Sebi warns Ahmedabad Stock Exchange, bars three directors

Finding some irregularities, market regulator Securities and Exchange Board of India (Sebi) on Friday warned Ahmedabad Stock Exchange and asked it to be cautious while carrying out its functions, including financial dealings, and barred three shareholder directors from its board.

The Sebi order followed certain lapses and irregularities found in the functioning of the exchange.

"The governing board of the Ahmedabad Stock Exchange Ltd is warned and is advised to be cautious in the discharge of all its functions and also in their financial dealings," Sebi's whole-time member Prashant Saran said in a 19-page order.

Further, he directed the board to ensure that the bourse "strictly and promptly" complies with regulatory requirements.

Sebi has barred the bourse's shareholder directors - Keyur B Mehta and Kush B Shah - from being appointed on its board for five years.

Another shareholder director Hemant Singh Jhala has been restrained from holding any position as a director with any intermediary or entity registered with Sebi till further directions.

Taking a strong position, the bourse has also been ordered against using money from its investor protection and investor service funds till adequate checks and balances that are to the satisfaction to Sebi are in place.

The exchange has to appoint an independent auditor to assess its internal control systems and implement suggestions after discussions in the board within two months.

Observing that allegations of financial irregularities leveled against Mr Jhala are "serious in nature", Mr Saran has advised Sebi to conduct a detailed probe into the matter.

"In the meantime, Hemant Singh Jhala is being restrained from holding any position as a director with any intermediary or entity registered with Securities and Exchange Board of India till further directions," the order noted.

According to the order, Sebi is advised to complete the probe within one year.

Sebi's inspection revealed lapses and irregularities in the functioning of the exchange, as well as at the level of Chairman and Directors on the governing board, among others.

The inspection - conducted for the period July 5, 2011 to July 8, 2011 and May 15, 2012 to May 17, 2012 - focused on aspects such as management, compliance, administrative monitoring/control and financial management.

"I am convinced that Ahmedabad Stock Exchange was negligent in the discharge of its functions and duties. I note that suspending/interrupting the working of the stock exchanges is not an appropriate penalty as it involves negative externalities and could be considered only in extreme cases," Mr Saran said in the order.

Considering the nature of the lapses and the efforts made, he noted that "penalty of warning to Ahmedabad Stock Exchange would be appropriate in this case".

Mr Saran also noted that a stock exchange has to function in an objective and just manner, setting an example for the intermediaries related to its business and also promote healthy development of the securities market.