Order in the matter of Pune Stock Exchange Limited

WTM/PS/17 /MRD/DSA/JULY/2013 SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under Section 12A of the Securities Contracts (Regulations) Act, 1956 IN RESPECT OF THE GOVERNING BOARD, PUNE STOCK EXCHANGE LIMITED Date of hearing: April 09, 2013 Appearances: For Noticee: Mr. S.R. Gadre, Chairman, Pune Stock Exchange Mr. N.H. Kakirde, Director, Pune Stock Exchange Mr. J.B. Joshi, Director, Pune Stock Exchange Ms. M.S. Gawali, Authorised Representative, Pune Stock Exchange For SEBI: Mr. P.K. Bindlish, Chief General Manager Ms. Anitha Anoop, Deputy Legal Adviser Mr. Pradeep Kumar, Assistant Legal Adviser Mr. A. Joe Pradeep, Assistant General Manager 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an inspection of the Pune Stock Exchange Limited (hereinafter referred as 'PSE'), during the period of December 29, 2011 to December 31, 2011, on receipt of the representation from PSE Broker Forum. The inspection of PSE also included the inspection of its major shareholders with/ without trading rights, their associates and the subsidiary company namely PSE Securities Limited (hereinafter referred as 'PSL'). A further inspection of PSE was held during June 25, 2012 to June 27, 2012, for the purpose of renewal of recognition as the existing recognition of PSE was expiring on September 01, 2012. The inspections inter alia revealed lapses and irregularities in the functioning of the Exchange and in the management of the subsidiary, PSL, as also non-compliance of various SEBI regulations and directives.

2. Upon consideration of the inspection reports, SEBI issued a Show Cause Notice (hereinafter referred to as ‘SCN’) dated November 22, 2012 to PSE under Section 12A of the Securities Contracts (Regulation) Act, 1956 read with Section 11 of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act') Regulation 11 of the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public

Shareholding in recognised Stock Exchanges) Regulations, 2006 (hereinafter referred to as 'MIMPS Regulations') and Regulation 52 of the Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012. The SCN inter alia alleged that PSE has failed to submit periodical reports, failed to appoint the Chief Executive/ Managing Director, failed to conduct half yearly inspection of subsidiary and the sub-brokers, intervened in the functioning of PSL, committed irregularities in the composition of Investor Protection Fund (hereinafter referred to as 'IPF'), etc., in violation of the provisions of Regulation 11(1), (2) and (3) of the MIMPS Regulations, the SEBI Circular bearing no. MRD/DSA/Cir-06/2005 dated February 17, 2005, SEBI Circular bearing no. SMD/SED/6919/93 dated April 20, 1993, SEBI Circular bearing no. SMD/POLICY/Cir-4/2003 dated February 11, 2003, SEBI Circular bearing no. SMD/POLICY/Cir-4/2003 dated February 11, 2003, SEBI Circular bearing no. MRD/DOP/SE/Cir-38/2004 dated October 28, 2004, SEBI Circular bearing no. SMD/POLICY/Cir-32/97 dated December 03, 1997, SEBI Circular bearing no. SE/10118 dated October 12, 1992, SEBI Circular bearing no. MRD/DOP/SE/Cir-07/2005 dated February 23, 2005. PSE was advised to reply to the SCN, within a period of fifteen days from the date of receipt thereof. It was also informed that in case of failure to reply, it would be presumed that PSE had no explanation to offer and that SEBI shall proceed in the matter as deemed fit.

3. PSE vide its letter dated December 03, 2012 requested for extension of time for filing reply to the SCN. PSE replied to the SCN vide its letter dated December 31, 2012 and requested for an opportunity of personal hearing. Accordingly, an opportunity of personal hearing was granted to PSE on March 11, 2013 before me. However, PSE vide its email dated February 21, 2013 requested for rescheduling of the personal hearing as it had convened Extra Ordinary General Body meeting on the scheduled date. The request of PSE was granted and accordingly the hearing was rescheduled to March 14, 2013. On this day, Mr. S.R. Gadre, Chairman, PSE, Mr. N.H. Kakirde, Director, PSE, Mr. J.B. Joshi, Director, PSE and Ms. M.S. Gawali, PSE appeared on behalf of the Governing Board of PSE and made oral submissions.

