The regulator also removed him from the post of Public Investor Director on the exchange, sources said. Shah was appointed Public Investor Director by Sebi in November last.
When contracted, Shah confirmed the development.
"I have handed over charge to Acting MD (M Shaikh) of VSEL after I received an e-mail message from Sebi in this regard. I have obeyed the (Sebi) order (to step down)," he told PTI.
He, however, questioned the rationale behind sudden action of Sebi to remove him from both posts.
Shah's removal comes in the wake of a preliminary report submitted by a two-member Sebi team which visited the city yesterday and initiated an inquiry into the resignation of VSEL MD Someshwara Rao on October 7.
Rao had earlier alleged he was forced by the Board of Directors to quit, a charge denied by Shah, who said it was a voluntary decision by the former.
Sebi later ordered reinstatement of Rao as Managing Director, but VSEL was yet to comply with the directive. After Rao's resignation, Shaikh was named Acting MD.
The Sebi team had a series of meetings with Rao, Shah, Directors of VSEL, local stock exchange brokers forum and others, which lasted till late last night.
Rao, however, said despite being reinstated he was not being allowed to work and no official papers are being sent to him.