Order passed in the matter of Governing Board, Ahmedabad Stock Exchange Limited, Mr. Hemant Singh Jhala, Mr. Keyur B. Mehta, Mr. Kush B. Shah, Mr. Apurva R. Hathi and Mr. Sunil B. Patel

WTM/PS/04/MRD/DSA/APR/2014 BEFORE THE 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, Ahmedabad Stock Exchange Limited, Mr. Hemant Singh Jhala, Mr. Keyur B. Mehta, Mr. Kush B. Shah, Mr. Apurva R. Hathi and Mr. Sunil B. Patel Date of hearing: April 09, 2013 and November 28, 2013 Appearances: For Noticee: Mr. K.K. Mishra, Managing Director, Ahmedabad Stock Exchange Mr. Hemant Singh Jhala, Shareholder Director, Ahmedabad Stock Exchange Mr. Kush B Shah, Shareholder Director, Ahmedabad Stock Exchange Mr. Keyur Mehta, Shareholder Director, Ahmedabad Stock Exchange Mr. Sunil Patel, Ex-Trading Member Director, Ahmedabad Stock Exchange Mr. Apurva Hathi, Ex-Shareholder Director, Ahmedabad Stock Exchange For SEBI: Mr. P.K. Bindlish, Chief General Manager Mr. Sunil Kadam, General Manager Ms. Anitha Anoop, Deputy Legal Adviser Mr. Pradeep Kumar, Assistant Legal Adviser Mr. T. Vinay Rajneesh, Assistant Legal Adviser Mr. Vineet Biyani, Manager 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) on receipt of various complaints, conducted an inspection of the Ahmedabad Stock Exchange Limited (hereinafter referred as 'ASE'), for the periods of July 05, 2011 to July 08, 2011 and May 15, 2012 to May 17, 2012, focused on the management, compliance, administrative monitoring/ control, financial management, etc. The inspection inter alia revealed lapses and irregularities in the functioning of the exchange, its Chairman and the Directors on the Governing Board, etc.

2. Upon consideration of the inspection report, SEBI issued two Show Cause Notices (hereinafter referred to as ‘SCN’) both dated November 01, 2012 under Section 11 and 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'). One of these was issued to the Governing Board of ASE and the another SCN was issued to the Shareholder Directors of ASE namely Mr. Hemant Singh Jhala, Mr. Keyur B. Mehta, Mr. Kush B. Shah, Apurva R. Hathi and Trading Member Director of ASE namely Mr. Sunil B. Patel (hereinafter all collectively referred to as ‘noticees' and individually by their respective names). The SCN inter alia alleged that the then Chairman of ASE, had interfered with the day to day functioning of the exchange and the decision taken by the board of ASE were not in the best interest of the exchange. The SCN further alleged that the accounts of ASE were not maintained properly, the exchange has failed to maintain statutory funds like Investor Service Fund (hereinafter referred to as 'ISF'), etc. and also failed to conduct the inspections of the subsidiary and sub-brokers etc.

The SCN also alleged that the acts of the noticees were in violation of the provisions of SEBI Circular bearing no. CIR/MRD/DSA/SE/43/2010 dated December 31, 2010, 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. SMD/POLICY/SGF/CIR-13/97 dated June 09, 1997. SEBI Circular bearing no. SEBI/SMD/Policy/Cir-4/2003 dated February 11, 2003, SEBI Circular bearing no. SMD/Policy/Cir-7/98 dated February 06, 1998, SEBI Circular bearing no. SMD- II/Policy/Cir-37/99 dated November 26, 1999, SEBI Circular bearing no. SMD- II/Policy/Cir-40/99 dated December 19, 1999, Master Circular dated December 31, 2010, SEBI Circular bearing no. MRD/DSA/SE/Cir.-34 /2008 dated December 05, 2008, SEBI Circular bearing no. SMD-II/Policy/Cir-37/99 dated November 26, 1999, SEBI Circular bearing no. SMD-II/Policy/Cir-37/99 dated December 19, 1999, SEBI Circular bearing no. SE/2936 dated April 06, 1992, SEBI Circular bearing no. SMD/POLICY/IECG/5694/96 dated December 20, 1996, SEBI Circular bearing no. OIAE/Cir-1/2009 dated November 25, 2009 and Rule 14 of the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as 'SCR Rules'). The ASE and its directors were advised to reply to the SCNs, 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 ASE have no explanation to offer and that SEBI shall proceed in the matter as deemed fit.

3. ASE vide its letters dated November 16, 2012 and November 26, 2012 requested for extension of time for filing reply to the SCNs. SEBI vide its letter dated December 11, 2012 extended the time for filing reply by ASE. Thereafter, ASE replied to the SCNs vide its letter dated December 22, 2012. The noticee, namely Mr. Apurva R. Hathi vide his letter dated February 07, 2012, submitted his reply to the SCN. Another noticee, Mr. Hemant

Singh Jhala also filed his reply to the SCN vide his letters dated January 05, 2013, March 01, 2013, April 02, 2013 and April 04, 2013. As no reply was coming from the other noticees, SEBI proceeded further with the matter and as requested, an opportunity of personal hearing was granted to ASE and other noticees on July 25, 2013. In the meantime, one more noticee namely Mr. Sunil B. Patel submitted his reply to the SCN vide letter dated June 03, 2013, which was taken on record.

