—

(

)

•

SECURITIES AND EXCHANGE BOARD OF INDIA

NOTIFICATION

Mumbai, the 12th July, 2002

Order U/S11 of the Securities Contracts (Regulation) Act, 1956 Superseding the Board of Directors of the

Uttar Pradesh Stock Exchange Association Ltd.

S.0.732(E).—JBased 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 July 27, 2001 and

attempt to threaten and restrain the Public Representative Director from

discharging their functions,

(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 August 14, 2001 to discuss the plan of each

exchange for Demutualization/ corporatisation,

(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superseded in view of the above mentioned instances of mismanagement and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 November 05, 2001.

Subsequently, upon request of the Governing Board, the hearing was fixed on

November 19,2001.

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 December 11, 2001, SEBI granted time until December 20, 2001.

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

331^1^-3

THi. C AZETTE OF INDIA: EXTRAORDINARY

[PART II—SEC. 3(u)l

one month to fake corrective measures to stabilise the trading system and rectify the

irregularities in the exchange.

8 Thereafter, SEBI, vide its letter dated March 26^th 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, stabilising 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 April 22, 2002 submitted their report which

allegedly detailed the manner in which they had rectified the irregularities. However,

on perusal of the said report it is observed that UPSE have not rectified many of the

irregularities mentioned in the show cause notice with the directives of SEBI. It was

observed that SEBI has issued the following directions to UPSE:-

(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 s'houtd 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 storjoing the

trading of members who do not oav UD the margin in.time.

(vi)

It appears that the cheques collected toward margin payme^ In, some cases

were not deposited in the bank. The Exchange did hot 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 L prc er sy-aem tor timely collection of

margin in all due cases.

(vii)

The Exchange is advised to ensure that all penalties arc 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 seJec • .• -•! ,,numbers tor

inspection on basis of surveillance action. The possibiiity of arbitrariness

and susceptibility to misuse should be minimised.

(xi)

The Exchange is advised to ensure that bank gu,. . n -

on behalf of

brokers are taken in the proper format and are renewed Sijuuy, if required.

(xii)

The Exchange shall take immediate measures to stop the \ n actice 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"<Jated August 8, 1995 and shall

maintain the hierarchy.

(xiv)

The exchange shalltake steps to comply with SEBI Circular dated July 2,

1999 and accept scrips from approved securities for the purpose of capital

adequacy and ensure that the members maintain the minimum BMC.

(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 SMD

SEBI Circular no. 13 dated June 9, 1997.

(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.

THE GAZETTE OF INDIA: EXTRAORDINARY

[PART II—SKC. 3(ii)l

(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 January 10, 2000. In fact reports have also been received by SEBI as regards

the establishment of an online trading ring to facilitate the integration of carry

forward and hawala transactions into the main trading system of the exchange and the

officers and staff of the exchange being coerced into acting against the interest of the

exchange and /or directives of SEBI and the harassment and victimisation of the

employees of the exchanges not cooperating in such matters by withholding

increments /promotion, or holding out the threat of compulsory retrenchment..

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.

16,

THE GAZbTTH OF INDIA: EXTRAORDINARY

[PART II—SEC.3(JI)1

12 In the course of hearing before the Chairman, the Fresidentand Officiating Executive

Director of the UPSE submitted that they have complied with all conditions imposed

at the time of, granting renewal tp UPSE, that the irregularities observed in the

inspection report have been rectified, that there is no interference in the day-today

affairs pf UFS.E 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 opcrationalise 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.

• • >^r\-\ •''

•

,1,1

13 Hpwever, reports, continue ,tp be received that unofficial carry forward transactions

continue in the floor, pf 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 unpffifiial cany !or*vard transactions. ,Iti is also noted that despite the

prder pf SEBIund,ersection 8 pf S. CRA, amending the articles of association notified

on May 20, 2002 stock brokers are still holding the ppst of President and Vice

President. The day-to-day administration, signing of cheques, staff matters,

purchases, $te. o$ 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 laJkbsiat alpss to the exchange. A proposal to.refund the initial contribution

to the SGF (§> R&,25,Q00 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 operatianalised the SGF under one pretext

or the other.! Model,Rul$6 fox stock exchanges have also not been made applicable.

Complaints have bepn received frpm public representatives and the SEBI nominee

director as regards- the President of the: Exchange not abiding by the SEBI directives,

and the intcrfereoc& of,the, elected; office, beards in the' day to day functioning of the

Exchange. In terms;of./he JBSpeptipnje.po.rt, the functioning qf,the surveillance set up

is also not in accordance wjth, the, SEBI Circular No, IEMI/LKS/MI/2990/95 dated

August 8J995* .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. Pyjce-ssssitivie infprmatjoniwpeived by ,therExchange is not forwarded

to the surveiUa8<»tdep»Hrnen_t for^ examination of price /volume movement in a prior

period and rn*$EH"eports are not seen / examined for any price sensitive information

or,ft. rumour in ueap^ctof the companies listed on the exchanges. There have been

reports of thfcqreation. of the artificial markets and trades, bejng executed at unusual

prices-

14 In view of Uie ab<s>ve, facts, I amcouvinced that,the Gpveming 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.

[F. No. SEBI/LE/12829/02]

G. N. BAJPAI, Chairman

Printed by the Manager, Govt, of India Press, Ring Road, Mayapuri, New Delhi-110064

and Published by the Controller of Publication*, Delhi-110034.