DOCUMENT WHICH COVERS SOME REGULATION OF SEBI ON STOCK EXCHANGES

1. SEBI REGULATIONS FOR STOCK EXCHANGES
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 these 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 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 Vadodara stock Exchange
was granted for a further period of three years.
During the year 1997-98, inspection 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.

2. 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, 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 trading, settlement,
collection of margins etc.
Supersession of the governing board of Magadh stock exchange
The annual inspection of 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 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.
The Administrator has been taking immediate steps to improve 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 since 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.

3. 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 of
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 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
on 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 on March
31, 1998, only 5 applications were pending which are under consideration of 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.