Order in the matter of Vadodara Stock Exchange Ltd (VSEL)

WTM/PS/MRD/DSA/61/JAN/2015 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM : PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under sections 12 A and 11 of the Securities Contracts (Regulation) Act, 1956 read with section 11 of the Securities and Exchange Board of India Act, 1992 In respect of Vadodara Stock Exchange Limited

1. Securities and Exchange Board of India (hereinafter referred to as "the SEBI") had issued a Show Cause Notice dated March 22, 2013 (hereinafter referred to as "the SCN") to the Vadodara Stock Exchange Limited (hereinafter referred to as "the VSE") through its Chairman. The SCN alleged that the conduct of VSE lacked transparency, due diligence and appeared to be arbitrary in nature. The SCN advised the said stock exchange to show cause as to why appropriate directions under sections 12A and 11 of the Securities Contracts (Regulation) Act, 1956 ("the SCRA") and section 11 of the Securities and Exchange Board of India Act, 1992 ("the SEBI Act") should not be issued for securing proper management of the assets and other properties of VSE including supersession of the governing body of the stock exchange. VSE was advised to submit its reply along with supporting documents and also to indicate whether it desired to avail the opportunity of personal hearing before SEBI.

2. The aforesaid SCN was issued on the basis of the observations and findings of an inspection conducted on VSE by SEBI during the year 2009. The facts and allegations, as stated in the SCN, are summarized below: (a) The Board of VSE, in a meeting held on May 11, 2009, had decided to sell six of its properties at Paradise Complex, Sayajigunj, Vadodara, viz., the Basement, Basement Office no. 46, First Floor Office Nos. 149 and 150, Second Floor Office Nos. 227 and 228. (b) An advertisement was issued on June 22, 2009 in the regional daily 'Sandesh', inviting offers within 10 days of the date of advertisement for such proposed sale. (c) The details of bidders who had applied, the date of offer, offer price, are: Sr. Property Area Name and address of the Offer Price Date of Offer Stat us of No offered for Sq.ft/carpet people who placed bid to (Rs.) per allotment sale area buy the property Sq.ft/ Carpet price Area

1 Basement 2181 sq ft Mr. Pravin Naik 1011/- July 1, 2009 Allotted at carpet area (On behalf of Jain Rs. 1100/- International Trade Organization) 13, Chinar Woods Akota, Vadodara 2 Basement 325 sq ft Mr. Pravin Naik 1001/- July 1, 2009 Offer Office No. carpet area (On behalf of Jain withdrawn 46 International Trade Organization) 13, Chinar Woods Akota, Vadodara 3 1st Floor 835 sq ft Z.A. Amiri 1400/- July 1, 2009 Allotted at Office No. carpet area 139-B, Paradise Complex Rs 1400/- 149 & 150 1st Floor, Sayajigunj, Vadodara

Mr. Pravin Naik 1021/- (On behalf of Jain International Trade Organization) 13, Chinar Woods Akota, Vadodara 4 2nd Floor 930 sq ft Sitar S. Shah 1200/- July 1, 2009 Allotted at Office No. carpet area 5, Harinagar Society Rs 1200/- 227 & 228 Opp. Anand Vidhyavihar School, Race Course, Vadodara

Mr. Pravin Naik 951/- (On behalf of Jain International Trade Organisation) 13, Chinar Woods Akota, Vadodara (d) The bids were opened by VSE on July 01, 2009 in the presence of Managing Director of VSE and Mr. Sudhir Shah, Chairman, VSE. (e) Thereafter, the Board of VSE had resolved in its meeting held on August 12, 2009 to allot properties to the highest bidders. (f) The properties mentioned at serial nos. 3 {first floor offices nos. 149 and 150} and 4 {second floor offices nos. 227 and 228} in the above table were allotted to the highest bidder.

(g) However, irregularities were observed in respect of allotment of properties at serial nos. 1 (Basement) and 2 (Basement office no. 46).

