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Appeal No.158 of 2004


         Date of Decision :04.10.2006



Mangalore Stock Exchange

                         ......  Appellant





Securities and Exchange Board of India





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




            This appeal is against the order passed by Securities and Exchange Board of India (for short “the Board).  The order dated 31st August, 2004 has been passed under section 4(4) of the Securities Contracts (Regulation) Act, 1956 (SCRA) refusing to grant renewal of recognition of the Mangalore Stock Exchange (for short “MGSE”).  MGSE is a company limited by guarantee which was granted recognition as a stock exchange on September 9, 1985.  The renewal of recognition of MGSE was being given by the Board from time to time and the last recognition was valid up to 8th September, 2003. 

            The 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 8th September, 2003, it forwarded the inspection report to MGSE and advised it to comply with the same within two months from the date of notification of the renewal.  Before the renewal was due in 2003, the Board conducted another inspection to find out the status of compliance of the suggestions made in the previous inspection.  It found out that most of the irregularities which had been pointed out in the previous inspection report were still continuing.  The renewal of MGSE had been granted on the condition that the irregularities/shortcomings pointed out in the inspection report would be rectified.  Therefore, the Board issued notice under section 4(4) of the SCRA and after giving a personal hearing to the governing board of MGSE, issued the impugned order dated 31st August, 2004.  The operative part of the order is as under:


“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:-

1)         The money available in the Investor Protection Fund and Investor Services Cell of MGSE shall be utilized only for the purpose for which these funds have been created, as per the Articles of MGSE.  Any pending claims of any investors should not be appropriated for any other purpose or for payment to the members/shareholders of MGSE.

2)         MGSE shall set aside sufficient funds in order to provide for settlement of any claims, pertaining to pending arbitration cases, pending non-implemented arbitration award, if any, liabilities/claims of contingent nature, if any, and unresolved investors complaints/grievances lying with the exchange, on the date of this order.

3)         The companies which are exclusively listed in the MGSE, may consider seeking listing at other stock exchanges or provide for exit option to the shareholders as per SEBI Delisting Guidelines.

             4)  Consequent  upon  de-recognition of MGSE, the

                  members/shareholders  of  MGSE  shall cease to

                  be    members  of   a  recognized stock exchange

                  and    therefore   liable   to   be  de-registered   as 

                  stock brokers,  and  hence, their    certificate    of

                  registration granted by SEBI shall stand     automatically cancelled.  However, the said members/shareholders of MGSE shall be liable to pay SEBI registration fees as per Schedule III of the said regulations, till the date of this Order.”


            The appeal against the impugned order of the Board was admitted by the Tribunal on 22nd November, 2004.  While admitting the appeal the Tribunal did not decide the question of maintainability of the appeal which was raised against the impugned order before the Tribunal by the Advocate representing the Board.  The Tribunal while passing the interim order ruled “however, this will not preclude the appellant in submitting an application for corporatisation and demutualization in accordance with law and the same may be considered expeditiously.”  The Tribunal on 20th January, 2005 while hearing the learned counsel for the appellant decided that “there will be a direction directing the respondent to consider the application in accordance with law de hors of the impugned order as expeditiously as possible”.  The Board filed a civil Appeal no.1685 of 2005 in the Supreme Court against the order of 20th January, 2005 of the Securities Appellate Tribunal.  While disposing of the appeal the Supreme Court passed the following order:-

“…We are of the view that once the Tribunal has noted that the appeal had been challenged as not being maintainable, it should dispose of the issue of  maintainability first before passing any further order.  In that view of the matter, the impugned order dated 20th January, 2005 is stayed until the Tribunal disposes of the issue of maintainability.  The Tribunal is requested to dispose of the issue as early as is conveniently possible, preferably within a period of 8 weeks from date.

The appeal is, accordingly, disposed of but without any order as to costs.”  


            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 3rd June, 2006 and the report was also sent to MGSE which has been presented before the Tribunal.  From the perusal of the report the learned counsel for the appellant argued that some of the irregularities which are still continuing are because the Board had not replied to or has not taken decision on the communications sent by MGSE.  He also contended that the Board has renewed recognition of other stock exchanges which were having similar shortcomings subject to some conditions.  He further contended that MGSE could also be granted renewal of recognition subject to the condition that these shortcomings would be removed within six months and all the conditions would be complied with. 

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. 

            When 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 31st August, 2004.  He mentioned that the question of renewal of recognition of stock exchange could be considered only if the basic conditions were complied with by the stock exchange.  He further submitted that the order dated 31.08.2004 of the Board refusing to grant renewal of recognition had been notified in the Official Gazattee and thereafter the stock exchange (MGSE) ceased to be a recognized stock exchange within the meaning of section 2(f) read with section 4 of SCRA, 1956.  Therefore the Board could not consider the application of MGSE for corporatisation and demutualization as on the appointed date the scheme was applicable to only recognized stock exchanges.  He further submitted that following conditions were absolutely necessary for the recognition of a stock exchange under the amended Act of 2004.

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.

2)         Turnover

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

                                                                                                Presiding Officer





                                                                                                C. Bhattacharya







                                                                                                R. N. Bhardwaj