IN THE SECURITIES APPELLATE TRIBUNAL
Appeal No.158 of 2004
Date of Decision :04.10.2006
Shri Umesh Shetty, Advocate alongwith Ms. Sharila D’Souza, Advocate for the Appellant
Shri Kumar Desai, Advocate alongwtih Ms. Daya Gupta, Advocate for the Respondent
Justice N.K. Sodhi, Presiding Officer
C. Bhattacharya, Member
R.N. Bhardwaj, Member
Per: R.N. Bhardwaj, Member
appeal is against the order passed by Securities and Exchange Board of India
(for short “the Board). The order dated
Board had conducted inspection of MGSE in September, 2002 and found number of
shortcomings in its working. While
granting renewal of recognition in the year 2002 up to
“In view of this order, MGSE shall cease to be a recognized stock exchange and therefore, it is imperative to pass necessary directions in the interest of investors/shareholders of the listed companies in MGSE and in the overall interest of the securities market. I, therefore, in exercise of powers conferred upon me under Section 19 read with section 11(1) of SEBI Act pass the following directions:-
appeal against the impugned order of the Board was admitted by the Tribunal on
The Tribunal heard the arguments of the appellant and the respondent on the question of maintainability of the appeal before the Securities Appellate Tribunal and decided that the impugned order had been passed under the provisions of the Securities and Exchange Board of India Act and directions are clearly under section11 of the said Act which were appealable to the Tribunal and therefore the appeal is maintainable in the facts and circumstances of the case. When the matter came up for hearing of the main appeal, the Board filed an application seeking direction/clarification of the interim order dated 20th January, 2005 of Tribunal which required the Board to consider the application of demutualization and corporatisation under the provisions of Securities Laws (Amendment) Act, 2004. It was submitted by the Board that vide the impugned order dated 31st October, 2004 the Board had already derecognized MGSE as a stock exchange under section 4(A) of the SCRA and therefore the existing scheme of demutualization and corporatisation could not be made applicable to MGSE because this scheme is applicable only to the recognised stock exchanges on the date of coming into force of the Securities Laws (Amendment) Act, 2004 i.e. October 12, 2004.
At the time of final hearing of the
appeal alongwith the review application filed by the Board seeking
clarifications/directions, it was contended by the learned counsel for the
appellant that the impugned order of August 2004 which had derecognized the
MGSE was based on number of irregularities pointed out in the course of the
annual inspection carried out in 2002 and 2003.
He contended that all those irregularities have since been rectified. He submitted a chart stating that the
deficiencies have since been removed and suggestions have been implemented. It
was then directed by the Tribunal that as time was not really the essence
looking to the nature of suggestions/shortcomings pointed out by the Board, it
should, therefore, conduct another inspection and report the matter to the
Tribunal within a period of three to four months. Board carried out the inspection of MGSE from
31st May to
He further mentioned that MGSE was constrained in helping the Board in collecting fees from the members because of its present status of a derecognized stock exchange and non renewal of its recognition. MGSE was not in a position to take any independent disciplinary action against its members. The current inspection report pointed out that the exchange is yet to complete the compilation of members data base. It had only 54 members and data is yet to be collected from seven members. The learned counsel of the appellant submitted that MGSE was doing its best to collect the information from the rest of the members and it will complete the job shortly.
the Tribunal put the question of recognition of renewal of MGSE with some
conditions to Mr. Desai the learned counsel for the Board, he pointed out that
the information pertaining to other stock exchanges was not before him and
neither are they parties to this appeal.
He was, therefore, not in a position to respond to this question. He, however, suggested that MGSE was free to
submit a fresh application for recognition in terms of the amended Act of 2004
and Board would consider it according to law.
He also pointed out that the present inspection reports have confirmed
the continuing serious irregularities which formed the basis of its earlier
decision of withdrawing recognition by its order dated
1) There is no connectivity to the depositories CDSL and NSDL. Since there is no rolling settlement system operating in the exchange, it has not made any arrangements for establishing connectivity with CDSL and NSDL which is absolutely essential for trading in a demat regime.
There is no turnover in the stock exchange for the year 2003-2004, 2004-2005, 2005-2006 and till May 2006 in the year 2006-2007.
3) Trading and settlement system
The exchange had not been recoding any trading with effect from 23.4.1999. It has also not adopted the latest T+2 system which was introduced by the Board in 2003.
4) Settlement Guarantee Fund
The MGSE did not comply with the requirements mandated by SEBI circular for setting up the settlement guarantee fund. The funds are required to be earmarked separately as a risk containment measure for the stock exchange but it has not been done so by the stock exchange (MGSE). The funds should be segregated and managed by an independent trust which has to be other than the present management of the stock exchange. No such trust has been created by the MGSE.
5) Hardware and software
Without computerization, it is not possible to have screen based effective and efficient trading system. There are only three members of the stock exchange who are using the existing system including the software of the exchange. There is no surveillance and monitoring system installed in the MGSE. Three members are trading through ISE Securities and Services Ltd. (ISS). The three members would not make the MGSE as a viable exchange.
The learned counsel for the respondent submitted that for the last four years MGSE has not taken any remedial steps for addressing the deficiencies pointed out in the inspection reports and therefore it was not in the interest of investors to allow MGSE to continue its operation.
Having heard the counsel for the appellant and respondent we are of the view that a stock exchange to be effective and useful to the investing public must have modern and uptodate hardware and software systems installed in it. It is almost impossible to operate without the assistance of adequate IT infrastructure. Similarly, the maintenance of settlement guarantee fund was essential for the security of trades being transacted on the platform of the stock exchange and for the safety of the exchange system itself. It is impossible to think of trades without connectivity with the depositories when these days almost entire trade is done in demat form and the settlement period is T+2. We do feel that a stock exchange which has only three active trading members and total members being reduced to 54 would not make it as a viable unit. We have also seen that the members are dwindling year after year as at the time of pervious inspection there were 69 members in the exchange which has come down to 54. There are no new admissions of members.
The Board had derecognized the MGSE due to non-compliance of the irregularities mentioned in the inspection reports of 2002-03. The current inspection by the Board confirms the persistence of quite a few of the serious irregularities. It is not possible to ignore this fact and allow the continuation of recognition subject to conditions. We are of the firm view that the appellant has to satisfy the Board that it has addressed all the concerns of the Board as pointed out in the inspection reports before it could be allowed the renewal of recognition. We agree with the learned counsel of the Board that other stock exchanges which allegedly have been allowed renewal of recognition subject to conditions are not before us and we are not aware of the circumstances under which the Board had taken such a decision. The appellant is free to apply afresh for the recognition of the stock exchange after fulfilling all the requirements. We, therefore, find no reason to interfere with the impugned order.
In the result, the appeal is dismissed with no order as to costs.
Justice N.K. Sodhi
R. N. Bhardwaj