IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.158 of 2004
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������� �Date of Decision :04.10.2006
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Mangalore
Stock Exchange
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������������������������ ......� Appellant
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Versus
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Securities
and Exchange Board of India
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������ �����������������..�Respondent
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Shri Umesh Shetty, Advocate alongwith Ms. Sharila
D�Souza, Advocate for the Appellant
Shri Kumar Desai, Advocate alongwtih Ms. Daya Gupta,
Advocate for the Respondent
CORAM
����������� Justice N.K. Sodhi, Presiding Officer
����������� C. Bhattacharya, Member
����������� R.N. Bhardwaj, Member
Per:� R.N. Bhardwaj, Member
����������� This
appeal is against the order passed by Securities and Exchange Board of India
(for short �the Board).� The order dated 31st
August, 2004
has been passed under section 4(4) of the Securities Contracts (Regulation)
Act, 1956 (SCRA) refusing to grant renewal of recognition of the Mangalore
Stock Exchange (for short �MGSE�).� MGSE
is a company limited by guarantee which was granted recognition as a stock
exchange on September 9, 1985.�
The renewal of recognition of MGSE was being given by the Board from
time to time and the last recognition was valid up to 8th
September, 2003.�
����������� The
Board had conducted inspection of MGSE in September, 2002 and found number of
shortcomings in its working.� While
granting renewal of recognition in the year 2002 up to 8th
September, 2003, it forwarded the inspection report to MGSE and advised it to comply
with the same within two months from the date of notification of the
renewal.� Before the renewal was due in
2003, the Board conducted another inspection to find out the status of
compliance of the suggestions made in the previous inspection.� It found out that most of the irregularities
which had been pointed out in the previous inspection report were still
continuing.� The renewal of MGSE had been
granted on the condition that the irregularities/shortcomings pointed out in
the inspection report would be rectified.�
Therefore, the Board issued notice under section 4(4) of the SCRA and
after giving a personal hearing to the governing board of MGSE, issued the
impugned order dated 31st August, 2004.�
The operative part of the order is as under:
�In view of this order, MGSE shall
cease to be a recognized stock exchange and therefore, it is imperative to pass
necessary directions in the interest of investors/shareholders of the listed
companies in MGSE and in the overall interest of the securities market.� I, therefore, in exercise of powers conferred
upon me under Section 19 read with section 11(1) of SEBI Act pass the following
directions:-
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1)
The money available in the Investor Protection Fund and Investor
Services Cell of MGSE shall be utilized only for the purpose for which these
funds have been created, as per the Articles of MGSE.� Any pending claims of any investors should
not be appropriated for any other purpose or for payment to the
members/shareholders of MGSE.
2)
MGSE shall set aside sufficient funds in order to provide for
settlement of any claims, pertaining to pending arbitration cases, pending non-implemented
arbitration award, if any, liabilities/claims of contingent nature, if any,
and unresolved investors complaints/grievances lying with the exchange, on
the date of this order.
3)
The companies which are exclusively listed in the MGSE, may consider
seeking listing at other stock exchanges or provide for exit option to the
shareholders as per SEBI Delisting Guidelines.
������������ 4)� Consequent�
upon� de-recognition of MGSE,
the
����������������� members/shareholders� of�
MGSE� shall cease to
�
����������������be��� members�
of�� a� recognized stock exchange
����������������� and��� therefore�� liable��
to�� be� de-registered�� as�
����������������� stock brokers,� and�
hence, their��� certificate��� of
����������������� registration granted by
SEBI shall stand���� automatically
cancelled.� However, the said
members/shareholders of MGSE shall be liable to pay SEBI registration fees as
per Schedule III of the said regulations, till the date of this Order.�
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����������� The
appeal against the impugned order of the Board was admitted by the Tribunal on 22nd
November, 2004.� While admitting the appeal the
Tribunal did not decide the question of maintainability of the appeal which was
raised against the impugned order before the Tribunal by the Advocate representing
the Board.� The Tribunal while passing
the interim order ruled �however, this will not preclude the appellant in
submitting an application for corporatisation and demutualization in accordance
with law and the same may be considered expeditiously.�� The Tribunal on 20th
January, 2005
while hearing the learned counsel for the appellant decided that �there will be
a direction directing the respondent to consider the application in accordance
with law de hors of the impugned order as expeditiously as possible�.� The Board filed a civil Appeal no.1685 of
2005 in the Supreme Court against the order of 20th
January, 2005
of the Securities Appellate Tribunal.�
While disposing of the appeal the Supreme Court passed the following
order:-
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��We are of the view that once the
Tribunal has noted that the appeal had been challenged as not being
maintainable, it should dispose of the issue of� maintainability first before passing any
further order.� In that view of the
matter, the impugned order dated 20th
January, 2005 is stayed until the Tribunal disposes of the issue of
maintainability.� The Tribunal is
requested to dispose of the issue as early as is conveniently possible,
preferably within a period of 8 weeks from date.
The appeal is, accordingly,
disposed of but without any order as to costs.���
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����������� The
Tribunal heard the arguments of the appellant and the respondent on the
question of maintainability of the appeal before the Securities Appellate
Tribunal and decided that the impugned order had been passed under the
provisions of the Securities and Exchange Board of India Act and directions are
clearly under section11 of the said Act which were appealable to the Tribunal
and therefore the appeal is maintainable in the facts and circumstances of the
case.� When the matter came up for
hearing of the main appeal, the Board filed an application seeking
direction/clarification of the interim order dated 20th January,
2005 of Tribunal which required the Board to consider the application of
demutualization and corporatisation under the provisions of Securities Laws
(Amendment) Act, 2004.� It was submitted
by the Board that vide the impugned order dated 31st October, 2004
the Board had already derecognized MGSE as a stock exchange under section 4(A)
of the SCRA and therefore the existing scheme of demutualization and
corporatisation could not be made applicable to MGSE because this scheme is
applicable only to the recognised stock exchanges on the date of coming into
force of the Securities Laws (Amendment) Act, 2004 i.e. October 12, 2004.�
At the time of final hearing of the
appeal alongwith the review application filed by the Board seeking
clarifications/directions, it was contended by the learned counsel for the
appellant that the impugned order of August 2004 which had derecognized the
MGSE was based on number of irregularities pointed out in the course of the
annual inspection carried out in 2002 and 2003.�
He contended that all those irregularities have since been rectified.� He submitted a chart stating that the
deficiencies have since been removed and suggestions have been implemented.� It
was then directed by the Tribunal that as time was not really the essence
looking to the nature of suggestions/shortcomings pointed out by the Board, it
should, therefore, conduct another inspection and report the matter to the
Tribunal within a period of three to four months.� Board carried out the inspection of MGSE from
31st May to 3rd June, 2006 and the report was also sent to MGSE
which has been presented before the Tribunal.�
From the perusal of the report the learned counsel for the appellant
argued that some of the irregularities which are still continuing are because
the Board had not replied to or has not taken decision on the communications
sent by MGSE.� He also contended that the
Board has renewed recognition of other stock exchanges which were having
similar shortcomings subject to some conditions.� He further contended that MGSE could also be
granted renewal of recognition subject to the condition that these shortcomings
would be removed within six months and all the conditions would be complied
with.�
He further mentioned that MGSE was
constrained in helping the Board in collecting fees from the members because of
its present status of a derecognized stock exchange and non renewal of its
recognition.� MGSE was not in a position
to take any independent disciplinary action against its members.� The current inspection report pointed out
that the exchange is yet to complete the compilation of members data base.� It had only 54 members and data is yet to be
collected from seven members.� The
learned counsel of the appellant submitted that MGSE was doing its best to
collect the information from the rest of the members and it will complete the
job shortly.�
����������� When
the Tribunal put the question of recognition of renewal of MGSE with some
conditions to Mr. Desai the learned counsel for the Board, he pointed out that
the information pertaining to other stock exchanges was not before him and
neither are they parties to this appeal.�
He was, therefore, not in a position to respond to this question.� He, however, suggested that MGSE was free to
submit a fresh application for recognition in terms of the amended Act of 2004
and Board would consider it according to law.�
He also pointed out that the present inspection reports have confirmed
the continuing serious irregularities which formed the basis of its earlier
decision of withdrawing recognition by its order dated 31st
August, 2004.� He mentioned that the question of renewal of
recognition of stock exchange could be considered only if the basic conditions
were complied with by the stock exchange.�
He further submitted that the order dated 31.08.2004 of the Board
refusing to grant renewal of recognition had been notified in the Official Gazattee
and thereafter the stock exchange (MGSE) ceased to be a recognized stock
exchange within the meaning of section 2(f) read with section 4 of SCRA,
1956.� Therefore the Board could not
consider the application of MGSE for corporatisation and demutualization as on
the appointed date the scheme was applicable to only recognized stock
exchanges.� He further submitted that
following conditions were absolutely necessary for the recognition of a stock
exchange under the amended Act of 2004.
1)
There is no connectivity to the depositories CDSL and NSDL.� Since there is no rolling settlement system
operating in the exchange, it has not made any arrangements for establishing
connectivity with CDSL and NSDL which is absolutely essential for trading in a
demat regime.
2)
Turnover
There is no turnover in
the stock exchange for the year 2003-2004, 2004-2005, 2005-2006 and till May
2006 in the year 2006-2007.
3)
Trading and settlement system��
The exchange had not been
recoding any trading with effect from 23.4.1999.� It has also not adopted the latest T+2 system
which was introduced by the Board in 2003.
4)
Settlement Guarantee Fund
The MGSE did not comply
with the requirements mandated by SEBI circular for setting up the settlement
guarantee fund.� The funds are required
to be earmarked separately as a risk containment measure for the stock exchange
but it has not been done so by the stock exchange (MGSE). The funds should be
segregated and managed by an independent trust which has to be other than the
present management of the stock exchange.�
No such trust has been created by the MGSE.
5)
Hardware and software
Without computerization, it is not
possible to have screen based effective and efficient trading system.� There are only three members of the stock
exchange who are using the existing system including the software of the
exchange.� There is no surveillance and
monitoring system installed in the MGSE.�
Three members are trading through ISE Securities and Services Ltd.
(ISS).� The three members would not make
the MGSE as a viable exchange.
����������� The
learned counsel for the respondent submitted that for the last four years MGSE
has not taken any remedial steps for addressing the deficiencies pointed out in
the inspection reports and therefore it was not in the interest of investors to
allow MGSE to continue its operation.�
����������� Having
heard the counsel for the appellant and respondent we are of the view that a
stock exchange to be effective and useful to the investing public must have
modern and uptodate hardware and software systems installed in it.� It is almost impossible to operate without
the assistance of adequate IT infrastructure.�
Similarly, the maintenance of settlement guarantee fund was essential for
the security of trades being transacted on the platform of the stock exchange
and for the safety of the exchange system itself.� It is impossible to think of trades without
connectivity with the depositories when these days almost entire trade is done
in demat form and the settlement period is T+2.�
We do feel that a stock exchange which has only three active trading
members and total members being reduced to 54 would not make it as a viable
unit.� We have also seen that the members
are dwindling year after year as at the time of pervious inspection there were
69 members in the exchange which has come down to 54.� There are no new admissions of members.
����������� The
Board had derecognized the MGSE due to non-compliance of the irregularities
mentioned in the inspection reports of 2002-03.�
The current inspection by the Board confirms the persistence of quite a
few of the serious irregularities.� It is
not possible to ignore this fact and allow the continuation of recognition
subject to conditions.� We are of the firm
view that the appellant has to satisfy the Board that it has addressed all the
concerns of the Board as pointed out in the inspection reports before it could
be allowed the renewal of recognition.�
We agree with the learned counsel of the Board that other stock
exchanges which allegedly have been allowed renewal of recognition subject to
conditions are not before us and we are not aware of the circumstances under
which the Board had taken such a decision.�
The appellant is free to apply afresh for the recognition of the stock
exchange after fulfilling all the requirements.�
We, therefore, find no reason to interfere with the impugned order.�
In the result, the appeal is
dismissed with no order as to costs.
����������������������������������������������������������������������������������������������������������� Sd/-
����������������������������������������������������������������������������������������������� Justice
N.K. Sodhi
����������������������������������������������������������������������������������������������� Presiding
Officer
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Bhattacharya
����������������������������������������������������������������������������������������������� Member
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����������������������������������������������������������������������������������������������� R.
N. Bhardwaj
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RRN