1.3
The investigation further revealed that inspite
of the fact that HTL did not meet the requirements of Rule 19(2)(b) of SCRR as
aforesaid, BgSE vide its letter dated 29th
July, 2002 informed SEBI that the scrip of HTL had met the requirement of Rule
19(2)(b) of SCRR and allowed listing to the scrip.
1.4
It was further noticed during the investigations that a set of 6
brokers had contributed to more than 80% of the volume in the scrip of HTL at BgSE.
From the trade log and order log analysis, it was noted that these set of six
brokers had been buying and selling the scrip of HTL among themselves
and in the process created artificial
volume and manipulated the price of the scrip to abnormal levels. The time of orders were coordinated by these
brokers in such a way that the order resulted in trades at a subsequent higher
price.
1.5
From the above, it was observed that BgSE
failed to curb market manipulations of the scrip which rose upto
Rs.895/- without corporate developments and also did not impose additional
margins, etc. to curb and check manipulative trading by its member brokers.
1.6
It was observed during the inspection of BgSE
that while the scrips listed on the Exchange were imposed special margins on the basis of
margins imposed by BSE, the same was not the case with the regional scrips
which were not listed with it. There
was no proper mechanism for disposal of complaints pertaining to trading of scrips nor there was
any proper method laid down for conducting surveillance in scrips, etc. The Exchange also failed to take action against brokers
violating the norms of the Exchange. The
documentation system for initiating surveillance actions of the scrips listed
on the Exchange is not properly laid down.
1.7
During inspection of the BgSE it was also
observed that :
a)
It failed to amend the byelaws providing code of
ethics as directed by SEBI ;
b)
It did not implement the settlement system introduced by it for
delivery of securities to investors;
c)
It was utilising
the Settlement Guarantee Fund for meeting the penalty and fine
obligations of the members of the
Exchange, which are not part of settlement obligations ;
d)
It has not complied with the requirement of doubling the capital adequacy
norms nor does it follow the practice of informing the depositories of granting
in-principle listing.
e)
Off the floor transactions are being reported once a month in improper
format.
f)
Surveillance reports are not sent to SEBI in time. There is delay in dissemination
of price sensitive information to the members, and also in implementation of
the arbitration award.
g)
Monetary penalties are not imposed by BgSE on
delay in submission / non-submission of audit reports by the broker members.
1.8
During the inspection of BgSE, it was
observed that the Exchange committed
irregularities / lapses in listing, surveillance functions, and also did not
take effective preventive steps and the general functioning and administration
of the Exchange had not been carried out as per the provisions of SCRA and
SCRR.
1.9
It was also observed that various circulars / directives / instructions
issued by SEBI under the provision of SEBI Act, 1992, was
not complied with by the Exchange. The
Exchange had also failed to exercise due diligence in respect of BgSE Financials Ltd.
The activities of the Exchange were found to be carried out against the
interest of investing public and in a manner which is adverse to the interest
of investors.
2.0
SHOW CAUSE
NOTICE AND ITS REPLY
2.1 On the basis of the aforesaid findings a
detailed show cause notice dated April 09, 2003 was issued to the Council of
Management of BgSE under Section 11 of Securities
Contracts (Regulation) Act, 1956 (hereinafter referred to as SCRA). Vide said
show cause notice, while referring to the observations made in the
investigation report,
the Council of Management of BgSE was
called upon to show cause as to why appropriate action including supercession of the Governing Board of BgSE
under Section 11 of SCRA should not be taken against it in light of the
aforesaid observations made in the investigation report.
2.2 BgSE vide its
letter dated 24.4.2003 replied to the show cause notice wherein while denying
the allegations of irregularities / lapses in the functioning of the Exchange
as alleged in the show cause notice, submitted a detailed reply with respect to
all the allegations.
2.3 With regard to the allegation for violation
of Rule 19(2)(b) of SCRR, it was submitted that BgSE relied upon the basis of allotment duly approved by Pune Stock Exchange (PSE), the Regional Stock Exchange and
as per the offer document, PSE was empowered to approve the basis of
allotment. It was further submitted that
the responsibility for finalising the basis of allotment rests with the Regional
Stock Exchange i.e. PSE alongwith the post issue Lead
Manager and the Registrar to the issue.
2.4 It was further submitted that the allotment
of shares was done under the scrutiny of PSE, along with Lead Manager and
Registrar to the issue.
2.5 BgSE further
submitted that the primary responsibility for ensuring compliance with relevant
laws, rules, regulations and guidelines with respect to the subscription and
allotment lies with the Lead Manager and the Registrar to the Issue in terms of
the relevant Regulations. It was further submitted on behalf of BgSE that as a matter of fact, the Lead Manager to the
issue M/s.Shriyam Broking Intermediary Ltd. and the
Chartered Accountants of the company M/s.Parimal R
Shah & Company vide their letters dated 30.10.1999 and 12.11.1999
respectively had certified compliance by the company with the appropriate
requirements and provisions of the offer documents and therefore, there was no
violation of Rule 19(2)(b) by BgSE
as alleged.
2.6 It was further submitted that in view of
the records furnished by the company, and certified copies of the quarterly
results filed before BgSE by it, confirming the
maintenance on a continuous basis, a minimum level of non-promoter holding
higher than 30%, it is incorrect to state that the Exchange did not ensure the
compliance of SEBI Circular No. SMDRP/Policy/Cir-28/01 dated
2.7 Regarding the allegations of price rise /
manipulation, it was submitted that the price of the scrip of HTL rose
gradually between November 1999 and September 2000. Significant upward movement was only between
November 1999 and March 2000 during which time the price movement in majority
of the scrips were similar to that of HTL.
2.8 BgSE further
denied that it did not take any surveillance action by way of additional margin
etc. or steps to ascertain whether the price rise was due to the price
manipulation. BgSE
submitted that it had been regularly and vigilantly monitoring the trading and
had been taking timely steps and actions to maintain integrity of the market
and also for managing the risks effectively.
Further it was submitted on behalf of BgSE
that as a normal practice, the activities in the market are regularly compared
with the activities at the major markets like NSE, BSE and any deviations are
thoroughly investigated. In respect of
the regional scrips where trading is exclusively at the Exchange, special
emphasis was placed on monitoring the price movement for abnormality and on
noticing any significant variation ad hoc margins were levied by the Exchange
during the relevant period.
2.9 It was further submitted that BgSE has a separate Surveillance Dept. headed by General
Manager who directly reports to the Executive Director. Online non-real time alerts are very much in
place at BgSE. While admitting that on very liquid
scrips in order to ensure uniformity BgSE had levied
ad hoc margins based on the decisions taken by BSE and NSE, BgSE
denied that it did not have any criteria for levying adhoc
margins on regional scrips.
2.10 Apart from the aforesaid, BgSE
has full fledged investor services cell which is being monitored by an Investor
Services Cell Committee. In addition to
this, the Board of the Exchange reviews the status of the complaints on a
regular and ongoing basis. The Exchange being the regional stock exchange does
have system to monitor the price movement to the extent of volumes recorded in
the Exchange. It was further submitted that in the scrip of HTL, the exchange
had levied adhoc margins of 75% from 18.01.2000 to
28.02.2000. Further, in order to curb undue volatility attributed to budget, as
an extra precautionary measure 100% adhoc margin was
levied on HTL scrip. Levying adhoc margins continued
till September 2000. Subsequently, the adhoc margins
were withdrawn as the volumes had dropped significantly. On detection of
abnormality in the price / volume of trade, the exchange started its
investigation in to the trading of the scrip in September 2001. The
investigation Report of the exchange was forwarded to SEBI vide their letter
dated 23.05.02.
2.11 BgSE has sufficient
documentation with its Surveillance and Listing Dept. for cross verification of
market rumours with the Compliance Officers of the respective companies. Apart from this, the Exchange has taken proactive
measures by imposing adhoc margins, calling for
client information and suspension of trading.
