THE GAZETTE OF
EXTRAORDINARY
PART – II
SECTION – 3 SUB-SECTION (ii)
PUBLISHED BY
AUTHORITY
SECURITIES AND
EXCHANGE BOARD OF
NOTIFICATION
Mumbai, the 12 day of July,
2002
ORDER U/S 11 OF THE SECURITIES CONTRACTS (REGULATION)
ACT, 1956 SUPERSEDING THE BOARD OF DIRECTORS OF THE UTTAR PRADESH STOCK
EXCHANGE ASSOCIATION LTD.
S.O.No.732(E) Based on the correspondence received
from the Public Representatives on the Board of the Uttar Pradesh Stock
Exchange (hereinafter referred to as “UPSE”) the then Nominee Director of the
Securities and Exchange Board of India (hereinafter referred to as “SEBI”) on
the Board of UPSE and the then Executive Director of UPSE and based on the
observations made in the inspection report of UPSE conducted by SEBI from March
12-17, 2001, the compliance reports and monthly development reports submitted
by the UPSE, SEBI had conducted an enquiry into the following irregularities:
(i)
Interference from the elected directors
and brokers in the functioning of the
exchange making it difficult for the Executive Director (ED) to function
as required under the bye laws of the exchange and SEBI directives,
(ii)
Unruly behaviour of the brokers in the
Board meeting held on
(iii)
Process of recruitment of ED without
following the guidelines issued by SEBI,
(iv)
Non attendance by the President and
restraining the ED from attending the meeting convened by SEBI on
(v)
Non compliance of SEBI directives,
(vi)
Delay in considering the inspection report and forwarding the compliance
report with reference to violation of SEBI directives,
(vii)
Board meeting not conducted as per rules and bye laws of UPSE.
2
Thereafter SEBI issued a notice dated September 03, 2001 under Section
11 of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to
as SCRA) upon the Governing Board of the UPSE (here after referred to as “the
Governing Board”) advising them to show cause as to why the Governing Board
should not be superseded in view of the above mentioned instances of mismanagement
and irregularities in the functioning of the exchange. The Governing Board was
called upon to submit their reply to the show cause notice within 15 days from
the date of the receipt of the notice and indicate their preference for a
personal hearing, if they so desired.
3
The Governing Board vide their letter dated September 13, 2001 sought
time of 10 days to submit the reply and thereafter submitted their reply to the
show cause to SEBI on September 19, 2001.
The Board also sought an opportunity to be heard in person. An
opportunity of hearing before the Chairman, SEBI, was granted to the President,
Vice-President and two members of the Board on
4
The President, Vice-President and two elected directors of the
Governing Board besides SEBI Nominee Director attended the hearing before the
Chairman, SEBI on 19.11.2001. In the course of hearing, the elected broker
directors refuted the various allegations raised against the Board.
5
Thereafter, vide letter dated November 29, 2001, SEBI forwarded the
documents relied upon by it for issuing the show cause notice, to the Governing
Board, and sought their submissions in regard to the same within 15 days of the
receipt of the said letter
6
Subsequently, the Governing Board, vide their letter dated December 05,
2001, sought for certain clarifications from SEBI and also requested for
extension of time of 20 days from the date of their Board meeting scheduled on
December 14, 2001 to make their submissions. Although SEBI provided the
necessary clarifications to the Board, the request for extension of time for
submission of the reply was denied. Subsequently however, pursuant to a further
request for extension of time made vide letter dated
7
However as the submissions made by the Governing Board vide their
letter December 20, 2001 found to be unsatisfactory, the Chairman, SEBI granted
another opportunity of hearing to the Board on March 15, 2002. On the said
date, the President and the Officiating Executive Director of UPSE appeared on
behalf of the Governing Board before the Chairman and made their submissions.
They requested for additional time for compliance with the directions of SEBI.
Accordingly UPSE was granted time of one month to take corrective measures to
stabilise the trading system and rectify the irregularities in the exchange.
8
Thereafter, SEBI, vide its letter dated March 26th 2002
called upon the UPSE to inter alia comply with the conditions imposed at the
time of renewal of recognition granted to the UPSE, observations in the
inspection report for 2000-2001, stabilizing the trading system, certifying
that activities such as unauthorized carry forward transactions, interference
by the elected directors in the day-to-day administration of the exchange had
been stopped and steps have been taken to appoint Executive Director and operationalise the SGF of the
exchange as per the scheme approved by SEBI and submit a compliance report,
failing which SEBI would be constrained to take such measures as it deems fit
including supersession of UPSE.
9
Thereupon, UPSE vide their letter dated
(i)
The
exchange is advised to hold the Annual General Meeting within the stipulated
period.
(ii)
The
Exchange should vigorously follow with the members for:
(a) submission of the statement regarding engagement/
non-engagement in other business.
(b) for submission of information for broker database.
(iii)
The
Exchange should ensure that its member brokers get their sub-brokers registered
with SEBI, before starting their dealings with them in accordance with
provisions of Chapter III of SEBI (Stock Brokers and Sub Brokers) Regulations
1992.
(iv)
Access
to the software program (for calculation of margin) is not restricted making
the system vulnerable to unauthorized changes. Changes in parameters should be
made only after proper documentation through sanction from competent authority.
The Surveillance department should be subjected to systems/ EDP audit to plug
the discrepancies in the control, systems and operations.
(v)
The
Exchange is advised to follow the practice of immediately stopping the trading
of members who do not pay up the margin in time.
(vi)
It
appears that the cheques collected toward margin payment in some cases were not
deposited in the bank. The Exchange did not furnish any clarification on these
cases during the period of inspection. Such instances have serious implication.
The Exchange should specifically explain these instances and ensure to
implement a proper system for timely collection of margin in all due cases.
(vii)
The Exchange
is advised to ensure that all penalties are recovered from members unless
waived by appropriate competent authority which should include the Executive
Director. The waiver of small amounts
should not emerge as an accepted policy at the Exchange.
(viii)
The
Exchange must discharge its responsibility of authenticating the turnover of
its members for calculation of fee diligently and ensure timely remittance of
fee to SEBI by all members.
(ix)
UPSE
should examine listing compliance of companies trading which were suspended in
other exchanges.
(x)
There should be predetermined criteria for selection of members for
inspection on basis of surveillance action. The possibility of arbitrariness
and susceptibility to misuse should be minimised.
(xi)
The Exchange is advised to ensure that bank guarantees on behalf of
brokers are taken in the proper format and are renewed timely, if required.
(xii)
The Exchange shall take immediate measures to
stop the practice of unofficial carry forward of transactions, and impose deterrent
punishment to the brokers who have been involved in such trades.
(xiii)
The exchange is advised to ensure that the
surveillance set-up is as specified in SEBI circular no. IEMI/LKS/MI/2990/95
dated
(xiv)
The exchange shall take steps to comply with SEBI
Circular dated
(xv)
The Exchange shall take immediate steps for the installation
of the software for compliance of suggestions of the inspection report for the
year 1999-2000 & 2000-2001, which have not been complied on account of
non-availability of software.
(xvi)
The UPSE shall operationalize the SGF of the exchange in terms of
(xvii)
The UPSE shall take immediate steps to appoint
the Executive Director.
(xviii)
UPSE should comply with the observations made in
the inspection report for the year 2000-2001 & 2001-2002.
(xix)
Deterrent action should be taken by exchange against members who
intentionally failed to submit their reply towards the findings of inspection
(xx)
The
Grievance committee is dominated by member brokers. The constitution of the
committee is apparently not in the interest of investors. The committee should
be reconstituted to increase the representation of non-members.
(xxi)
The
Exchange is advised to take steps to recover the arrears from Brokers towards
Infrastructure Development Fund.
(xxii)
The UPSE is advised to draw a schedule of
investor-related activities and implement a yearly program.
(xxiii)
Emphasis should be made towards improving the quality of inspection of
brokers by also examining unauthorized badla, price manipulation, circular
trading, improper utilization of clients’ funds etc.