(h) Alleged irregularities in the allotment of Basement (property mentioned at sr. no. 1 of the above table): It was observed from the details submitted by VSE that Mr. Pravin Naik, vide letter dated July 1, 2009, had applied for properties on behalf of Jain International Trade Organization ("JITO") and the price quoted for the 'Basement' property measuring 2181 sq. ft. area was Rs.1011/- per sq.ft. The SCN had also stated that Mr. Pravin Naik was the sole bidder for this property. However, the said property was allotted to JITO at Rs.1100/- per sq.ft., which price was higher than the bid offered on record by Mr. Pravin Naik. Therefore, it was alleged that "the allotment price (of Rs.1,100/-) for the basement was different from the bid price (Rs. 1011/-) which is in deviation from the decision of the Board to allot to highest bidder". The SCN also alleged " Further, no reasons have been recorded as to how Mr. Pravin Naik agreed to pay a price higher than the bid price and that too when he was the sole bidder for the property. No record of such negotiation are included in the submissions of VSEL".

(i) Withdrawal of offer for property (basement office no. 46) by Mr. Pravin Naik: The SCN has mentioned that Mr. Pravin Naik, vide letter dated July 1, 2009 had applied for all the four properties. As per the letter, these bids were made for and on behalf of JITO. The SCN stated that Mr. Pravin Naik had withdrawn his offer for property no. 46 vide letter dated July 30, 2009. On perusal of the said letter, it was observed that the same was a letter from VSE to Mr. Pravin Naik advising him to arrange for the stamp papers and cheque towards purchase of properties from VSE. On the said letter, handwritten comments of Mr. Pravin Naik are present with his signature, but without any date. VSE had stated that it considered such hand written comments of Mr. Pravin Naik as his withdrawal for property no. 46. Such comments are as follows: “As already informed, it is not viable for me to accept allotment of 1 small basement office only & therefore I would not be able to accept the same since my offer was for all offices. Sd/- Pravin Naik". Except the above, there is no letter from Mr. Pravin Naik on record with respect to his withdrawal of offer for property no. 46. The SCN has observed that "In the absence of same, date when offer has been withdrawn is not ascertainable".

The SCN had also stated "From the above, it is noted that Pravin Naik was interested in allotment of all properties instead of one small basement office (property no. 46 measuring 325 Sq. Feet) and therefore, it cannot be concluded that withdrawal offer was only for property no. 46 as submitted by exchange".

(j) Alleged irregularities in the allotment of property - Basement office no. 46 (mentioned at serial no. 2 of the above table): The Board of VSE in its meeting held on August 12, 2009 had noted that there are no buyers for the Basement Office no. 46 and had accordingly authorized the Chairman to accept offer from any person at the minimum offer price of Rs.1000/- per sq. ft.

Subsequently, one Viken Shah, vide letter dated August 31, 2009 (received by VSE on the next day i.e., on September 01, 2009), informed VSE that he proposes to purchase the said property at Rs.900/- per sq. ft. The offer of Mr. Viken Shah was accepted and a Board Resolution was passed on September 01, 2009 (the same day of receipt of the proposal) for disposal of the property. The decision was communicated to Mr. Viken Shah and the token amount of Rs.11,000/- was received from Mr. Viken Shah vide cheque dated September 02, 2009.

The SCN alleged that the decision taken on September 01, 2009 was materially different to its earlier decision taken by VSE on August 12, 2009. Though, there was no material changes between the period, it was alleged that the decision of the Board of VSE to dispose off the said property below Rs.1000/- without any reasons clearly indicated lack of transparency, diligence and fairness on the part of the Board of VSE.

The SCN also observed and alleged the following : "............... 12. Further, as per the valuation report (Annexure III) of Shanti Consulting Engineers dated June 26, 2007, valuation of property no. 46 was Rs 3,65,625/- (Rs 1125/- per sq. Feet). However, it is noted that Board of VSEL on September 1, 2009 (same day of receipt of offer) has decided to sell the property no. 46 at a price of Rs 900 which is 10% less than its earlier decision dated August 12, 2009 and also 20% less than the valuation of the property as per valuation report of Shanti Consulting Engineers. 13. It is alleged that entire process starting from the withdrawal of offer by Pravin Naik (though no letter received), receipt of offer from Viken Shah, passing of Board resolution on same day of receipt of offer, deviation from its own decision taken earlier, clearly indicates lack of transparency and fairness in allotment of property no. 46 especially when it was allotted at the price which is 10% less than the minimum price of Rs 1000 as decided by Board on August 12,

2009. Further, there is nothing to show that VSEL examined the feasibility to go for retender and fresh bids for the captioned property. 14. It is also alleged that VSEL failed to carry out any due diligence to ascertain whether the persons whom properties have been allotted (including property number 46) are related in any way to the Board/Management of VSEL. ............."