As regards, Settlement Guarantee Fund (SGF), it was submitted on behalf
of the Exchange that Bye-law 395(vi) read with 397(ii) empowers the Exchange to
utilise the funds of SGF towards dues to the Exchange on account of fines and
penalties.
2.12
Regarding allegation of failure to amend the bye-laws providing code of
ethics, it was submitted that the amendments were duly carried out. However,
the publication thereof in the Official Gazette of State of Karnataka is
pending due to some technical reasons.
It was further submitted that pending Gazette Notification, Exchange has
already put in effect, the requirements of SEBI by constituting an Ethics
Committee comprising of two public representative directors, one member
director and the Executive Director.
Regarding system of direct delivery of securities to the investors it is
informed that the said system which is optional, is
already in place in the Exchange.
However, due to some practical problems, it is not being used by the
members.
2.13
Regarding utilisation of Settlement Guarantee Fund for meeting the
penalty and fine obligations of the member, it was submitted that this is being
done in pursuance to Bye Law 395(vi) read with 397(ii) of the Exchange. Further, with respect to doubling the capital
adequacy norm, it was submitted that in view of the fact that no business is
taking place in the Exchange, even the existing base minimum capital (bmc) is lying ideal and doubling the capital at this
juncture would be too difficult a task.
2.14
Regarding off the floor transaction, it was submitted that one known
case of off-floor transaction was referred to the Strategic Action Committee
and the proceeding thereof is in progress.
It was further submitted that in view of the nil turnover in the
Exchange since January 2002, collection of details of off the floor
transactions from the members on a daily basis and considering the same for the
purpose of monitoring turnover / exposure limits and imposition of margins has
become redundant. Regarding submission
of surveillance report to SEBI, it was submitted that as desired by SEBI the
said report is being sent to SEBI once in a month.
2.15
Regarding dissemination of price sensitive information to its members,
it was submitted that the Exchange disseminates such information on an
immediate basis. Further, it was pointed
out that out of about 3600 instances of dissemination of price sensitive
information, the delay was only in about 4 – 5 instances. It was further submitted that the system has
been reviewed and fool proof procedures have been laid down to avoid the
reoccurrence of such instance.
2.16 Regarding non imposition of monetary penalty,
it was submitted that the Exchange has suspended all the members who have not
paid subscription to the Exchange. Further, with regard to delay in submission
/ non-submission of Audit Reports by the members, it was submitted that 90
members who have defaulted in this requirement have been suspended w.e.f
2.17 The Exchange submitted that it has not failed
in due discharge of its obligations as a stock exchange, either in terms of
listing or under the applicable laws, rules, regulations and / or guidelines
issued by SEBI from time to time.
2.18 The Exchange submitted that it has conducted
the business of stock exchange in a professional manner meeting all the
required criteria. The Exchange has
acted as the watchdog in appropriate circumstances and carried out its
surveillance functions to its utmost capacity.
2.19 Regarding other adverse observations made in
the show cause notice, the Exchange submitted its reply and explanation and
submitted that there has been no erroneous action on the part of the Exchange
either in law or on facts in permitting listing of HTL scrip. Further there was no irregularity or lapse on
the part of the Exchange either in listing or with respect to its surveillance
functions or in the general functioning and administration, as alleged by
SEBI. The Exchange has always exercised
due diligence with respect to the functioning of its subsidiary, BgSE Financials Ltd.
The entire functioning of the Exchange has always been geared up towards
protecting the interests of the investors.
2.20 The Exchange further submitted that it has
undertaken pioneering investor friendly measures such as establishing a full –
fledged library and information centre catering to all capital market needs of
investors, various educational initiatives such as investor education
programmes on the last Sunday of every month for past eight years, conducting
seminars in local language for the benefit of the investors throughout the
State, publication of books in local language to reach out to sub-urban
investor population and setting up of investor service centres in several
district head quarters in the State of Karnataka. By these measures, the Exchange has
virtually taken its services to the door-step of the investing public.
2.21 The exchange also submitted that in the
entire 40 years of its functioning, this is the first and only time that the
Exchange has received a show cause notice of this nature. There has never been any reason for any one
to allege any wrongdoing on the part of the Exchange or its governing
body. The Board of Directors of the
Exchange comprises of luminaries in varied fields, and they have always acted
in a bonafide, efficient and effective manner. The Board meets at regular intervals to
discuss various aspects of the operations of the Exchange.
3.0 HEARING AND SUBMISSIOINS
3.1
The hearing scheduled to be held on
(a)
With regard to the alleged violation of Rule 19(2)(b)
of SCRR, it was submitted by the Exchange that BgSE
is a non regional stock exchange for the purpose of listing the securities of
HTL. It was also pointed out that the
offer document of HTL clearly specified that the basis of allotment would be
finalised in consultation with the Regional Stock Exchange i.e. the Pune Stock Exchange.
Therefore, it was submitted that on the basis of allotment document
approved by PSE, BgSE had approved the listing of
securities of HTL and therefore, BgSE did not
contravene the provisions of Rule 19(2)(b) of SCRR. She also submitted
that there was no reason to suspect that the allotment was made to the promoters
from public category as it was not possible to notice that persons to whom
allotment was made in public category were persons belonging to the promoters
category.
(b)
Further, it was submitted that BgSE followed the similar
practice in listing of HTL as is being followed by other stock exchanges. As
per the said practice, once the basis of allotment is finalised by the Regional
Stock Exchange which is empowered to finalise the basis of allotment, other
exchanges place their reliance on the said basis of allotment and as such other
stock exchanges do not again go through the entire allotment process by
verifying all the details. It was
submitted that BgSE also followed the same practice
and allowed listing of HTL in its Exchange pursuant to the listing given by PSE.
3.2
Since a lot of reliance was placed upon the fact that once the Regional
Stock Exchange in consultation with the Lead Manager, Registrar and the
Company, approves the basis of allotment, other stock exchanges as a practice
do not go through the entire allotment process like, weeding out technically
defective applications, despatch of refund orders, etc. and allow listing of the securities of the
applicant company with it on the basis
of allotment duly approved by Regional Stock Exchange, the Exchange was
directed to obtain the response from other exchanges on the issue in support of
their claim.
3.3
As requested by the Executive Director of the Exchange, the Exchange
was given two weeks time to file its written submissions. The exchange vide its
letter dated August 4, 2003 submitted its written submissions wherein while
reiterating the submissions made during the personal hearing, it filed letters
received from Cochin Stock Exchange, Madras Stock Exchange, Jaipur
Stock Exchange, Ludhiana Stock Exchange, Delhi Stock
Exchange, Hyderabad Stock Exchange and Inter Connected Stock Exchange of
India. These letters were received in
response to the letters written by BgSE to the
aforesaid stock exchanges. Vide the said letters, these stock exchanges by and
large confirmed that in case of listing
of non regional companies, they do not go through the entire process of basis
of allotment, since the Prospectus / letter of offer specifically mentions that the basis of allotment would be
finalised in consultation with the Regional Stock Exchange.
3.4
After the receipt of the aforesaid written submissions, SEBI received
another letter dated 6.8.2003 enclosing therewith the fax received from NSE
informing that as per Clause 7.6.1 of SEBI (DIP) Guidelines, 2000, it is the
duty of the Regional Stock Exchange alongwith the
Lead Manager and the Registrar to finalise the basis of allotment in a fair and
proper manner in accordance with the Guidelines.
3.5
Regarding the allegation of improper surveillance action by BgSE and non imposition of margins, it was submitted that
in the case of HTL, BgSE had periodically reviewed
the activity level and
imposed adhoc margins to curb the possible
manipulation. When pointed out during the submission that the said allegation
was based on the information furnished by the stock exchange itself during the
inspection, the Executive Director of the Exchange submitted that there could
be an error in furnishing the information and requested time to verify the
actual status. She further stated that the Surveillance Dept. of the Exchange
did not find any circular trading in the scrip of HTL
3.6
Regarding surveillance action taken by the Exchange in the scrip of
HTL, it was informed that the Exchange had periodically reviewed the activity
level of the scrip, and as a result ad hoc margins were levied which varied
from 30% to 100% at different points of time.
Further, while admitting the error in the information furnished by BgSE vide their letter dated 4.8.2003 in this regard, it
was submitted that there was an inadvertent error wherein it was mentioned that
“NIL” additional margins were levied on HTL and therefore, the same may be
condoned.
3.7
It was further submitted that apart from levying additional margins, BgSE had conducted preliminary investigations in September
2001 to ascertain whether any circular trading was done in the scrip of
HTL. The Exchange also submitted that
most of the trades were executed on behalf of the clients who were not common, there was no reason to suspect circular trading in
the scrip. In light of these submissions, it was submitted that the Exchange
has taken reasonable care in carrying out the surveillance functions and
therefore the charges in this regard may be dropped.
3.8
It was further submitted that the Surveillance as well as Listing are
administrative functions and the Board of the Exchange has not failed in
exercise of its duties as the Board is primarily responsible for policy
formation and plays only supervisory role in monitoring the day to day
functioning of the Board.
4.0 CONSIDERATION OF
SUBMISSIONS AND FINDINGS
:
4.1
I have carefully considered the findings of the investigation and
inspection report, the show cause notice issued, and oral and written
submissions made by Executive Director of BgSE.
4.2
With regard to the grant of listing on the basis of finalisation of
basis of allotment by the Regional Stock Exchange without verifying as to
whether it is done in a fair and proper manner in accordance with the
Guidelines, in view of the practice followed by other stock exchanges, I find
the submissions of BgSE are convincing.
However, being a self regulatory organisation, it was expected to be more
vigilant and careful in granting listing to the scrip of HTL which was
eventually in violation of Rule 19(2)(b) of SCRR.
4.3
I find that during the inspection carried out by SEBI, the officials of
the Exchange did not furnish the correct information with respect to the ad hoc
margins imposed by the Exchange in the scrip of HTL. The Exchange during the oral submissions admitted
the error. In the written submissions also while admitting the error, the
exchange regretted the error and requested for the condonation
of the same as it had, in fact, levied adhoc margins
varying from 30% to 100% at different points of time.
4.4
Regarding other allegations as set out in the show cause notice and the
reply submitted, I find that the allegations are technical in nature and in
some cases the exchange has failed to implement the directive issued by SEBI in
timely manner in its true letter and spirit. For this reason I feel that the
exchange needs to be proactive in implementing the decisions
of SEBI and it needs to be cautious and careful in future in this
regard.
4.5
Further, I do not entirely agree with the submissions of the Exchange
that the Governing Board plays only supervisory role and is not responsible for
the day to day operations of the Exchange. The Governing Board has to take full
responsibility for all the acts of omission and commissions of the Exchange
which functions under the supervision of the Board.
4.6
Considering the reply submitted by the Exchange, I find that the
allegations are not serious enough to warrant supercession
of the Governing Board of the Exchange under section 11 of SCR Act. However, in
view of the forgoing, I am constrained to observe that the exchange has to
improve its efficiency and timely compliance with the directions issued by SEBI
in the interest of investors from time to time. Further, the Exchange needs to
implement all the decisions/directions issued by SEBI in true letter and spirit
and with utmost expedition. Only by doing so would the Exchange be able to
effectively exercise its role as a self-regulatory organisation and achieve the
objective of its establishment under SCR Act.
5.0 ORDER
5.1 Having regard to the above, I, in exercise
of the powers conferred upon me in terms of Section 19 read with Section 11 of SEBI Act, 1992 and Section 11 of Securities
Contracts (Regulation) Act, 1956 and in the interest of investors, hereby issue
a warning to the Governing Board of Directors of the Bangalore Stock Exchange
Ltd. to be more vigilant, cautious and careful in future in discharge of its
functions as a self regulatory organisation.
A K
BATRA
MEMBER
Securities
and Exchange Board of India
Place
: Mumbai
Dated
:
August 27th, 2003