4. PSE vide its letter dated March 01, 2013, had submitted copies of the inspection reports of its subsidiary PSL and its sub brokers, copies of the Annual Reports and Balance Sheets for the years 1996-2002 with respect to the utilisation/ transfer of Investor Service

Fund and the same was taken on record. The submissions of PSE, made during the oral hearing as well as in its written replies dated December 31, 2012 are summarized in brief below: a. PSE has admitted that there have been certain irregularities in its functioning. It said that it has rectified most of the irregularities as mentioned in the SCN and is in the process of complying with the remaining ones. b. PSE had made various efforts in order to appoint the Executive Director and Managing Director for the purpose of day to day administration of the Exchange. c. PSE stated that Mr. Amit Modak, a Trading Member Director of PSE and Mr. Rajendra Nahar, a Shareholder Director of PSE were appointed only to oversee the functioning of PSL without any intention to interfere in its working. d. The IPF Trust of PSE, consist of one office bearer, one Public Representative Director and one representative of the Investor Association. The representatives have been appointed by PSE after passing the Trust Board Resolution dated November 30, 2012. Further, it was also submitted that all the accounts of IPF were disclosed during the inspection. e. PSE has submitted that it will transfer the amount of 97,46,766 from the General Reserves Fixed Deposit to the Investor Service Fund fixed deposit along with the interest earned on the said amount on approval by the Board Resolution and the Auditors of the PSE. f. PSE has submitted that notices have been issued to 41 members who have not complied with the Base Minimum Capital (hereinafter referred to as 'BMC') of 1 lakh and action is being contemplated as against these.

5. I have carefully considered the SCN issued to the PSE and the replies/submissions including those made during the personal hearing. Considering the above, the charges raised in the SCN are being dealt below in seriatim:

a. Non submission of reports in terms of MIMPS Regulations The SCN has alleged that PSE has failed to submit the quarterly reports regarding its shareholding under Regulation 11(2) of the MIMPS Regulations and also failed to submit the undertaking confirming the compliance of the provisions of the MIMPS Regulations under Regulation 11(3) of the MIMPS Regulations. The relevant provisions of the MIMPS Regulations are extracted below:

"11(1) .... (2) Without prejudice to the provisions of the Act and the rules made thereunder, the recognised stock exchanges shall submit a report to the Board disclosing the following on a quarterly basis within fifteen days from the end of each quarter:- (a) the names of ten largest shareholders along with the number of shares held by them and their percentage shareholding; (b) the names of the shareholders falling under regulation 8 who had acquired shares in that quarter; (c) the shareholding pattern in the recognised stock exchange in such format as may be specified by the Board. (3) The recognised stock exchange shall submit an undertaking confirming the compliance of the provisions of sub-regulation (1) to the Board on a quarterly basis within fifteen days from the end of each quarter. (4) ...." I note that PSE had not submitted the reports as mandated by the aforementioned provisions until the issuance of the SCN i.e. November 22, 2012. PSE in its reply has admitted that there have been certain irregularities in its functioning. Further, it has now submitted these reports along with its reply dated December 31, 2012 and has also undertaken to submit such reports in future, as and when due.

b. Mismanagement of Subsidiary The SCN has alleged - that PSE has failed to nominate Public Representative Directors and nominee Directors of the parent exchange on the Governing Board of PSL, when the terms of the Public Representative Directors expired/ vacancies arose in those categories of Directors; - that PSE had authorized Mr. Amit Modhak, a Trading Member Director of PSE and Mr. Rajendra Nahar, a Shareholder Director of PSE to attend the board meetings of PSL. PSE had also authorized Mr. Amit Modhak to visit PSL three times a week for supervising its affairs; in violation of the SEBI Circular bearing number SMD/POLICY/Cir-4/2003 dated February 11, 2003. The authorization of the directors of PSE to attend the Governing Board meetings of subsidiary company raises serious questions on the autonomy of the Governing Board of the subsidiary (PSL) and the decisions taken by it.

