WTM/RKA/ISD/11/2013. Case: In Re: Zenith Infotech Ltd. Vs. Securities and Exchange Board of India

Case NumberWTM/RKA/ISD/11/2013
JudgesRajeev Kumar Agarwal, Whole Time Member
IssueSecurities And Exchange Board of India Act, 1992 - Sections 11(1), 11(4), 11B, 12A, 12A(b), 19; Securities Contracts Regulation Act, 1956 (42 of 1956) - Section 21
Judgement DateMarch 25, 2013
CourtSecurities and Exchange Board of India


Rajeev Kumar Agarwal, Whole Time Member

  1. Zenith Infotech Limited ('ZIL/company') is a public limited company having its shares listed on the Bombay Stock Exchange Ltd. ('BSE') and the National Stock Exchange Ltd. ('NSE'). The Integrated Market Surveillance System (IMSS) of the Securities and Exchange Board of India ('SEBI'), generated an alert on the sudden change in the price of the scrip of ZIL. Meanwhile, the SEBI also received complaints against ZIL inter-alia alleging the following:

    i. The affairs of the company are carried out in a manner which could be catastrophic for the retail investors and shareholders of the company.

    ii. The promoters of the company willfully omitted to disclose, certain key transactions, information about company's financial standing and material price sensitive information to the stock exchanges.

    iii. The company defaulted on its obligation to redeem the FCCBs due in 2011 resulting in loss of shareholder value.

    The matter was, therefore, taken up for preliminary inquiry which revealed that Mr. Rajumar Saraf, Mr. Akash Kumar Saraf, Ms. Devita Saraf, Ms. Vijayrani Saraf, VU Technologies Private limited and Zenith Technologies Private Limited are all promoters of ZIL and they together hold 64.89% of its shareholding (as on December 31, 2012). Mr. Rajkumar Saraf and Mr. Akash Saraf are the Chairman cum Director and Managing Director of ZIL, respectively. ZIL has two sets of businesses: Cloud Computing Business & Managed Services Business ('MSD').

  2. The preliminary inquiry further revealed that ZIL had raised monies from foreign investors by issuing Foreign Currency Convertible Bonds ('FCCBs') of US$ 33 million ( ` 179.19 crores) in August 2006 and those of US$ 50 million ( ` 271.5 crores) in August 2007. The FCCBs were due for redemption in August 2011 and August 2012, respectively, as mentioned in ZIL's notice dated December 27, 2010.

  3. On December 27, 2010, ZIL announced to BSE/NSE that its Board of Directors had resolved to raise funds for re--payment/redemption of FCCBs and for this purpose ZIL was calling an Extraordinary General Meeting (EGM) to obtain shareholders' approval to borrow money upto ` 1500 crore.

  4. A resolution was passed by the shareholders of ZIL at its EGM held on January 29, 2011 approving and authorizing its Board of Directors to raise money for repayment/redemption of FCCBs in one or more of the following methods:

    a) To borrow moneys from Domestic markets and/or through External Commercial Borrowings up to an amount not exceeding ` 1,500 Cr.

    b) To sell and/or lease the business and/or divisions including the subsidiaries (wholly and partly) of the company and for that purpose to issue debt securities/bonds, etc, in the domestic or international markets, as permitted by law...

    ZIL submitted a copy of the approved resolution to the Exchange (NSE) on February 15, 2011.

  5. On September 26, 2011, ZIL informed the BSE that: "the Company have spun--off one Division of its Business known as MSD Division to M/s. Zenith Monitoring Services Pvt. Ltd. Mumbai which will be a Subsidiary of Zenith RMM LLC, by way of an Asset Purchase Agreement. However, Zenith Infotech Ltd. is going to be a major shareholder."

  6. During preliminary inquiry it was observed that despite realising money through the sale of its MSD Division, ZIL defaulted in the redemption of FCCBs as approved by its shareholders. Further, it failed to disclose to BSE/NSE the default in redemption of FCCBs. When on October 13, 2011, BSE suo moto sought clarification from ZIL, it informed BSE as under:

    a. The company has defaulted on its US$33mn FCCB which was due on 21st September 2011 and the company was (and is) in negotiations with the bondholders to extend the time for repayment.

    b. As informed to BSE earlier vide our letter dated September 24th 2011, we have received all monies due from Zenith RMM, LLC except for the amount to be held in escrow, part of which the company plans to utilize for partial repayment of FCCBs.


  7. As news of probable default in redemption of FCCBs spread in the market, the share price of ZIL fell sharply from ` 190 on September 23, 2011 to approximately ` 45 on November 30, 2011 i.e. a fall of approximately 75% in just 45 trading days (as per BSE data). Even for the period from September 23, 2011 to October 13, 2011 (i.e. the day of disclosure of default on FCCBs by ZIL) the price of the scrip fell by half i.e. from ` 190 to ` 93. Further, it has been observed that the price of ZIL again halved to ` 45 on November 30, 2011. Moreover, it appears from the shareholding pattern that there was a marked decline in the shareholding of Institutional Investors from 20.17% to 11.96% during the quarter ending September 2011 to December 2011. The following graph demonstrates such fall in the price of the scrip.

    Price - Volume movement during the period September 23, 2011 to November 30, 2011

  8. Vide letter dated December 10, 2011 ZIL submitted to SEBI that the matter of redemption of FCCBs is sub judice in a Suit(L) No. 3091 of 2011 before the Hon'ble High Court of Bombay. It further provided a copy of an affidavit dated November, 28, 2011 filed by Mr. Raj Kumar Saraf in the said Suit. ZIL has also submitted that it was in negotiations with the FCCB holders to make full or part payment or extend the maturity date. Further, ZIL stated that it did not make disclosure of the default as it would have prejudicially affected the interest of the company and its stakeholders. Yet the above price movements reveal that the uncertainty surrounding the event of redemption had, prima facie, substantially harmed the interest of the shareholders by the time of subsequent confirmation at BSE.

  9. During the preliminary inquiry, the following sequence of the events in the case has been noted:

    a) ZIL spun--off one of its divisions, MSD, in a related party...

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