Exit Order in respect of Cotton Association of India (CAI).

1. Cotton Association of India, (hereinafter referred to as “CAI” andformerly known as the East India Cotton Association Limited) was granted recognition, under section 6 of the Forward Contracts(Regulation) Act, 1952(hereinafter referred to as “FCRA”), vide notification dated June, 14, 1955, on a permanent basis, for organising and regulating forward contracts in cotton throughout India. The volume of futures trade on CAI started to decrease from 2001-02 and became „nil‟ in 2006-07 and no futures trading was conducted thereafter.TheForward Markets Commission (hereinafter referred to as “FMC”)merged with SEBI with effect from September 29, 2015, further revoked its permission for execution of any trading on CAI with effect from April 2008.The CAI has ever since remained dormant, without any attempt being made to revive the futures trading.

2. The erstwhile FMC vide Circular No. 9/1/2014-MKT-I (Vol-II), dated May 19, 2015, directed all the commodity derivatives exchangesthat had suspended theirtrading operations to refund the clients margin money and members‟ depositsand resolve outstanding client disputes. The erstwhile FMC also directed that failure by an exchange to revive its trading operations within 12 months from the date of suspension of trading would leadto cancellation of its registration andmade a recommendation to the Ministry of Financein respect of CAI seeking withdrawal of its recognition, under the FCRA.

3. As per Section 28A(1) of the FCRA as inserted vide the Finance Act, 2015, all recognised associations under FCRA are deemed to be recognised stock exchanges under the Securities Contracts (Regulation) Act, 1956, (hereinafter referred to as „SCRA‟). Consequently, upon section 28A (1) of the FCRA coming into force, CAI is deemed to be a recognised stock exchange under the SCRA.

4. SEBI issued a Circular No. CIR/CDMRD/DEA/01/2016 dated January 11, 2016 laying out the mandatory requirements/ exit policy for all commodity derivatives exchanges (hereinafter referred to as „Exit Circular, 2016‟). In terms of clause 4 of the Exit Circular,

Exit Order in respect of Cotton Association of India

2016, in case of no trading operation on the platform of any commodity derivatives exchange for more than twelve months, such exchange shall be liable to exit. Additionally, in terms of clause 5 of the Exit Circular, 2016, all Regional Commodity Exchanges shall ensure that they have at least 5% of the nation-wide market share of the commodity, which is principally traded on their platform. In case any Regional Commodity Exchange fails to meet the above criteria for two consecutive years, it shall be liable to exit.

5. Vide letter dated February 12, 2016, SEBI directed CAI to comply with the provisions of the Exit Circular, 2016 including valuation of its assets. In response to the above and with reference to the Exit Circular, 2016, CAI, vide its letter dated March 14, 2016submitted as follows: i. On December 10, 2009, the Board of Directors of the Association, resolved that the Association ceases to be a recognised association under provisions of FCRA. The same was ratified at its extra ordinary general meeting held on June 18, 2012 by the members of the Association. ii. CAIdoes not carry out any trading on the platform of the Association. iii. However, having accepted the contents of SEBI’s letter dated February 12, 2016, assuming it was a recognised exchange, it desired a formal exit to be granted to the Association in terms of the Exit Circular, 2016.

6. I have considered the submissionsadvanced on behalf of CAI and the relevant documents on records as also in terms of the Exit Circular, 2016, for the purpose of considering the case of exit of CAI. In terms of clause 7 of the Exit Circular, 2016,I note that the following conditions are, inter-alia, required to be complied with by any non-functional commodity derivative exchange for seeking an exit: (a) Distribution of its assets subject to certain conditions as laid down in the Exit Circular, 2016 as well as the other guidelines as may be issued by SEBI, the Government of India or any other statutory body from time to time.

(b) For the purpose of valuation of the assets of the exchange, submission of the report of a valuation agency appointed by SEBI. All the valuation charges shall be paid by the Exchange. (c) Quantum of assets for distribution to be made available after payment of the following by the Exchange: (i) Statutory dues including Income Tax; (ii) Transfer of Investor Protection Fund, or any such fund available with the Exchange to SEBI Investor Protection and Education Fund (hereinafter referred Exit Order in respect of Cotton Association of India to as the 'IPEF'); (iii) Payment offollowing dues to SEBI by the concerned exchange:-  Dues outstanding to SEBI and the annual regulatory fee;  The outstanding registration fees of brokers/trading members of such de-recognised exchanges as specified in the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, till the date of such de-recognition;  In case of any shortfall in collection of dues of the brokers to SEBI, the Exchange to make good the shortfall;

(iv) Refund of deposit (refundable) to the stock brokers including their initial contribution/deposit to Settlement Guarantee Fund/Trade Guarantee Fund (SGF/TGF).

(d) Contribution of up to 20% of its assets (after tax) towards IPEF taking into account, inter alia, the governance standards of the exchange and estimation of future liabilities.

