The Securities and Exchange Board of India's (Sebi) probe into United Stock Exchange (USE), alleging it of giving BSE more than permissible representation on its board, has led to the resignation of two directors.

Arun Ramanathan, public interest director (PID) at USE and chairman of Indian Clearing Corp promoted and wholly-owned by BSE, has resigned from the USE board, said people familiar with the matter. Another PID on the USE board, Dipak Chatterjee, who was also serving as a shareholder director on BSE, has resigned from his post at BSE to avoid any allegations of conflict of interest, said sources.

BSE is a major shareholder of USE, with about 15% of the equity. A few months ago, the capital market regulator had issued a show-cause notice to USE, accusing it of skewed board structure. Sebi also raised concerns over USE's corporate governance structure and found instances of violation of regulatory norms.

Sebi is at an advanced stage of completing its investigation based on submissions made by USE, after the exchange sought two extensions to reply to a show-cause notice dated December 29, 2011.

USE did not respond to ET query, nor did Sebi. The USE board had seven members - two trading member directors, two public interest directors, two shareholder directors and one MD & CEO. According to Sebi, this was not in accordance with Sebi norms.

The Sebi notice said apart from the two PIDs who are also on the board of BSE/ICCL, there were two shareholder directors - Madhu Kannan, MD and CEO of BSE and Ashish Chauhan, deputy CEO of BSE, who were part of the USE board.

"The number of directors on USE, having vital positions in BSE /ICCL, is four. This is not in the interest of the governance of a stock exchange and the market," said Sebi.

The development may spell trouble for the USE board, which may have to revamp the management team, going forward. USE's former chairman and managing director TS Narayanaswami resigned from the exchange a few months ago. Madhu Kannan, MD & CEO, BSE, will soon join Tata Sons as group head - business development. On Monday, Ashishkumar Chauhan was appointed as BSE's interim CEO.

"Stock exchanges are public body. If there are any violations, the regulator can also take action against the directors," said PR Ramesh, senior consultant, Economic Laws Practice.

He feels Sebi may also probe the role of BSE. "There is a need to separate the regulation from that of supervision. Being first-level regulators themselves, stock exchanges are required to have an independent board so as to avoid any potential conflict of interest," he said.

The Sebi probe also found that USE has amended its article of association (AoA) without regulatory approvals, which said no quorum can be constituted unless at least there is one nominee director from Jaypee Capital, BSE, Federal Bank present in the board meeting.

"Such kind of restrictive arrangements may constrain the independent functioning of the exchange," the regulator noted.

Sebi accused Jaypee Capital, which occupies a position on the USE board, for contributing 80% of USE's turnover. It said Jaypee has not paid its statutory dues.

"The dues were made good only after Gaurav Arora, the trading member was advised to meet Sebi in his capacity as the director on the board," said Sebi's show-cause notice. (Economic Times