4. On the date fixed for the personal hearing Mr. K. K Mishra, the Managing Director of ASE appeared on behalf of the Governing Board of ASE along with the other noticees namely Mr. Hemant Singh Jhala, Mr. Keyur B. Mehta, Mr. Kush B. Shah, Mr. Apurva R. Hathi and Mr. Sunil B. Patel. During the course of personal hearing, Kush B. Shah and Keyur B. Mehta submitted their replies to the SCN both dated July 24, 2013. The noticees submitted that their replies have been filed.

In the course of personal hearing, Mr. K.K. Mishra submitted the copies of the minutes of the meetings dated December 18, 2012 and December 22, 2012 which were taken on record. Mr. Hemant Singh Jhala also filed certain papers which were also taken on record.

5. Thereafter, Mr. Hemant Singh Jhala vide his letter dated July 26, 2013, requested for another opportunity of personal hearing, in order to clarify and justify the allegations made against him in the inspection report. SEBI while recording the version of the noticees during the personal hearing vide letter dated August 19, 2013, gave Hemant Singh Jhala an opportunity to submit the written submissions, if any, within a period of one week. However, Mr. Jhala vide his another letter dated August 24, 2013, again requested for an opportunity of personal hearing and requested SEBI not to pass any order against him until he is heard. Considering such requests and in the interest of principles of natural justice, one more opportunity of personal hearing was granted to Hemant Singh Jhala on November 28, 2013. On the date fixed, Mr. Hemant Singh Jhala appeared and made submissions. He filed certain documents and copies of his earlier letters, which were taken on record. He was also given liberty to make further submissions and file documents if any, within a week's time.

6. The submissions of ASE and the other noticees are summarized, in brief, below: a. ASE vide its letter dated December 22, 2012, submitted as under: - The board of ASE has reconstituted its committees and has reduced the sphere of direct influence of Mr. Hemant Singh Jhala.

- As regards the signatures on the minutes of the meetings, ASE has submitted that as per the powers conferred under Section 193 of the Companies Act, 1956, the Chairman of the meeting is empowered to sign the minutes. - Sunil Patel being the interested person had abstained from participating in the decision when his relative's offices was finalized for rent/ lease. Further, the board of ASE had in principle decided to conduct Investors' seminar and programmes with other SEBI registered investors association also. However, none came forward with any such request. - The exchange maintains Broker database in hard as well as soft copy. - The holding of ASE Capital Market Limited (hereinafter referred as 'ACML') in ASE Capital Market Development Board (hereinafter referred to as 'ACMDB') (both subsidiaries of ASE) falls under the provisions of Section 4(1)(b) of the Companies Act, 1956, and therefore, is in compliance to the SEBI circulars.

b. Mr. Apurva R. Hathi vide his letter dated February 07, 2012, submitted as under: - He was co-opted on the Board of ASE as additional director on November 08, 2011 and remained a director till the conclusion of the next Annual General Meeting. At the Annual General Meeting held on September 17, 2012, he was reappointed as director unanimously. - He is not connected/ related to Mr. Hemant Singh Jhala or All Gujarat Investor Protection Trust (hereinafter referred to as 'AGIPT') or any member of AGIPT mentioned in the SCN. He came in touch with Mr. Jhala only after the appointment as director of ASE. - Other matters as brought out in the SCN pertains to the period before his appointment as director.

c. Mr. Hemant Singh Jhala vide his letters dated January 05, 2013, March 01, 2013, April 02, 2013, April 04, 2013 and email dated March 28, 2013 submitted as under: - There are no irregularity nor lapse regarding financial management in ASE. - The appointment of Mr. Pankaj Pancholi as an advocate is not only signed by him but also by Mr. K.K. Mishra after following due procedure and in consultation with the Board of Directors of ASE. - Mr. K.K. Mishra had refused to sign the minutes of Board meetings and he has misguided him that the minutes should only be signed by the Chairman and there is no requirement of the Managing Director's signature in the minutes. All seminars were conducted with the due approval of 'Investor Service Cell' committee and Board of ASE, by following due procedures and recording the same in respective minutes by Mr. K.K. Mishra. Further, he and Mr. Postwala had never sanctioned payments to AGIPT. - If there was any conflict of interest because of the association of Mr. Postwala with AGIPT, Mr. K.K. Mishra must have drawn the attention of the Board or SEBI. - The Managing Director has failed in performing his duties in a fair and transparent manner.

