REGULATION OF BUSINESS IN THE STOCK EXCHANGES

Under the SEBI Act, 1992, the SEBI has been empowered to conduct inspections of stock exchanges. The SEBI has been inspecting the stock exchanges once every year from 1995-96. During these inspections, a review of the market operations, organizational 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 organization, systems, and practices are in accordance with the Securities Contracts (Regulation) Act (SC(R) Act), 1956, and the rules framed thereunder
• 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 exchanges are 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 them in implementing the suggestions contained in the inspection report. The SEBI nominee directors and public representatives on the governing board/council of management of the stock exchanges also pursue the matters in the meetings of the governing board/council of management. If the performance of the exchanges whose renewal of recognition is due, is not found satisfactory, the SEBI grants further recognition for a short period only, subject to fulfillment of certain conditions.

During the year, renewal of recognition was granted to three stock exchanges. The renewal of recognition to Saurashtra – Kutch Stock Exchange was renewed for a further period of one year only as the exchange failed to rectify the deficiencies pointed out in the inspection report and renewal of recognition of Jaipur Stock Exchange was granted only for a period of one year as the exchange has not started Screen Based Trading. The renewal of recognition of the Vadodara Stock Exchange was granted for a further period of three years.

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During the year 1997-98, inspections of stock exchanges were carried out with a special focus on the measures taken by the stock exchanges for investors’ protection. Stock exchanges were, through inspection reports, advised to effectively follow up and redress the investors’ complaints against members/listed companies. The stock exchanges were also advised to expedite the disposal of arbitration cases within four months from the date of filing.

During the earlier years’ inspections, common deficiencies observed in the functioning of the exchanges were delays in post-trading settlement, frequent clubbing of settlements, delay in conducting auctions, inadequate monitoring of payment of margins by brokers, and non-adherence to Capital Adequacy Norms, etc. It was observed during the inspections conducted in 1997-98 that there has been considerable improvement in most of the areas, especially in the trading, settlement, collection of margins, etc.

Supersession of the governing board of Magadh stock exchange

The annual inspection of the Magadh Stock Exchange for the year 1997-98 was conducted by the SEBI during August 11-13, 1997. Based on 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 Management of the exchange, a show-cause notice was issued by the SEBI to the Council of Management of Magadh Stock Exchange as to why it should not be superseded. The Council of Management did not respond to show-cause notice and also did not avail of the two opportunities of personal hearing granted to them by the Chairman, SEBI. The SEBI received a letter from the Executive Director of the exchange enclosing a copy of the circular resolution passed by a majority of the members of the Council of Management requesting SEBI to take immediate appropriate action in the light of the complete breakdown in the administration of exchange.

Taking in view the gravity of the situation, the Chairman, SEBI, in pursuance of powers conferred on him under Section 11 of the Securities Contracts (Regulation) Act, 1956, read with notification No. SO 573, dated July 30, 1993, and Section 4(3) of the SEBI Act, 1992, superseded the Council of Management of the exchange for a period of one-year w.e.f. December 08, 1997, and appointed an Administrator as an alternative arrangement.

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The Administrator has been taking immediate steps to improve the overall functioning of the exchange. An Advisory Committee has also been constituted to assist the Administrator. The exchange is in the process of constituting various Statutory Committees and also the appointment of an Executive Director. The performance of the exchange is being monitored on a monthly basis by the SEBI.

Expansion of BSE On-Line Trading System (BOLT)

In order to have a level playing field and to provide healthy competition in the Secondary Market, the SEBI had, in October 1996, permitted stock exchanges to expand their trading terminals to locations outside the city wherein such exchanges are located subject to compliance with certain conditions.

The stock exchanges were granted permission to expand their trading terminals to those cities where no other stock exchange is located. The BSE On-Line Trading system (BOLT) has already been permitted to expand to such cities subject to compliance with certain conditions imposed by the SEBI.

As for the cities where a stock exchange already exists, the exchanges seeking expansion were required to enter into a Memorandum of Understanding (MoU) with the concerned stock exchange. Accordingly, the Stock Exchange, Mumbai has entered into MoU with the Pune, Calcutta, Ahmedabad, and Rajkot stock exchanges. After due consideration, the SEBI has permitted BOLT expansion to the cities of Pune, Calcutta, and Rajkot subject to fulfillment of certain conditions by these stock exchanges. The proposal of BOLT expansion to Ahmedabad was under consideration by the SEBI.

Similar proposals by stock exchanges to expand outside their area of jurisdiction were also received from Bangalore Stock Exchange and were under evaluation by the SEBI.

New Stock Exchanges

In December 1996, the SEBI had taken a policy decision, in public and trade interest, that grant of recognition to new stock exchanges would be considered subject to fulfillment of the following conditions :

• The exchange would begin trading only after the introduction of On-Line Screen Based Trading
• The exchange makes rules, regulations, and bye-Laws with adequate provisions for investor protection, with the approval of the SEBI, and thereafter strictly follows them
• The exchange establishes a Clearing House within 6 months from the date of recognition

The SEBI received several applications for recognition of new stock exchanges. As of April 01, 1997, the number of such pending applications/representations for new stock exchanges was 6. During the current year 1997-98, 4 new applications were received. Out of a total of 10 applications/representations, 3 were closed and 2 were granted ‘in-principle recognition’ during the year 1997-98. As of March 31, 1998, only 5 applications were pending which are under consideration by the SEBI.

The Capital Stock Exchange Kerala Limited (CSEKL) and The Inter-Connected Stock Exchange of India (ISE) were granted ‘in-principle recognition’ by the SEBI subject to compliance with certain conditions.

The Inter-Connected Stock Exchange of India Limited (ISE)

The Inter-Connected Stock Exchange of India Limited (ISE) is being promoted by 14 regional stock exchanges to set up a new national-level stock exchange. The ISE will set up an Inter-Connected Market System (ICMS) which would provide a national market in addition to the trading facility at the regional stock exchanges. The proposed stock exchange has a broader objective of protecting the regional stock exchanges as the consolidation of the market would increase the order flow to the regional stock exchanges and help in their survival and also benefit the investors by offering them a national reach with greater liquidity. The fourteen stock exchanges participating in the Inter-Connected Stock Exchange of India are :

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1. Bangalore Stock Exchange
2. Bhubaneshwar Stock Exchange
3. Cochin Stock Exchange
4. Coimbatore Stock Exchange
5. Guwahati Stock Exchange
6. Hyderabad Stock Exchange
7. Jaipur Stock Exchange
8. Ludhiana Stock Exchange
9. Madhya Pradesh Stock Exchange
10. Magadh Stock Exchange
11. Mangalore Stock Exchange
12. Saurashtra Kutch Stock Exchange
13. Uttar Pradesh Stock Exchange
14. Vadodara Stock Exchange