Regulation of Business in The Stock Exchanges

SEBI has been inspecting the stock exchanges in the country once every year since 1995-96. During these inspections, a review of the market operations, organisational structure and administrative control of the exchange is made to ascertain whether:

• the exchange provides a fair, equitable and growing market to investors
• the exchange’s organisation, systems and practices are in accordance with the Securities Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed thereunder
• the exchange has implemented the directions, guidelines and instructions issued by SEBI from time to time
• the exchange has complied with the conditions, if any, imposed on it at the time of renewal/ grant of its recognition under section 4 of the SC(R) Act, 1956.

SEBI’s inspection reports contain, inter alia, suggestions for improvements in the procedures, operations and working of the exchange. The exchange is advised to send to SEBI a compliance report within one month of the receipt of the inspection report by the exchange and thereafter quarterly reports indicating the progress made by it in implementing the suggestions contained in the inspection report. The SEBI nominee directors and public representatives on the governing board of the stock exchanges also pursue the matters in the meetings of the governing board.

If the performance of the exchanges whose renewal of recognition is due, is not found to be satisfactory, SEBI grants further recognition for a short period only, subject to fulfilment of certain conditions. For example, in 1996-97 the recognition of the Vadodara and Magadh stock exchanges was renewed for a year only, after SEBI ascertained that the systems and operations of these exchanges were not fully satisfactory and many of the suggestions given in the previous inspection report had not been implemented.

Some of the common deficiencies observed during earlier inspections were non adherence to settlement schedules and frequent clubbing of settlements, delay in conducting auctions, inadequate monitoring of payment of margins by the brokers, lack of proper clearing mechanism and exchange of deliveries directly between members and failure to monitor the underwriting exposures of the members etc. It was observed during the inspections conducted in 1996-97, that there has been considerable improvement over the year in certain areas, which is described in more detail in the following paragraphs.

Capital adequacy

In January 1996, the exchanges were advised to double the amount of base minimum capital of their members at the earliest. Major exchanges such as the National, Mumbai, Delhi and Calcutta stock exchanges have already doubled the base minimum capital of their members.

Computerised trading

All the exchanges in the country were advised to introduce screen based trading and computerise post-trading operations to facilitate greater transparency and faster execution of transactions. 16 exchanges have already commenced screen based trading. Of these, 11 stock exchanges went on line in 1996-97. The remaining exchanges are expected to go on line by June 1997. The details of stock exchanges which introduced screen based trading in 1996-97 are given in Table 25.

Table 25 : Introduction of Screen Based Trading

Exchange	Commencement of screen based trading
Vadodara Bangalore Mangalore Madras Coimbatore Ludhiana Ahmedabad Hyderabad Calcutta Madhya Pradesh Cochin	July 1996 July 1996 September 1996 September 1996 October 1996 November 1996 December 1996 February 1997 February 1997 February 1997 March 1997

Investor protection

The Ministry of Finance had instructed all the exchanges in the country in 1985 to set up an Investor Protection Fund to compensate investors against a default by a member of any exchange. SEBI, in January 1996, advised the exchanges to increase the amount of a single claim of an investor to Rs. 1 lakh in case of major Stock Exchanges, to Rs. 25,000 in case of smaller exchanges viz. Gauhati, Bhubaneshwar, Magadh and Madhya Pradesh and to Rs. 50,000 in case of other stock exchanges.

SEBI has asked all the exchanges to ensure that their respective Investor Grievance Cells promptly resolve the complaints of the investors against the brokers/companies. The functioning of the Investor Grievance Cell is looked into at the time of the inspection of the exchange. The exchanges have also been advised to try and redress majority of the complaints at the administration level itself and go for arbitration as a last resort only.

Supersession of the governing board of Pune Stock Exchange

In view of the allegations of unauthorised carry forward transactions, SEBI conducted inquiries and found that a large number of member brokers of Pune Stock Exchange, including the President, Vice President and elected directors were indulging in unauthorised carry forward transactions. A show cause notice was issued by SEBI to the governing board of Pune Stock Exchange as to why it should not be superseded. The governing board of the exchange submitted its reply and was granted a personal hearing by Chairman, SEBI. After taking into consideration the reply of the exchange and on the basis of discussions during the hearing, SEBI came to the conclusion that the elected directors had failed in their duty to protect the safety and integrity of the market and investors’ interest. Taking in view the gravity of the situation, Chairman, SEBI, in pursuance of the powers conferred on him under Section 11 of the Securities Contracts (Regulation) Act, 1956, read with notification No. SO 573, dated July 30, 1992, superseded the governing board of Pune Stock Exchange for a period of 6 months effective from September 27, 1996 and appointed an administrator as an alternative arrangement.

The administrator has since has taken various steps to improve the functioning of the exchange. The performance of the exchange was reviewed by SEBI in March 1997 and it was observed that there was marked improvement in the administrative, operational and technical areas of the exchange. Hence, it was felt that the process of reconstitution of the governing board can be set in motion. Accordingly, the exchange has been advised to reconstitute the governing board. The administrator will continue to administer the exchange till the new governing board takes over from him. However, SEBI has advised the exchange to appoint an advisor to ensure the continuity of the reform process of the exchange.

New stock exchanges

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  1. The exchange begins trading only after the introduction of screen based trading.
  2. Establishment of clearing house within 6 months from date of recognition.
  3. The exchange makes rules, regulations and bye-laws, with the approval of SEBI.
Taking in view that SEBI receives several applications for recognition of new stock exchanges and that the new technology has changed the scenario in the secondary market, the following policy decisions regarding grant of recognition to new stock exchanges have been taken:
SEBI has been receiving several applications for recognition of new stock exchanges. As on April 1, 1996, the number of such pending applications/representations for new stock exchanges was 24. During the current year, three new applications were received. Out of the total 27 applications/representations, 21 have been disposed of during the year 1996-97. As on March 31, 1997, only 6 applications are pending which are under consideration.