It has been requested that SEBI should investigate the financial mismanagement and wastage of shareholders fund by Mr. K.K. Mishra. - Mr. K.K. Mishra had participated in all acts of ASE and had never objected or dissented for any matters. - Mr. K.K. Mishra during his tenure as a Managing Director from 2008 has appointed a person namely Mr. Virendra Shah as his P.A. who is creating fake and bogus cash voucher in ASE. As regards the promotion to Mr. Vipul Patel and Mr. K.S. Devda, it has been submitted that both of them are senior employees of ASE, serving for more than 18 years. Looking at their seniority, experience etc., as well as the circumstances as narrated in the respective board meeting, the matter of their promotions were taken up. - The 21 committees of ASE were constituted in the presence of the Board members, including Mr. K.K. Mishra by issuing notice agenda, etc. as per the Companies Act. - Inspite of ASE having a qualified Company Secretary, hiring services of a senior practicing Company Secretary and the managing director himself being a qualified Company Secretary, such violations were never highlighted/ apprised to the Board. - No threat was ever made to the managing director.

If it was so, he should have complained to police for such threat. He is neither familiar with any ASE staff nor has he influenced them. - AGIPT is SEBI recognized and registered (established not to earn profit), NGO working only for an interest of the Gujarat based investors and all its trustees are honorary and it is being run without taking any financial help from any agency including SEBI. The purpose of AGIPT is only to educate and empower the investors with the activities of Capital Market as per the SEBI guidelines. - Mr. K.K. Mishra has attempted to hide the breach of regulatory and statutory non-compliances, violations of SEBI rules, codes, circulars, guidelines, financial and administrating mismanagement, defaults etc. by giving favours. - The SCNs have been issued only to shareholder directors and trading member directors while ignoring the Managing Director and the public interest directors, despite having an equal role of all the Board Members.

d. Kush B. Shah and Keyur B. Mehta vide their respective letters both dated July 24, 2013 relied on the reply filed by ASE.

e. Sunil Patel vide his letter dated June 03, 2013 submitted as under: - He being an interested director, when his relative's office was taken on rent/ lease, he abstained from participating in the discussion when the matter was being finalized. - The exchange has put in place a system of obtaining an undertaking in order to prevent any duplicate financing as happened in the case of AGIPT.

7. I have carefully considered the SCN issued to ASE and the other noticees and the respective replies/submissions including those made during the personal hearing. As regards the allegation of giving favours by Mr. K.K. Mishra, I note that the documents submitted by Mr. Hemant Singh Jhala are insufficient to verify the veracity of the claims made and therefore no credence can be given to these. Mr. Hemant Singh Jhala in his submissions has also said that the SCNs have been issued only to shareholder directors and trading member directors, while ignoring the Managing Director and the public interest directors. In this regard, I note that in the present proceedings a SCN has been issued to the Governing Board of ASE, which includes the public interest directors and the managing director as well. The second SCN has been issued to the respective directors of ASE against whom allegations have been leveled in the inspection report.

8. While proceeding further with the matter, I note that certain charges are common in both the SCNs issued to the Governing Board of ASE, Mr. Hemant Singh Jhala, Mr. Keyur B. Mehta, Mr. Kush B. Shah, Mr. Apurva R. Hathi and Mr. Sunil B. Patel. Considering the above, firstly the common charges raised in both the SCNs are being dealt below in seriatim:

a. Influence of single share holders in the shareholders meeting The SCN has alleged that the shareholders holding single shares of ASE, mainly AGIPT (All Gujarat Investor Protection Trust) related entities, who had presence in the Board of ASE in significant numbers had influenced the election of directors in Annual General Meeting and passing of resolutions through show of hands. It has also been alleged that with this method such entities had subverted the genuine functioning of the shareholders' meeting, selection of directors and the day to day functioning of the stock exchange. It was also alleged that the approval of shareholders was also obtained for the proposal to sell the immovable properties of ASE situated at Manek Chowk and Ellisbridge, Ahmedabad, through similar process.

I note from the findings of inspection (provided to the noticees along with the SCN) that during the period of year 2007 till May 2012, one Mr. Rakesh Patel, a member of AGIPT had purchased 176 shares of ASE from one Mr. Prajapati Hasmukh Swarupji. Out of these 176 shares, Rakesh Patel sold 129 shares to various persons/ entities (mostly one share each) including the members of AGIPT and the related entities of various directors of ASE which enabled such entities to influence the board meeting. Further, it has also been said that the shareholders who proposed and seconded the proposals for appointment of a few directors at ASE were the members of AGIPT and had purchased the shares from the said Prajapati Hasmukh Swarupji.

In this regard, ASE in its reply has submitted that it is not practical for the exchange to get any proposal moved/ approved by demanding a poll under Section 179 of the Companies Act, 1956. The noticee, namely Apurva R. Hathi in his submission has said that the provisions of Section 179 of the Companies Act, 1956 have not become redundant in view of the provisions of 8(1) of Securities Contract (Regulation) (Manner of Increasing and Maintaining Public Shareholding) Regulations, 2006. Further, at the general meeting of stock exchanges also a poll can be demanded on any item of agenda. Election of directors on show of hands is not the only option and poll can also be demanded.

The noticee namely Hemant Singh Jhala in his reply has submitted that the Annual General Meeting notices were sent to all the shareholders of ASE and equal opportunity was given to all of them to attend the meeting in a fair and transparent manner. Further, it has also been said that Managing Director had assented for all the business transacted in the Annual General Meeting.

From the available records, it is difficult to say that there was any demand for poll. I note that the resolutions passed by show of hands were in compliance of the procedure prescribed under Section 179 of the Companies Act, 1956. Considering the above, I find no merit in the allegation levelled in the SCNs.

b. Control of day to day activities of the Exchange The SCN has alleged the noticee namely Hemant Singh Jhala who was appointed as the Chairman of ASE w.e.f. July 20, 2010, had usurped the powers of the Managing Director by indulging in the day to day affairs of ASE in violation of the SEBI Circular bearing no. CIR/MRD/DSA/SE/43/2012 dated December 31, 2010. Further, it has been alleged that Hemant Singh Jhala in addition to heading the Board of ASE also heads the 21 committees of ASE and in many of these committees, there is no representation of Public Interest Directors.

In reply to the allegation, Hemant Singh Jhala has denied the allegation that he usurped the powers of Managing Director. It has been said that he was elected to become a Chairman of ASE by following due procedures at Annual General Meeting. Further, all the 21 committees were constituted in the presence of the Board members including the Managing Director of ASE by issuing notice and agenda as per the requirements of the Companies Act, 1956.

I note from the inspection report that Mr. Hemant Singh Jhala had put forth proposals for the promotion of one Mr. Vipul Patel, CFO, ASE and Mr. K.S. Devda, PA to Chairman, ASE in the board meetings dated October 05, 2010 and October 27, 2010 respectively, without any recommendation from ASE. As per the Code of ethics for Directors and functionaries of Exchanges, the chairman/ president and directors shall not interfere in the day to day functioning of the exchange and shall limit their role to decision making on policy issues and the issues as the Governing Board may decide. The SEBI circular dated December 31, 2010, also requires that the Chairman and directors shall not interfere in the day to day functioning of the exchange. Further, it also requires that the Chairman and directors shall not be directly involved in the function of appointment and promotion of employees, unless it is specifically decided to be so by the Governing Board. Therefore, the acts of Mr. Hemant Singh Jhala are in clear violation of the Code of ethics for Directors and functionaries of Exchanges and the SEBI Circular bearing number CIR/MRD/DSA/SE/43/2010 dated December 31, 2010.

I note that the noticees namely Mr. Keyur B. Mehta and Mr. Kush B. Shah who were directors on the board of ASE at the relevant point of time had not taken any objection when the proposal as discussed above were being put forth.

I note from the reply of ASE that the directors propose to observe the norms of Corporate Governance in letter and spirit and the Board of ASE in its meeting held on November 15, 2011, has reconstituted its committees and reduced the sphere of direct influence of Mr.

Hemant Singh Jhala and other directors have replaced him as Chairman of such committees. I have considered the submission of ASE vis-a-vis the allegations leveled and it is noted that it has reconstituted its committees and thereby has taken corrective steps.

c. The SCN has alleged that the minutes of the Board Meetings were signed by Hemant Singh Jhala, the Chairman of ASE and not by the Managing Director of ASE. It has also been alleged that the final minutes of Board meetings do not represent the correct picture regarding the decisions taken in the meetings and are in violation of the 'Code of Conduct prescribed for the Directors of the Governing Board' of the Exchange.

ASE in its reply has submitted that as per the powers conferred under section 193 of the Companies Act, 1956, the Chairman of the meeting is authorised to sign and accordingly he has signed. It has also been said that as a matter of abundant caution, the Managing Director will also sign the final minutes after the counter signature of the secretarial staff and the company secretary.

Hemant Singh Jhala in his submissions has submitted that despite his insistence to Mr. K.K. Mishra for signature in the minutes of meeting of ASE, he always refused and informed that as per the Companies Act, 1956, minutes are required to be signed by the Chairman and there is no requirement of signature of the Managing Director. As regards the allegation that the final minutes of the Board meeting do not represent the correct picture, Hemant Singh Jhala has termed it as false and baseless. It has also been said that the minutes of meeting were prepared by the Managing Director and the practicing company secretary and the matter could have been deleted by the Managing Director.

I note from the inspection findings that only Chairman was signing the minutes of meeting. The same is reiterated in the submissions of ASE and Mr. Hemant Singh Jhala. I note that as per the Companies Act, 1956, only chairman of the meeting or the Chairman has to sign on the minutes of the general meetings.

As regards the allegation that the final minutes of the Board meeting do not represent correct picture, I note from the findings of the inspection that the draft minutes of the meeting held on April 19, 2010, had contained the discussion that “MD impressed upon the Board that the Directors role of intervention and indulging in day to day activities of the Exchange, influencing the Staff as well as micro management is looked down by the regulator, SEBI and amounts to breach of code of Ethics laid down by SEBI. Hence requested the Board to exercise restraint in verbal and written communication.” The said discussion was deleted from the final minutes. Another instance is regarding the draft minutes of the Board meeting held on October 05, 2010, not containing the mention of a few decisions taken.

