SEBI has warned the United Stock Exchange (USE) to be cautious and perceptive while discharging its functions and regulatory duties. SEBI also directed the exchange to undo the imbalance in favour of particular directors within two months.

While reviewing trading volumes of exchanges, SEBI noticed that 77-80 per cent of USE's volumes originated from two brokers.

SEBI communicated its concern to the USE in August last year and received a reply in September.

Meanwhile, SEBI has received a letter from Mr T. S. Narayanasami, MD and CEO of USE, stating that he had resigned. The letter also said that the USE board had asked him to continue until November end.

In December 2011, SEBI issued a show cause notice to USE and advised the exchange to reply within 15 days. The notice alleged that there was a lack of a robust surveillance system at USE to monitor artificial boosting of volumes by one broker. It also said that USE had not built its own infrastructure and had diluted the independence of its public interest directors.

SEBI further alleged that USE did not have a sustainable pricing policy and had failed to collect turnover fees from brokers and pay SEBI. The USE board was also responsible for not correcting imbalances in favour of particular directors (including delayed payment and quorum rights), SEBI alleged.

Finally, SEBI also charged that USE had amended its Articles of Association without its approval and that the existing state of affairs at USE was not in the interest of the securities market.

Subsequently, SEBI found that USE had taken corrective steps by inducting new directors, clarifying on delayed payment of turnover fees, augmentation of its own staff and introducing transaction charges. The regulator then ruled that USE was negligent to a certain extent in discharging its functions and duties.

SEBI directed USE not to amend its articles of association (AoA) without its approval.

It also said that USE's decision to provide in its AoA that no quorum could be constituted unless at least one of the three promoters was present at a board meeting (as a special right to promoters) was not tenable.

SEBI observed that the special articles in USE's AoA had an over riding effect on its general AoA.

Hence it was detrimental to shareholder interest, inconsistent, imprudent and contrary to best corporate governance practices and constrained the independent functioning of the stock exchange, said SEBI.

SEBI noted that these defaults not only reflected bias towards certain shareholders, but also revealed that such provisions in AoA were against the spirit of demutualization of stock exchanges.

Not wanting to disrupt the functioning of the exchange as it could be considered only in extreme cases, SEBI let USE off with a warning and a direction to amend its AoA within two months.

raghavendrarao.k@thehindu.co.in

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