3. VSE (vide letter dated April 02, 2013), while acknowledging the receipt of the SCN, informed that an urgent meeting of the Board of Directors of VSE was scheduled on April 11, 2013 to discuss the subject matter and that the reply would be submitted thereafter. Thereafter, vide letter dated April 15, 2013, VSE submitted its explanations to the allegations in the SCN. Such submissions inter alia are the following : a) Background of the property situated at Paradise Complex and the circumstances that lead the Board of VSE to sell the said property: i. The property was virtually unused since the year 1995. ii. VSE had incurred an expenditure of Rs.5,88,574/- (approx. from the period 1995- 2008) towards municipal tax, electricity bill etc. iii. Though the governing board of VSE tried to lease this property by giving advertisement in the newspaper in the year 2008, there was no response from the public. iv. The property is situated on the bank of river Vishwamitri and as the property is located in the basement, the property gets damaged during the floods. The condition was deteriorating day by day. This situation led to the reduction of its market value. VSE felt that before the condition would worsen and reduce the value, it was commercially prudent to dispose off the property. v. The area in which the property is situated has been declared as communally disturbed area by the relevant authority. This factor also has a negative impact and VSE found it difficult to get buyers. vi. The building management where this property was situated was not providing adequate facilities like lift, water etc., therefore, some offices did not fetch good rates. vii. Further, there is no proper ventilation as the property is situated in the basement. The building has no adequate parking facilities.

Other submissions: b) Mr. Pravin Naik had made an offer in his personal capacity. JITO, another bidder, had also made a separate offer on its letter head which was considered by VSE. The offer of Mr. Pravin Naik in respect of property mentioned at Sr. no. 1 of the above table was not accepted as his quote was not the highest.

c) As regards the withdrawal of offer by Pravin Naik, VSE stated that when its official went to the office of Mr. Pravin Naik for hand delivering its letter dated July 30, 2009, he withdrew his offer by writing his comments on the said letter. Therefore, the Board of VSE had considered the date of withdrawal as the date of VSE's letter.

d) The bids provided by Mr. Pravin Naik for all offices of Paradise Complex was lower than the other bidders except for office no. 46. Accordingly, VSE accepted his bid only for office no. 46. Although, Mr. Pravin Naik offered bids for all properties, he had not specified that his offer shall be accepted in toto for all properties and he was not interested in any one of the properties. Therefore, under the circumstances the Board of VSE has taken cognizance of his withdrawal for office no. 46 only, as acceptance of offer by VSE was only for property no. 46.

e) As regards acceptance of offer from Mr. Viken Shah, VSE submitted that as a matter of normal process, the notice dated August 28, 2009, convening the Board Meeting of VSE on September 1, 2009 was sent to all the directors of VSE and accordingly the said Board Meeting was held. The date of receipt of offer by Mr. Viken Shah and the date of Board Meeting being on the same day was a coincidence. As VSE was not having any other offer in its hand, the Board after considering all aspects decided to accept the offer given by Mr. Viken Shah at Rs. 900 per sq.ft. VSE also submitted that it felt that it was business prudence to accept the offer of Mr. Viken Shah and sell the property to him instead of re-tendering or inviting fresh bids.

f) VSE requested SEBI to consider the background and circumstances under which the Board of VSE arrived at a decision to sell the property.

g) As regards, the valuation of the property as mentioned in the SCN, VSE submitted that the said valuation was done by the Valuers in the year 2007 and thereafter the value of the property had diminished because of various reasons mentioned above. VSE also stated "it would further be evident from the Jantri of this particular Area which mentions value @ 4.9% and the property was sold by the Exchange @ Rs.900 per sq.ft.".

h) VSE had sold the property strictly as per the Jantri prevailing at that time and executed the sale deed on Stamp Paper of Rs. 15,000/- and the Office of Sub Registrar, Division 1-A, had registered the documents without any objection. It was also mentioned "325 sq.ft x 900 rate = 292500 and jantri @ 4.9% comes to Rs. 14332.50".

i) VSE submitted that its Board has taken all due care and diligence while taking this decision to dispose of the property in question and acted in a transparent and fair manner.

j) VSE further submitted that in the absence of any specific procedure and oversight, it had not obtained any related party undertaking from the purchaser. VSE undertook that it would henceforth take undertaking from purchasers at the time of selling any of its assets to the effect that the person is not a relative of any of the members of the Board of Directors of VSE.

k) VSE also submitted that SEBI had in the past observed that VSE had made all possible efforts to comply with provisions of various rules, regulations from time to time. VSE submitted that it strongly believes in transparency, trust and safety at all levels and by which it has earned prestigious image in the market. According to VSE, the public have shown their confidence by opening more than 77,000 DP accounts with it.

l) VSE further submitted that it has always remained compliant of relevant guidelines and protecting the interest of all stakeholders including investors and would remain committed in future also.

VSE also sought for an opportunity of a personal hearing and stated that majority of the directors of the present governing board were not the directors on the governing Board of VSE during the relevant period. It requested SEBI to consider its submissions and further requested not to issue any directions.

4. VSE, vide letter dated June 29, 2013, also provided clarifications with respect to certain queries of SEBI (sought vide e-mail dated June 03, 2013). Such queries and their responses from VSE are mentioned below :

(a) SEBI had stated that the value of the property as on July 28, 2009 was Rs. 656600 and the sale was to be executed on a Stamp Paper of Rs. 32174, whereas VSE had stated in its reply that the property was sold as per the prevailing 'jantri' for Rs. 292500.

To this query, VSE reiterated its earlier submissions that it had sold the property strictly as per the 'Jantri' prevailing at that time and executed the sale on a stamp paper of Rs. 15000 and the Registrar's Office had registered the documents without any objection.

(b) SEBI had advised VSE to provide supporting documents in respect of its submission that 'the area in which the property was situated was declared as communally disturbed area'.

VSE had submitted a 'Schedule- Areas of Vadodra City and Police Commissionerate area declared as disturbed areas' issued by State Government of Gujarat. As per this schedule, three areas falling under the Police Station of Sayajigunj were notified as 'disturbed areas'.

(c) SEBI sought clarification from VSE in respect of its submission that Mr. Pravin Naik and JITO made separate bids. SEBI noted that as per letter dated July 1, 2009 from Mr. Pravin Naik to VSE, Mr. Pravin Naik had applied for all the four properties on behalf of JITO.

In this regard, VSE had reiterated its earlier submission and annexed copies of bids made by Mr. Pravin Naik and JITO

5. VSE was also afforded an opportunity of personal hearing on August 02, 2013, when Mr. Jayeshkumar N. Shah (Deputy Manager, VSE), Dr. Markand Parikh (Shareholder Director) and Mr. Himanshu Parekh (Shareholder Director) appeared and submitted VSE's letter dated August 1, 2013 enclosing documents claiming to be the supportive documents for valuation of basement office no. 46 of Paradise Complex. The representative requested SEBI to consider the same and the replies already filed in the matter.

6. Vide the above said letter dated August 1, 2013, VSE stated that it enclosed copy of Annual Statement of Rates along with Guidelines for implementation of Annual Statement of Rates with effect from 2006 published by the Superintendent of Stamps and Valuation Department, Gandhinagar, Gujarat and the same was in implementation upto 2011.

VSE stated that as per the Guidelines, if any basement is used for commercial use, then it is to be valued at 60% of the applicable rate. As per the 'zone', its property fell under "V.V1/8, Sayajigunj area and the rate quoted is Rs.25,000/- per sq.mt." and after deducting the discount of 40%, the rate comes to Rs.15,000/- per sq.mtr. According to VSE, the valuation is Rs.4,53,000/- (30.20 sq.mtr x Rs.15,000/-).

VSE also submitted that the property no. 46 has no frontage on Road and hence 20% discount was considered as per the valuation guidelines. Accordingly, 20% (Rs.90,600/-) is deducted from the above valuation and the resultant figure was Rs.3,62,400/-.

VSE further stated that as per Guidelines, 1% of total construction cost is to be considered as depreciation per year. As per permission letter, the same was granted in the year 1986 and the agreement for purchase of office no. 46 in Paradise Complex was executed in the year 2010. Hence, depreciation for 24 years i.e. from 1986-2010 is to be considered which comes to Rs.86,976/-. Accordingly, the net valuation was Rs.2,75,424/-.

VSE also submitted that in the special note to 'jantri', it is mentioned that the 'jantri' valuation is approximate and the actual valuation will be considered at the time of registration of agreement with sub registrar will be final. It also contended that all benefits available under the Guidelines are not shown in the jantri and such benefits are availed at the time of registration of documents. Further, as per the directives of Government of Gujarat and as per the rules at that time, if Jantri valuation shows lesser stamp duty the Sub-Registrar registering the agreement will not accept. It was therefore contended that in the case of VSE, the sale deed for property comprised in office no. 46 is executed vide Sr. no. 1896 dated March 16, 2010. As per the above statement, total net valuation comes to Rs.2,75,424/- and that stamp duty paid was Rs.15,000/- on the net value of Rs.2,92,200/-.

7. I have considered the SCN, the submissions made by VSE and the documents available on record. The allegations against VSE are in respect of allotment of properties mentioned at serial nos. 1 (i.e. Basement comprising 2181 sq.ft. carpet area) and 2 (i.e., Basement office no. 46 comprising 325 sq.ft. carpet area).

8. As regards the Basement, the SCN has alleged that the same was allotted to JITO and that as per record the sole bidder was Mr. Pravin Naik. VSE has contended that it has allotted to JITO as its bid was higher and in support of the same had forwarded the letter of JITO wherein it has made the offer. I have perused the letters of Mr. Pravin Naik and JITO. Mr. Pravin Naik, vide his letter dated July 01, 2009 had mentioned his bids for all properties. Further, this letter mentions that it is made for 'Jain International Trade Organization (Vadodara)'. JITO (Vadodara), vide a separate letter dated July 01, 2009 has placed bid only for the Basement office measuring 2181 sq.ft. carpet area at a price of Rs.1100/- per sq.ft. carpet area. The bid placed by JITO (at Rs.1100/- per sq. ft.) is higher than the bid placed by Mr. Pravin Naik (at Rs.1011/- per sq. ft.). The SCN has alleged "Further, no reasons have been recorded as to how Mr. Pravin Naik agreed to pay a price higher than the bid price and that too when he was the sole bidder for the property. No record of such negotiation are included in the submissions of VSEL". If VSE had placed such separate bids received from JITO and Mr. Pravin Naik during SEBI Inspection or thereafter, this issue could have been clarified. As there are two separate bids from Mr. Pravin Naik and JITO and as JITO has made placed its bid only for the Basement property, VSE's submission could be accepted that it allotted the property to the highest bidder, which was JITO. However, it becomes difficult to comprehend as to why VSE did not disclose the fact regarding the separate bid placed by JITO for the said property during the SEBI Inspection or thereafter. On receipt of an offer separately from JITO for the Basement property, VSE should have ideally clarified with Mr. Pravin Shah and JITO regarding the same and documented such events. This would have ensured better transparency and fairness.

9. The next allegation is regarding the withdrawal of offer for basement office no. 46 by Mr. Pravin Naik. The SCN has mentioned that the offers/bids were opened on July 01, 2009. It appears that when VSE communicated to Mr. Pravin Naik regarding acceptance of his offer for Basement office no. 46, Mr. Pravin Naik, has indicated in the letter of VSE that his bids were for all properties and he would not be able to take only a small office. Accordingly, VSE has construed the same as his withdrawal of his offer. The SCN has alleged that except for the hand written comments of Mr. Pravin Naik, there was no other letter regarding his withdrawal and therefore the date when offer has been withdrawn is not ascertainable. However, considering the fact that Mr. Pravin Naik has made his comments on the letter dated July 30, 2009 and also as VSE has informed that the said letter was forwarded to Mr. Pravin Naik by hand-delivery, the date of VSE's letter could be considered as the date of withdrawal by Mr. Pravin Naik.

10. The other allegation against VSE is the irregular manner in which the property - Basement office no. 46 was allotted to Mr. Viken Shah. The SCN has stated that the Board of VSE in its meeting held on August 12, 2009 had noted that there were no buyers for the said property and the Board had authorised the Chairman to accept the offer from any person at the minimum offer price of Rs.1000/-per sq.ft. The allegation is that VSE had allotted the property to Mr. Viken Shah at a price of Rs.900/-per sq. ft. which was lower than the minimum price resolved in the above said Board meeting. VSE, in its defense, has argued that it accepted the offer from Mr. Viken Shah as it did not have any offers for the property. According to VSE, the decision to sell the property to Mr. Viken Shah at the offer price was taken in the meeting of VSE's Board of Directors held on September 01, 2009.

11. I have perused the letter dated August 31, 2009 from Mr. Viken Shah. This letter was received in VSE on September 01, 2009. According to VSE, it was a coincidence for the Board meeting and the receipt of letter to happen on the same day i.e., September 01, 2009. VSE has also contended that the Board meeting scheduled on September 01, 2009 was informed to its directors vide VSE's notice dated August 28, 2009. It is alleged that VSE had sold its property at a price less than 10% of the Board decided minimum price at Rs.1000/- per sq. ft. and 20% less than the price as per the Valuation Report.

12. As per documents, Basement Office no. 46 was sold to Mr. Viken Shah for a consideration of Rs.2,92,500/- and a stamp duty of Rs.15,000/- was paid for such sale. VSE had tried to justify the consideration amount by its contentions mentioned in its letter dated August 01, 2013. According to VSE, discounts on the consideration amount could be availed as the (i) property was situated in basement for which 40% discount was available and (ii) depreciation at 1% per year was available for 24 years. Therefore, according to VSE, from the valuation of Rs.4,53,000/- discounts under these heads were available and after deductions, the net amount was Rs.2,75,424/-. It further stated that it has paid stamp duty of Rs.15,000/- on a consideration of Rs.2,92,200/-. However, these factors and the reasons have not been documented in its Board meetings to ensure transparency and fairness in the allotment process. All that exercise that has been carried out by VSE in defending itself in this matter, the documents submitted, the reasons brought out, could have been deliberated and documented during the allotment and sale of the said properties.

13. I am also of the considered opinion that the Valuation Report, as mentioned in the SCN, would have ideally considered the factors and circumstances including those (reasons why there were no buyers and the diminishing value of property) submitted by VSE, while arriving at a guideline value of the said property. VSE has not produced any material to show that it conducted an inquiry to find whether any related party is purchasing the property to his advantage. However, VSE states that it would henceforth take an undertaking that the purchaser is not a 'related party'. It appears that VSE is still not serious in exercising due diligence as it wishes to rely only on such an undertaking. By not inviting fresh bids and selling the property for a value less than the guideline value and the value decided in an earlier Board meeting, the same may have caused loss to VSE and its shareholders. Therefore, the charge that the decision making in VSE lacked 'transparency' and 'fairness in allotment' may therefore sustain.

14. In view of the foregoing observations, I, in exercise of the powers conferred under section 19 of the Securities and Exchange Board of India Act, 1992 read with section 11 thereof and section 12A of the Securities Contracts (Regulation) Act, 1956, hereby caution the Vadodara Stock Exchange Limited for its conduct observed in this Order. The Stock Exchange is advised to ensure transparency and fairness in its dealings in future and also ensure compliance with all statutory provisions that govern its activities in the securities market.

15. The SCN dated March 22, 2013 issued to Vadodara Stock Exchange Limited is accordingly disposed of.

Sd/- PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Date : January 07, 2015 Place: Mumbai