I note the submission of ASE that the Managing Director will also henceforth sign the final minutes of the meeting. Such practice will be in line with the 'Code of Conduct prescribed for the Directors of the Governing Board'. I note that the practice of omitting the discussions of Board meetings is not proper. As per section 193(2) of the Companies Act, 1956, the minutes of each meeting shall contain a fair and correct summary of the proceedings thereat. In view of the above, it can be concluded that omission of the discussions of the Board meetings was not in line with the Companies Act, 1956.

d. Another allegation in the SCN is that the Board of ASE in its meeting held on August 25, 2010, had resolved that the appointment of Mr. K.K. Mishra, Managing Director of ASEL will be subject to the approval of the shareholders of ASEL. It has been alleged that such resolution is in violation of the directive issued vide SEBI letter bearing number MRD/DSA/C&D/50049/2005 dated September 21, 2005 and also confirmed by the SEBI Circular bearing no. CIR/MRD/DSA/SE/43/2010 dated December 31, 2010, which excludes the Public Interest Directors (hereinafter referred to as 'PID') and Chief Executives like Chief Executive Officer, Executive Director, Managing Director etc. from the need to be elected by the shareholders.

ASE in its reply has discussed about the reconstitution of the remuneration committee and the resolutions passed by the Board on re-appointment, remuneration, lien, filing of form 25C, etc. It has also been said that the Board of Directors have authorized two different practicing company secretaries to examine the relevant provisions of the Companies Act, 1956, the provisions of Securities Contracts (Regulation) Act, 1956, SEBI Circulars and Regulations in order to ascertain, if approval of shareholders is required. Hemant Singh Jhala in his reply has submitted that the said SEBI circular would have been complied with by drawing the attention of the Board. He has also submitted that such regulatory compliance of SEBI circulars is expected from the Managing Director.

In view of the above, I note that the resolution of the board of ASE dated August 25, 2010, was clearly not in line with the SEBI directive dated September 21, 2005. I note that the noticee namely Mr. Hemant Singh Jhala was acting as Chairman on the board of ASE at the relevant point of time and had not raised any objection when the said resolution was being put forth.

e. The SCN alleges that ASE had opened three Investor Service Centers (hereinafter referred to as 'ISC'), however, in none of these investor education programs were conducted and instead AGIPT conducts such programs and gets huge money for the same. It has been alleged that the ISC opened by ASE did not have the facilities required in accordance with the provisions of SEBI Circular bearing no. SMD/Policy/Cir-32/97 dated December 03, 1997.

The SCN further states that since July 20, 2010, when Hemant Singh Jhala assumed the charge as the Chairman of ASE, all investor seminars conducted by ASE have been conducted through only AGIPT where Hemant Singh Jhala is a trustee. The SCN alleges that AGIPT was reimbursed by both ASE and Bombay Stock Exchange for several seminars. The SCN also alleges conflict of interest with respect to the noticee namely Sunil B. Patel, director of ASE whose premises situated at Naroda, Ahmedabad was being used by ASE as ISC. Another conflict of interest as brought out in the SCN is that the members of AGIPT namely Mr. Postwala and Hemant Singh Jhala who were also the members of ISC of ASE had approved payments to AGIPT without maintaining proper accounts of Investor Service Fund.

In reply to the allegations, ASE has said that the Board of ASE had in-principle decided to conduct Investors' seminars/ programmes, with other SEBI registered Investors' Association also. However, none came forward with any such request for conducting seminars. Further, it has been submitted that the exchange is obliged to conduct the Investor Seminars, but not necessarily in its own ISCs. The three ISCs opened by ASE provide facilities as required in terms of the SEBI circular. As regards the seminars conducted in collaboration with AGIPT, ASE has submitted that the seminars were conducted with AGIPT, which is a SEBI registered Investor Association. It has also been said that the exchange was under an impression that SEBI does examine the investors' association accounts as well, in detail. ASE has submitted that it has re-constituted the Investors Service Cell committee w.e.f. November 15, 2011.

The noticee namely Sunil Patel, a Trading Member Director, in his reply has submitted that being an interested director, when his relative's office was taken on rent/ lease by ASE, he abstained from participating in the discussion when the matter was finalized. Further, as regards duplicate financing to AGIPT, it has been said that the exchange has put in place a system of obtaining an undertaking to prevent duplicate financing.

Further, I note the submission of ASE and other noticees that when the premises of Sunil Patel's relative was taken, Mr. Hemant Singh Jhala was not the director of ASE. Later when the said relative of Sunil Patel built a new premise, a fresh lease deed was executed with new rent. It has been submitted that the hired premises is situated on the fourth floor of the building and the entry and exist to investors' cell of ISC (Investor Service Center) is free. However, in order to monitor the access of non-genuine investors, it was decided to register the investors and issue them an identity card for which ₹25 was collected and paid to the printer. As per ASE, this practice of issuing identity card for using ISC has been discontinued w.e.f. December 04, 2012. ASE with its reply has also provided a copy of the complaint register maintained at ISC, ASE. It has been said that the office situated at C.G. Road is being taken on lease by the Stock Exchange Customer Protection Fund, registered as a trust. ASE has submitted that it had conducted various ISC programmes at its own premises as well and it provides the facility of newspaper, water and internet at ISC. However, I note that ASE had not provided adequate infrastructure in accordance with the SEBI Circular bearing no. SMD/POLICY/CIR-32/97 dated December 03, 1997.