PSE in its reply has submitted that the Public Representative Directors and the Nominee Directors of PSE on the Governing Board of PSL were approved by a Board Resolution passed by PSE on August 24, 2012. It has also been said that the said appointments have been approved by SEBI. As regards the authorisation of Mr. Amit Modhak and Mr. Rajendra Nahar to attend the meetings of the Governing Board of PSL and authorisation of Mr. Amit Modhak to attend the office of PSL, PSE has submitted that these two persons were appointed only to oversee the functioning of the PSL, but without any intentions to interfere in the working of the subsidiary. It has also been said that these two had not received any remuneration from PSL for these honorary positions and further on account of the expert advice of Mr. Amit Modhak, PSL was able to avoid certain unnecessary costs and thereby reduce its losses. PSE in its reply has also submitted that it has only two office bearers who remained in its premises. PSE has submitted that as and when any new office bearer is appointed, he/she shall be appointed on the Governing Body of PSL. I have considered the SEBI Circular bearing no. SMD/POLICY/Cir-4/2003 dated February 11, 2003 w.r.t. the composition of the Governing Board of the subsidiary company and note that the exchange is authorized to appoint a maximum of two directors who are officers of the parent exchange, such directors shall be in addition to 50% Public Representative Directors. The said circular further states that the subsidiary should have its own staff and none of these should be concurrently working for or holding any position of the office in the parent exchange. The very act of PSE authorising its directors to attend the meetings and office of PSL is wrong and violates SEBI Circular bearing no. SMD/POLICY/Cir-4/2003 dated February 11, 2003. Such authorisation would invariably tantamount to the parent exchange influencing the decisions of the subsidiary.

Further, I note that PSE has failed to conduct half yearly inspections of its subsidiary and the inspection of 20% of the sub-broker of the subsidiary, as required by the SEBI Circular bearing number SMD/POLICY/Cir-4/2003 dated February 11, 2003. PSE in its reply has submitted that the inspection of PSL has now been completed and has also enclosed a copy of the inspection report vide letter dated March 01, 2013. Further, it has also been submitted that the inspection of the sub-brokers of the PSL shall be completed in due course.

c. Non compliance with respect to the constitution of the Investor Protection Fund Trust The SCN has alleged that the composition of the IPF Trust of PSE is not in accordance with the SEBI Circular bearing no. MRD/DOP/SE/Cir-38/2004 dated October 28, 2004. The SEBI Circular requires one Public Representative Director, one Representative from an Investor Association and one Exchange representative. The IPF Trust of PSE consists of three Shareholder Directors, one Public Representative and one Investor Association Representative. PSE in its reply has submitted that the IPF Trust has been reconstituted according to the requirements of the said SEBI Circular.

The SCN also alleged that PSE had failed to produce the accounts of the IPF during the inspection by SEBI. The inspection further found that PSE has utilized around 1,25,000 from IPF for the purchase of franking machine and also incurred expenditure viz., insurance premiums and annual maintenance charges. PSE in its reply has submitted that it had disclosed all the accounts of IPF at the time of inspection and have also transferred 2,54,147 to IPF on July 30, 2010 for reversing the expenditures incurred on franking machine and other articles. PSE vide another letter dated June 26, 2013 has confirmed that the expenditure incurred for insurance premiums and annual maintenance charges have also been transferred back to IPF.

The activities of PSE, as discussed above, are in contravention of SEBI Circular bearing no. MRD/DOP/SE/Cir-38/2004 dated October 28, 2004 and SEBI circular no. SMD/POLICY/CIR-32/97 dated December 3, 1997. d. Non compliance with other SEBI Circulars - The SCN has alleged that PSE has failed to submit quarterly development reports of the exchange for the quarters ended on December 31, 2011, March 31, 2012, and June 30, 2012 as required by the SEBI circular bearing no. MRD/DSA/Cir-6/2005 dated February 17, 2005. I note that PSE has now submitted the reports along with the reply and has also undertaken to submit such reports for subsequent period as and when these are due. It has further requested to condone the delay in the filing of the report.

- The SCN has further alleged that the post of Executive Director/ Managing Director of PSE is lying vacant from February, 2012 onwards and no efforts have been made for the appointment of the Executive Director/ Managing Director in violation of the SEBI Circular bearing no. SMD/SED/6919/93 dated April 20, 1993. PSE in its reply has submitted that it has expedited the selection process of Managing Director and issued advertisements in the newspapers in January, 2013. I note the submission of PSE that the Governing Board of PSE in its meeting held on March 11, 2013, has approved the name of Deputy Manager of PSE for the post of Managing Director and approval for the same has been taken from SEBI. PSE has taken steps in order to comply with the said circular.

- PSE has also been alleged to have failed to make listing fee contribution of 97,46,766 to the Investor Services Fund for the period of 1995-96 to 2002-03 in terms of the SEBI Circular bearing no. SE/10118 dated October 12, 1992. It has also been alleged that PSE has not taken any serious effort to transfer the funds to the Investor Services Fund despite the intervention of SEBI. PSE in its reply has undertaken to transfer the said amount form the General Reserves Fixed Deposit to the Investor Service Fund fixed deposit along with the interest earned on the said amount.

Later on, vide letter dated March 01, 2013, PSE submitted the copies of Annual Report and Balance Sheets from the year 1995-1996 to 2002-2003 and stated that they had incurred expenditure on the Investor Awareness programs for these years and no amount is now due to be transferred to the Investor Service Fund.

- The SCN has alleged that PSE did not have proper and adequate infrastructure in its Investor Service Centre in violation of the SEBI Circular bearing no. SMD/POLICY/CIR-32/97 dated December 03, 1997. It has been found that there are no personnel for receiving/ recording investor complaints. PSE in its reply has submitted that they provide basic facilities such as library, telephone, photo copies etc. However, the fact remains that PSE has no dedicated Investor Services Cell with adequate infrastructure in accordance with the SEBI Circular bearing no. SMD/POLICY/CIR- 32/97 dated December 03, 1997.

- It has also been alleged that out of 170 members, 46 members of the exchange have not maintained Base Minimum Capital of 1 Lakh in violation of the SEBI Circular MRD/DOP/SE/Cir-07/2005 dated February 23, 2005 dated February 23, 2005. PSE in its reply has submitted that it has issued notices to 41 members, who had a shortage in Base Minimum Capital and the exchange is contemplating appropriate action against the non-compliant members.

6. Having considered the facts and circumstances described in the above paragraphs, it is seen that PSE has taken certain corrective steps and has undertaken to comply with the necessary requirements prescribed under SEBI Rules and Regulations. I note that the steps taken by PSE are pursuant to the intervention of SEBI. I note that a Stock Exchange, who is in charge of the trading platform for all the market participants, has to function in an objective and just manner setting an example for the intermediaries related to its business and also promote healthy development of the securities market. Though the exchange may attribute its inability to ensure timely compliance with SEBI circulars/ directives, to its limited resources, it only shows the lack of its commitment to function as a stock exchange. Having considered the above, I am convinced that PSE was negligent in the discharge of its functions and duties. Now, I have to decide on the appropriate action to be awarded to PSE. Considering the nature of the lapses and the efforts made, I am of the opinion that the penalty of warning would be appropriate in this case.

7. Having regard to the above, I, in exercise of the powers conferred upon me in terms of Sections 11(2)(j) and Section 19 of the Securities and Exchange Board of India Act, 1992 read with Section 12A of Securities Contracts (Regulation) Act, 1956, hereby warn the Governing Board of the Pune Stock Exchange Limited and advise it to be more cautious in the discharge of its functions and regulatory duties.

DATE : 23/JULY/2013 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA