SATYANARAYANA AGARWAL VS. SEBI Vide its order dated February 20, 2007, SEBI imposed penalty of Rs.1 crore on the Appellants for trading in the shares of Bhoruka Financial services Ltd. in violations of the provisions of Section 19 and 23H of SCR Act 1956. The shares were traded in Magadh Stock Exchange which was not not a recognized stock exchange at that time. They were listed under the the permitted category at magadh stock Exchange. The Hon’ble SAT allowed the appeal on the ground that the appellant could not have violated Section 19 of the Securities Contract (Regulations) Act,1956 since MSEA was a recognized stock exchange and shown as such on the website of the SEBI and permission was granted by the Exchange to trade trade in the shares of Bhoruka Financial Services Ltd. Ltd. Therefore, the appellant would not have been been faulted for for the trades.
FUNCTIONS OF SEBI IN RESPECT OF MATTERS SPECIFIED IN SECTION 11 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 Under the SEBI Act, 1992, the SEBI has been empowered to conduct inspection of stock exchanges. The SEBI has been inspecting the stock exchanges once every year since 1995-96. During the course of inspections a review of the market operations, organisational structure and administrative control of the exchange is made to ascertain whether:
the exchange provides a fair, equitable and growing market to investors the exchange’s organisation, systems and practices are in accordance with the Securities Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed there under the exchange has implemented the directions, guidelines and instructions issued by the SEBI from time to time the exchange has complied with the conditions, if any, imposed on it at the time of renewal/ grant of its recognition under section 4 of the SC(R) Act, 1956.
Based on the observations/suggestions made in the inspection reports, the exchange is advised to send a compliance report to SEBI within one month of the receipt of the inspection report by the exchange and thereafter quarterly reports indicating the progress made by the exchanges in implementing the suggestions contained in the inspection report, have to be submitted to the SEBI. The SEBI nominee directors and public representatives on the governing board / council of management of the stock exchange also pursue the matters in the meetings of the governing board / council. If the performance of the exchange, whose renewal of recognition is due, is not found satisfactory, SEBI grants further recognition for a short period only, subject to fulfillment of certain conditions. Further the functioning of the exchange is also monitored via a Monthly Development Report which the exchange is required to submit to the SEBI every month.
SUPERSESSION OF THE GOVERNING BOARD OF MAGADH STOCK EXCHANGE The Council of Management of the Magadh Stock Exchange was superseded with effect from December 08, 1997 due to the mismanagement and various irregularities observed in the functioning of the Exchange during the inspection and the complaints received from the Public Representative Directors and SEBI Nominee Directors on the Council of the Exchange. The Council was superseded for a period of one year and an Administrator Shri S.S. Dhanoa, IAS (Retd) was appointed as an alternative arrangement. The Administrator has been taking steps to improve the overall efficiency of the Exchange.
An inspection of the Magadh Stock Exchange was conducted conducted by SEBI in August 1998 and it was decided on the basis of the inspection report to extend the period of supersession of the Council of Management of the Magadh Stock Exchange for a further period of one year. In order to have further streamlining in the functioning of the Exchange and to continue the corrective measures initiated by the Administrator the period of supersession has been extended for a further period of a year with effect from December 08, 1998.