In reply to the allegations, Hemant Singh Jhala has submitted that the investor seminars conducted by ASE were only with the approval of Investor Service Cell committee and the Board of ASE, by following the due procedures. It has been said that the Managing Director had never objected despite being aware that Hemant Singh Jhala is a trustee of AGIPT and Mr. Postwala is associated with AGIPT. Neither AGIPT nor Hemant Singh Jhala had insisted that ASE or its Managing Director do seminars with AGIPT. It has also been said that all the seminars were attended by ASE officials too and all the payments made to AGIPT was towards the reimbursement of expenses by the Managing Director of ASE. As regards the usage of premises of Sunil Patel, Trading Member Director, it has been submitted that the said premises were being used even before his association with ASE. Hemant Singh Jhala has denied sanctioning payments to AGIPT and submitted that payments were sanctioned by the ASE officials and the Managing Director. Further, it has been said that maintaining proper accounts of Investor Service Fund is an obligatory duty of the Managing Director.

Mr. Hemant Singh Jhala in his reply has not explained his defence to the allegation that reimbursements have been claimed from both ASE and BSE. BSE has said that the reimbursement payment is made to AGIPT on the basis of supporting vouchers and certificate that it has not taken monetary help from any other entity. From the available records, I note that AGIPT has claimed reimbursements from both BSE and ASE, for at least twelve investor seminars conducted by it. These facts suggests that AGIPT under the chairmanship of Mr. Hemant Singh Jhala has given false declaration to BSE and again claimed the reimbursements for the same seminars from ASE where the ISC committee was headed by Mr. Hemant Singh Jhala himself, which had sanctioned the payment to AGIPT. It is a matter of serious concern as the same involves misuse of public funds.

f. In addition to the above discussed common charges in both the SCNs, there are certain other charges which are exclusive to ASE. The consideration in respect of these are as under: - Composition of the Investor Protection Fund Trust and misappropriation of funds of Investor Protection Fund/ Customer Protection Fund The SCN has alleged that the composition of the IPF Trust of ASE is not in accordance with the SEBI Circular bearing no. MRD/DOP/SE/Cir-38/2004 dated October 28, 2004. As per the SEBI Circular, the Investor Protection Fund (hereinafter referred to as 'IPF')/ Customer Protection Fund (hereinafter referred to as 'CPF') Trust shall consist of atleast one Public Representative, one representative from an registered Investor Association recognized by SEBI and one exchange representative (Executive Directors/ Managing Directors/ Administrators). The SCN has also alleged that ASE had misappropriated the funds of IPF/ CPF towards purchase of property, legal fees, audit fees, remuneration to ASE staff members, Charity Commissioner etc. in violation of the Government of India notification F. No 14/4/SE/84 dated August 22, 1985 and SEBI Circular bearing no. MRD/DoP/SE/Cir-38/2004 dated October 28, 2004.

I note that the IPF Trust of ASE consisted of five members and out of these two members represented the same investor association. ASE in its reply has submitted that the composition of IPF Trust has been rectified according to the requirements of the SEBI Circular bearing no. MRD/DOP/SE/Cir-38/2004 dated October 28, 2004.

Further, ASE has also submitted that the payment of ₹50,000 each year to Charity Commissioner is made under section 58 of the Mumbai Charitable Trust Act based on the advice of the statutory auditors of the CPF. As regard audit fees, it has been said that the same is paid to statutory auditors. ASE has also submitted that CPF had released the payment to a company namely Induram Developers Pvt. Limited, which decision was taken in the CPF meeting for acquiring office space of IPF. Later as the deal was cancelled, the advance given was recovered. It has also been said that the CPF trustees have not derived any pecuniary benefit and deny that the funds of CPF trust are misused by them. I note that ASE had made a payment of ₹67,40,000 as on March 30, 2011 to one Induram Developers Pvt. Limited for acquiring office space for IPF for the purposes of research activities and investor education. As the deal could not be completed, the subject amount was recovered almost after three months, during which no interest was earned by IPF for such amount which caused loss to IPF.

In view of the discussion above, it is clear that the composition of IPF Trust was not in accordance with the SEBI Circular. Further, the management of the IPF trust was also not diligent and the use of the fund was not as per the guidelines of the Government of India vide notification F. No 14/4/SE/84 dated August 22, 1985 and SEBI Circular bearing no. MRD/DoP/SE/Cir-38/2004 dated October 28, 2004.

- Inspection of subsidiary and sub-brokers The SCN has alleged that the exchange is required to conduct half-yearly inspection of the subsidiary and 20% of its sub-brokers and place such reports before the Governing Board of the exchange in terms of the SEBI circular bearing no. SEBI/SMD/Policy/Cir- 4/2003 dated February 11, 2003. However, it has been revealed that the same was not happening on a regular basis and the percentage of inspection of sub-broker conducted by the exchange since April 2010 is below the regulatory requirement of 20% as stipulated vide the above circular.

