The Securities and Exchange Board of India has suspended the board of directors of the Pune Stock Exchange for one year with effect from April 4, 2003. The regulator has appointed B D Banerjee as an administrator of the bourse.

The move follows Sebi's investigation into the listing of Home Trade Ltd's shares and the subsequent spike in the stock. It also conducted an annual inspection of PSE during March 2002, with particular reference to the surveillance mechanism of the bourse and serious allegations against the ex-president of PSE, P C Mutha.

The investigations revealed that the general functioning and administration of the PSE governing board, which took over on September 29, 2001, was not carried out in accordance with the provisions of the Securities Contracts (Regulation) Act.

It was also observed that various circulars, directives and instructions issued by Sebi had not been complied with by the exchange. Sebi also conducted an inspection of PSE Securities Ltd (PSESL), a subsidiary of PSE, during March 2002.

The investigation revealed serious irregularities and interference committed by the PSE governing board in the functioning of PSESL. According to the investigation, the listing permission granted by PSE to Home Trade (formerly Euro-Asian Securities Ltd) was not in accordance with the Securities Contracts (Regulation) Act.

The PSE did not conduct any inspection of brokers or take any risk containment measures such as imposition of special margin, putting the scrip on a spot basis, suspension of trading in the scrip and indefinite suspension to check the artificial rise in the stock price.

Large scale violations were observed in the surveillance areas of the exchange. It was observed that at PSESL sub-broker terminals were activated before getting Sebi registration.

Sebi has also issued a show-cause notice to the board of PSE as to why they should not be superseded. An opportunity of hearing was also given on September 16, 2002. However, it was observed that the board had not rectified or addressed the issues.

Issuing the order, Sebi chairman G N Bajpai said, "The failure on the part of the surveillance mechanism of the exchange in checking the price rise in the Home Trade scrip and the functioning of the surveillance department is bound to lead to the inevitable conclusion that the surveillance department is not independent and the non-interference with the surveillance mechanism has not been ensured."

The chairman said that though collection of margin money and maintenance of base minimum capital are required to ensure that transactions at the exchange take place safely without any defaults and without causing any loss to the investors who trade through the exchange, "it was noted that the exchange has been found to collect margin money by way of cheques. Further, the base minimum capital has not been maintained as per Sebi secondary market department circular No. 19 dated July 2, 1999."