ORDER AGAINST MAGADH STOCK EXCHANGE ASSOCIATION (MSEA) & OTHERS1 Securities and Exchange Board of India (SEBI) has passed an ex-parte order dated August 19, 2005 undersection 12A of Securities Contracts (Regulation) Act, 1956 read with Section 11(4) and 11B of SEBI Act, 1992 and Section 19 of Depositories Act, 1996 in the matter of transactions in the scrip of Bhoruka Financial Services Limited (BFSL) on Magadh Stock Exchange Association (MSEA) The directions in the aforesaid order order are as follows: follows: a) In order to prevent the affairs of MSEA being conducted in a manner detrimental to the interests of the investors and also to secure proper management of the stock exchange, MSEA, which has been illegally used to facilitate the trading in the scrip of BFSL in violation of Sections 13 and 19 of Securities Contracts Contracts (Regulation) Act, 1956 and also in violation of the conditions of renewal of the MSEA, is directed not to a ssist , regulate or control the dealings in securities in any manner whatsoever until further directions or pending completion of final proceedings, whichever is earlier. b) It is prima facie found that the member of the MSEA namely Rajat Share & Stock Broker Pvt. Ltd. facilitated the above transactions illegally on the stock exchange and without following Know Your Client criteria. They are directed not to deal in securities, undertake any transactions in securities as a broker registered with SEBI. c) Under Section 19 of Depositories Act, 1996 read with Section 11 (4) of SEBI Act 1992, the shares of BFSL lying with Central Depository Services (India) Ltd. (CDSL) in demat form are hereby impounded till further orders. CDSL is also directed not to permit any transfers in the shares of BFSL till further orders. d) Under Section 11 (4) (a) read with Section 19 of SEBI Act, 1992, SEBI has directed that the transactions in the scrip of BFSL (which is listed on the Bangalore Stock Exchange (BgSE) be suspended on BgSE and any other stock exchange until further orders. e) The acquirer namely DLF Commercial Developers Developers Ltd. is prohibited from dealing in the scrip of BFSL so long as the above directions are in force. f) The promoters of BFSL who are the sellers in this scrip namely Shri Satyanarayan Agarwal , Shri Viveek Agrawal, Umah Agrawal, Siddhartha Agrawal, Satyanarayanan Vivek Kumar HUF, M/s Prabhu Securities Limited, M/s. Bhoruka Engineering Ind. Ltd., who have been prima facie found to have gained unfairly, have been directed by SEBI under Section 11 B read with 11(4) to deposit the proceeds of these transactions in an escrow account with a nationalised bank opened exclusively for this purpose and they are further directed to take prior approval of SEBI for dealing in this account. acc ount. g) In view of the reckless and unseemly conduct on the part of the Officiating Executive Director (OED) of MSEA, Shri C M Pandey, he is suspended from acting as a OED or in any capacity in MSEA or in any other institution related with the securities market, till further orders.
1
PRESS RELEASE, PR No.105/2005.
The order was passed passed by SEBI in the following context: context: On August 10, 2005, it came to the notice of SEBI that, the MSEA has illegally commenced trading even though it had not complied with the conditions of renewal of the exchange, which inter alia required that trading on the exchange should commence only after the setting up of the settlement guarantee fund duly approved by SEBI. SEBI immediately advised MSEA to stop trading and called for the details of trades undertaken. On examination of the trading details it was found that MSEA had illegally commenced commenced trading since August 1, 2005 and out of the total trading volume of Rs 109.71 crore, nearly 99% of the trading volume i.e. Rs 108.87 crore was in the scrip of BFSL. It was found that BFSL is listed only on Bangalore Stock Exchange Ltd. (BgSE) and was last traded 17 years back, in 1988 at Rs 5/- in BgSE. This scrip which is not listed in MSEA, was admitted to trade under the permitted category by MSEA on August 1, 2005, at the request of the broker Rajat Share & Stock Broker Pvt. Ltd.. The trades amounting to 1, 98,850 shares, and accounting for 98.73 % of the paid up share capital of BFSL, were all executed at an incredibly high price of Rs 4,490/- per share. The above trades were executed by the promoters of BFSL of Bangalore as sellers and DLF Commercial Developers Ltd of Delhi was the acquirer. It was also noted that DLF had earlier applied to SEBI to seek exemption from making a public announcement to acquire these many shares (i.e 98.73%) of the company from the promoters at a pre negotiated price of Rs 2,400 per share. SEBI had by its order dated June 29, 2005 had exempted the acquirer from making an open offer. The trades done on MSEA at Rs.4490 were therefore also in violation of SEBI’s Takeover order. Thus the buyer DLF was located in Delhi, being a Delhi based company, while the sellers (promoters of BFSL) were Bangalore based entities and the scrip of BFSL listed only on Bangalore Stock Exchange was illegally traded on MSEA in Patna, through a broker common to the buyer and sellers based in Patna. In view of the foregoing, SEBI after gathering the trade details on August 16, 2005, examined the matter and sent out teams to MSEA, BgSE, on August 18, 2005. The details of payments were verified with the concerned bank and that of the securities with the CDSL. The matter was also confronted with the buyers in Delhi on August 19, 2005 and in view of the exigencies of circumstances as enumerated above, an ex-parte order was passed on August 19, 2005.