ASE in its reply has submitted that the exchange has inspected 20% of the active sub-brokers. Further, it has also been said that the inspection of the subsidiary for the period ended on March, 2011, has been completed and further inspections are in progress. I note that during the inspection by SEBI, ASE was yet to start the inspection of the sub-brokers of its subsidiary for the period of April 01, 2010 till June 20, 2011.

I have seen the details submitted by ASE. From the same, it is noted that ASE had inspected 29 sub-brokers out of 143 active sub-brokers at BSE during the year 2010 - 2011. Similarly, 12 sub-brokers out of 58 active sub-brokers at NSE were inspected by ASE during the year 2010 - 2011. SEBI has called for the list of the said 29 and 12 sub-brokers for detailed scrutiny. In the said list, the names of only 28 sub-brokers of BSE have been given i.e. one short of the earlier number. As regards the inspection of subsidiary of ASE, I note that no inspection was conducted during the year 2008-2009. This shows that the half yearly inspection of subsidiary of ASE was not being conducted on regular basis.

- It has also been alleged in the SCN that ASE had formed a subsidiary company namely ASMDB (ASE Capital Market Development Board) for the establishment of another subsidiary company ACML (ASE Capital Market Limited). From the shareholding pattern of ACML, it has been found that 54.27% holding is of ASE, ACMDB is holding 22.94% in ACML and other trading members are holding 22.79% in it. It has been alleged that the 22.94% of the shareholding of the subsidiary ACML should have been held by ASE, however, the same is being held by the subsidiary ACMDB in violation of the provisions of SEBI Circulars bearing nos. SMD-II/Policy/Cir-37/99 dated November 26, 1999, SMD-II/Policy/Cir-40/99 dated December 16, 1999 and Master Circular dated December 31, 2010, which requires that the trading members of an exchange can hold maximum 49% of shares in the subsidiary company and the balance shall be held by the exchange.

ASE in its reply has submitted that the SEBI circular dated November 26, 1999, requires the exchange to own 100% shares in subsidiary company to acquire membership of other stock exchanges. Further, the SEBI circular dated December 16, 1999 stipulates that the said 100% shareholding be co-owned by the exchange together with its members and 51% holding has to be with the exchange. It has also been said that the holding is in compliance with the stated SEBI Circulars and the provisions of the Section 4(1)(b) of the Companies Act, 1956.

I note that as per the SEBI Circulars, the exchange and its members shall together hold 100% shares of the subsidiary with exchange holding not less than 51% of the equity share capital of the subsidiary. As discussed above, ACMDB is a subsidiary of ASE, therefore the holding of ACMDB cannot be treated as holding of ASE in terms of the SEBI circular dated December 16, 1999.

- It has been alleged in the SCN that ASE has not received any security deposit of 1% of the total issue size from the companies wanting to issue further capital in violation of the SEBI Circular bearing no. SE/2936 dated April 06, 1992. It has also been alleged that ASE has released 1% security deposit for certain companies in cases where the records regarding the 'no objection certificate' for SEBI or the exchange could not be found as required by the SEBI Circulars bearing numbers MRD/DSA/SE/Cir-34/2008 dated December 05, 2008 and OIAE/Cir-1/2009 dated November 25, 2009.

In reply to the allegation, ASE has submitted that the security deposit is receivable only by the exchange in case of IPO/ rights issue. However, in view of no new IPO/ rights issue by listed company during the relevant period, no deposit is due and hence did not receive the same. It has been said that the data of companies as relied by SEBI pertains to the year 1995-1996 i.e. prior to the period of inspection. ASE in its reply has also argued that SEBI circulars mandating SEBI NoC is dated November 25, 2009 and is applicable from the said date. In this regard, I note that prior to the said circular, the NoC was required to be taken from SEBI in accordance with the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (now rescinded). However, ASE while replying to the SCN has undertaken strict compliance of the said circulars for future.

- The SCN has also alleged that ASE has not completed the computerization of the broker's database due to which the updation of the same does not take place which is in violation of the SEBI Circular bearing no. SMD/Policy/Cir-7/98 dated February 06, 1998. In reply to this allegation, ASE has relied upon the observation made by SEBI in the inspection for 2004-2008 that the exchange maintains broker database in hard as well as in soft form. ASE in its reply has said that for the trading members registered by SEBI after August 2004, due to no trading activity on ASE, the date of commencement of business of the broker is not applicable, therefore the same was not mentioned in the database. I have considered the submission of ASE and find that the allegation cannot be proved against it.

- The SCN further alleges that serious concerns about the maintenance of the accounts of ASE were raised by the auditor, M/s Manubhai & Co. Further, the accounts submitted by ASE to auditor were said to be not reliable and shows that there was no proper accounting of utilization of funds of ASE. It has also been alleged that ASE has not maintained statutory funds separately for Investor Service Fund (hereinafter referred to as 'ISF') and Settlement Guarantee Fund (hereinafter referred to as 'SGF'). ASE in its reply has submitted that the concerns expressed by the Statutory Auditors were not pursued by them, after an initial explanation. Further, there are no qualifications in the Auditors report and therefore the queries do not stand.