(xxiv) Media reports should be seen
/ examined for any price sensitive information/ rumour in respect of companies
listed at UPSE.
(xxv)
The Exchange is advised to recover annual charges from the members who
have not paid.
(xxvi) The Exchange is advised to
reformulate its accounting policies with regard to listing to present a true
and fair picture of listing fees recoveries.
(xxvii) It is suggested that
defaulting companies may be served legal notices to the company and directors,
action u/s 23 of the SCRA, 1956, winding up proceedings
in accordance with section 433 and 434 of the Companies Act, 1956 may be
initiated for recovery of the listing fee.
(xxviii) The Exchange with its
investments to the extent of Rs 10.00 crore should explore other avenues of
investments and take steps i.e. Outlining an investment portfolio with possible
investment avenues in other “Zero” risk products including government
securities and maximizing the yield on investments by selecting the optimum
product mix. The exchange is also advised to have a proper investment policy
for investing surplus funds.
(xxix) The Exchange should
introduce internal audit by way of an independent internal auditor or
concurrent audit by a firm of Chartered Accountants reporting to the Board.
(xxx)
(a)The Exchange should adopt a system of periodical hardcopy backup of
all the books of account of the Exchange
(b)The Exchange needs to
frame rules in respect of -
(1) Backup register specifying the mode and
periodicity of the backup and
(2) Passwords register detailing the secret passwords
and periodic changes of passwords to be kept under the safe custody of the
GM/President/ED.
(xxxi) The procedure for physical
verification of Fixed Assets being followed by the Exchange needs to be
improved and all Fixed Assets should be physically verified as at the year end
by a team of official(s) assisted by the Statutory Auditors/Internal Auditors
instead of adopting the system of departmental confirmations, as prevalent
currently.
(xxxii) The Exchange should work out
a system of apportioning the common pool expenses between itself and the
subsidiary. The expenditure incurred only for its subsidiary should be
recovered from it.
(xxxiii) The Exchange is advised to
formulate a strategy
to improve the financial health of the Exchange as the financial
condition has deteriorated over the last few years. It should look into the
quantum of user charges being recovered from its members and should consider
increasing it.
10 It is also noted that UPSE
has failed to comply with the conditions stipulated by SEBI at the time of renewal
of recognition of UPSE. It is relevant
to note that SEBI has received reports of interference by the elected directors
in the day-to day management of UPSE which is in violation of the SEBI circular
no. SMD-II/ALLSE/CIR-02/2000 dated
11 Due opportunity was given to
the Governing Board to show cause as to why it should not be superseded. The
Governing Board has not cared to address or rectify the allegations of
mismanagement levelled against them. In fact, SEBI, vide its letter dated May
17, 2002, informed the UPSE that since the undertaking given by the UPSE as
regards the compliance of the various conditions as directed by SEBI vide its
letter-dated March 26, 2002, was found to be unsatisfactory, SEBI would, in the
facts and circumstances of the case, be constrained to initiate immediate
action against the UPSE, which may include supersession
of the Governing Board.
12 In the course of hearing
before the Chairman, the President and Officiating Executive Director of the
UPSE submitted that they have complied with all conditions imposed at the time
of granting renewal to UPSE, that the irregularities observed in the inspection
report have been rectified, that there is no interference in the day-today affairs
of UPSE by the elected directors, that steps have been taken to appoint
Executive Director and that they have stopped the practice of carry forward.
They also submitted that UPSE is not in a position to operationalise
the SGF on account of expiry of Rs.500 lakhs
sanctioned by Vysya Bank and that software upgradation is not complete for lack of fine tuning, which
is being done by CMC Ltd.
13 However, reports continue to
be received that unofficial carry forward transactions continue in the floor of
the exchange. It may be relevant to note that pursuant to the special
inspection of the Exchange conducted on November 2001, enquiry proceedings have
already been initiated by SEBI against 14 brokers of the Exchange for entering
into unofficial carry forward transactions.
It is also noted that despite the order of SEBI under section 8 of SCRA,
amending the articles of association notified on May 20, 2002 stock brokers are still holding the post of
President and Vice President. The
day-to-day administration, signing of cheques, staff matters, purchases, etc.
of the UPSE are still being handled by the President, elected directors and
other brokers. Further, reports have
been received that the Exchange has appointed the Executive Director without
the approval of SEBI. There have also
been reports of misuse of the funds of the Exchange by the elected directors
and contributors to the subsidiary projects have been refunded Rs.50,000/- each totalling to Rs.23 lakhs at a loss to the
exchange. A proposal to refund the initial contribution to the SGF @ Rs.25,000 per member has been announced by the Chairman of the
newly formed UPSE member’s association with the tacit blessings of the elected
directors. Furthermore, the UPSE has not
operationalised the SGF
under one pretext or the other. Model
Rules for stock exchanges have also not been made applicable. Complaints have
been received from public representatives and the SEBI nominee director as
regards the President of the Exchange not abiding by the SEBI directives, and
the interference of the elected office bearers in the day to day functioning of
the Exchange. In terms of the inspection report, the functioning of the
surveillance set up is also not in accordance with the SEBI Circular No.
IEMI/LKS/MI/2990/95 dated August 8,1995. The Surveillance department does not have
access to real time scrip prices at the BSE.
Lacunae exists in the trading software and the
settlement mechanism. Price-sensitive
information received by the Exchange is not forwarded to the surveillance
department for examination of price /volume movement in a prior period and
media reports are not seen / examined for any price sensitive information or a
rumour in respect of the companies listed on the exchanges. There have been
reports of the creation of the artificial markets and trades being executed at
unusual prices.
14 In view of the above facts, I am convinced
that the Governing Board of UPSE has failed to ensure proper governance and
implementation of the provisions of the SCRA, Bye-Laws of the Exchange and SEBI
directives. As a result of this the confidence of investors in transparent and
impartial working of the stock exchange has been impaired. I am also convinced
that there is interference from the elected directors and brokers in the day-today
functioning of UPSE making it difficult for the exchange to function as
required by the byelaws of the exchange and SEBI directives. I am also
convinced that there has been non compliance with SEBI directives, that there
has been undue delay in taking up the inspection report for the year 2001-02
for consideration by the Governing Board, that the meetings of the Board of
Directors are not conducted as per rules and byelaws, that the Executive
Director of UPSE is prevented from discharging his duties in the manner
provided in the Rules and Bye-Laws of the exchange due to interference by the
elected directors and members of the exchange.
15 Therefore, I am of the
opinion that it is essential that immediate measures are adopted to ensure the safety
and integrity of the stock exchange and to ensure that transactions on UPSE are
carried out as per the regulatory framework and that the interest of investors
are not jeopardised further.
16 SEBI is mandated to ensure
that the systems and the procedures on an exchange are such,
that transactions are carried on in a lawful manner and without
adversely affecting the interest of investors. In order to ensure that such
systemic improvements take place on the exchange, the persons who have
prevented transactions from being carried on in a lawful manner need to be
excluded from governance of the exchange. In order to ensure that systemic
improvements take place on the exchange, it is necessary that an independent
and impartial person is appointed.
17 In view of the above and in
exercise of the powers conferred on me under Section 11 of the Securities
Contracts (Regulation) Act, 1956 to be read with the Government of India
Notification number S.O. 573 dated July 30, 1993 and Section 4 (3) of the SEBI
Act, 1992, the Board of the Uttar Pradesh Stock Exchange is hereby superseded
for a period of one year with effect from July 12, 2002 and Shri.
M. N. Sabharwal is hereby appointed as an
Administrator to exercise and perform all the powers and duties of the
Governing Board. Shri. Sabharwal
may take assistance of such persons as he thinks it necessary.
Dated this 12
day of July, 2002
File no.
SEBI/LE/ 12829 /02
G. N. BAJPAI
CHAIRMAN
SECURITIES AND
EXCHANGE BOARD OF