(e) The concerned commodity derivative exchange to set aside sufficient funds in order to provide for settlement of any claims, pertaining to pending arbitration cases, arbitration awards, not implemented, if any, liabilities/claims of contingent nature, if any, and unresolved investor complaints/grievances lying with it.

7. In terms of the condition mentioned in para 6(b) above, SEBI in consultation with CAI on May 18, 2016 appointed M/s. Jain Tripathi& Co., as the valuation agency for verification and valuation of assets and liabilities of CAI. The Valuation Agency submitted its final report to SEBI on June 17, 2016.

8. With respect to the compliance of conditions specified in the Exit Circular, 2016 and settlement of liabilities by CAI, from the findings in the report submittedby the valuation agency M/s. Jain Tripathi& Co and also the undertaking dated August 25, 2016 (hereinafter referred to as the "undertaking") submitted by CAI which has been verified and endorsed by the valuation agency, it is noted as follows: (a) The Association prepares separate Income & Expenditure statements for the various activities which are grouped and reported as separate schedules in financial statements. These include Income from Cotton Green Building, Cotton Testing Laboratories, Standard Boxes Account, Arbitration Income, Printed Books, Futures Trading Division (till F.Y. 2010-11) and other income. The verification and valuation of assets and Exit Order in respect of Cotton Association of India liabilities of the CAI was restricted to Futures Trading Division only as the principles of valuation of a going concern cannot be applied for valuing the business of the Futures Trading Division, since CAI has discontinued its futures trading business activities from 2006.

(b) With regard to valuation of its assets including immovable property, CAI had certain assets like computers, office equipment etc. for carrying out activities of the futures trading division which have depreciated over the years. As per balance sheet on March 31, 2015, the book value of tangible depreciable assets was ₹`5,608/- only which can also be taken as fair market value of the assets.

(c) In compliance with condition mentioned in para 6(c) (ii) above, the Valuation Agency has informed that the Exchange had created a contingency fund amounting to Rs.60,319/- which had been written back and adjusted against accumulated losses in the FY 2010-11.

(d) Incompliance with condition mentioned in para 6(c)(iii) above, CAI has paid the outstanding annual regulatory fees amounting to ₹`25,000/- and`₹50,000/- for the financial years 2015-16 and 2016-17, respectively, vide demand draft no. 787493, dated November 25, 2016. Further, there is no outstanding registration fees / dues payable by brokers/sub-brokers, since all deposits have been refunded.

(e) In compliance with condition mentioned in para 6(c) (iv) above, CAI has confirmed in their letter dated 25.08.2016 that there is no liability towards refundable deposits of clearing members and brokers.This fact has been verified and accepted by the valuer, viz – Jain Tripathi& Co vide letter dated 21.12.2016.

(f) Incompliance of condition mentioned in para 6(d) above,CAI has contributed an amount of ₹`1,00,000 vide demand draft no. 787496, dated November 25, 2016, towards SEBI IPEF for investor protection and in order to cover future liabilities, if any.

(g) In compliance of condition mentioned in para 6(e) above,CAI has submitted in its undertaking that there are no arbitration disputes/investor complaints pending and that it will clear all the liabilities, if any, before distribution of assets of the Exchange.

(h) With regard to its other liabilities and contingent liabilities, the valuation agency in their

Exit Order in respect of Cotton Association of India report dated 17.06.2016 have stated that there are no outstanding liabilities, no contingent liabilities & no tax liabilities pending in the Exchange and all deposits of clearing members & brokers have been refunded.

(i) CAI in its undertaking has stated that there are no cases lodged against it/pending beforevarious legal fora.

9. From the valuation report and undertaking of CAI, it is observed that all the known liabilities as on date have been brought out. I note that CAI has substantially complied with the conditions contained in the Exit Circular, 2016 subject to its undertaking. Therefore, I am of the view that it is a fit case to allow exit to CAI in terms of clause 7 of the Exit Circular, 2016.

10. I, therefore, in exercise of the powers conferred upon me by virtue of section 19 read with provisions of sections 11(1), 11(2) (j) of the Securities and Exchange Board of India Act, 1992 and sections 4, 5 and 12A of the SCRA, allow the exit of Cotton Association of India as a stockexchange and consequent withdrawal of recognitiongranted to CAI. I hereby direct it to:- (a) comply with its tax obligations under Income Tax Act, 1961; (b) comply with the undertakings given by it to SEBI; (c) comply with other consequential conditions of Exit Circular, 2016; and (d) not use the expression “Exchange” or any variant of this expression in its name and to avoid any representation of its present or past affiliation with the stockexchange, in the media;

11. This order shall come into force with immediate effect. A copy of this order shall also be forwarded to the Income Tax Authorities, the Ministry of Finance, the Ministry of Corporate Affairs and the State Government of Maharashtra intimating the exit of Cotton Association of Indiaand for appropriate action at their end as per applicable laws.

Sd/- DATE:December 29, 2016 S. RAMAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Exit Order in respect of Cotton Association of India