I note that ASE has now appointed a qualified Chartered Accountant to look after the work of accounting department and to point out the deficiencies in the department.

g. Having noted all the charges in respect of ASE, now the charges in respect of the directors of ASE needs to be considered i.e. the Chairman, ASE was favoring people related with him through AGIPT and using the funds to pay for unsubstantiated claims made by such favored persons. It has been alleged that Chairman, ASE vide his letter dated October 25, 2010 has appointed one Mr. Pankaj Pancholi as legal adviser and advocates of ASE. It has been found that Pankaj Pancholi is also an advocate of AGIPT. Hemant Singh Jhala in his reply has submitted that the appointment and assigning the work to Pankaj Pancholi was after due consultation with K.K. Mishra, Managing Director of ASE. It has also been said that the Managing Director was well aware that Pankaj Pancholi is associated with AGIPT. I note that the version of Mr. K.K. Mishra is not available on record and in the absence of the same, I am inclined to give the benefit of doubt on this count.

9. Having considered the facts and circumstances described in the above paragraphs, it is seen that ASE has taken certain corrective steps and has undertaken to comply with the necessary requirements prescribed under SEBI Rules and Regulations 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. On examination of the facts and issues as described in the paragraphs above, I am convinced that ASE was negligent in the discharge of its functions and duties. I note that suspending/ interrupting the working of the stock exchanges is not an appropriate penalty as it involves negative externalities and could be considered only in extreme cases. Considering the nature of the lapses and the efforts made, I am of the opinion that the penalty of warning to ASE would be appropriate in this case.

As regards the noticees, namely, Mr. Keyur B. Mehta and Mr. Kush B. Shah, I note that they were on the board of ASE when the above discussed violation of circular at paragraph 8(b) above had occurred at ASE. It is seen that these directors remained mere spectators and refrained themselves from raising any voice against such contraventions. The objective of having Shareholder Directors and Trading Member Directors on the board of exchange is defeated when they remain silent spectators instead of protecting the interest of shareholders/ exchange.

As regards, the noticees namely Mr. Apurva R. Hathi and Mr. Sunil B. Patel, I note that no independent violation of the circular has been alleged/ proved against these.

10. In so far as the noticee, Mr. Hemant Singh Jhala is concerned, I note that by proposing for the promotion of employees of ASE without any recommendation of ASE, he has violated the provisions of the SEBI circular bearing no. CIR/MRD/DSA/SE/43/2010 dated December 31, 2010. Mr. Hemant Singh Jhala by not objecting the resolution in the meeting held on August 25, 2010, has violated the directive issued vide SEBI letter bearing number MRD/DSA/C&D/50049/2005 dated September 21, 2005. Further, by claiming reimbursements from both BSE and ASE for the same seminars conducted by AGIPT (for at least twelve investor seminars), Mr. Hemant Singh Jhala appears to have misused the public funds. I note that the bills submitted by AGIPT to ASE and BSE have not been formed part of the present proceedings. Such details are required to be shared with Mr. Hemant Singh Jhala as the allegations are serious in nature. However, considering the facts and the circumstances of the case, prima facie it appears that Mr. Hemant Singh Jhala had influenced the decision to conduct the seminars with AGIPT and releasing the payments thereof.

11. 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 issue the following directions: a. The Governing Board of the Ahmedabad Stock Exchange Limited is warned and is advised to be cautious in the discharge of all its functions and also in their financial dealings. Further, the Governing Board of the Ahmedabad Stock Exchange is directed to ensure that the regulatory compliances be done strictly and promptly, in accordance with law.

b. Ahmedabad Stock Exchange Limited shall not use any funds from Investor Protection Fund and Investor Service Fund till the exchange puts in place adequate checks and balances for utilisation of funds from this account to the satisfaction of Securities and Exchange Board of India. c. Ahmedabad Stock Exchange Limited shall appoint an independent auditor to assess internal control systems of the exchange and implement its suggestions after discussions in the Board meeting within two months from the date of this Order. d. The Shareholder Directors of ASE namely Mr. Keyur B. Mehta and Mr. Kush B. Shah, shall not be appointed on the Board of ASE for a period of five (5) years. e. The allegation of financial irregularities leveled against Mr. Hemant Singh Jhala are serious in nature and Securities and Exchange Board of India is advised to conduct a detailed probe in this regard. In the meantime, Mr. Hemant Singh Jhala is being restrained from holding any position as a Director with any intermediary or entity registered with Securities and Exchange Board of India till further directions. Securities and Exchange Board of India is also advised to endeavour to complete the probe within one (1) year from the date of this Order. f. dispose of the present proceedings initiated vide Show Cause Notice dated November 01, 2012 against the Shareholder Director of ASE namely Apurva R. Hathi and the Trading Member Director of ASE namely Mr. Sunil B. Patel without any directions.

DATE : APRIL 25, 2014 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA