The Bombay High Court also found evidence of various irregularities including alleged siphoning off of funds at Zenith Infotech following the sale of the company's MSD business
The Bombay High court has directed the sale of mainstay cloud computing business of Zenith Infotech Ltd (ZIL) to repay dues to foreign currency convertible (FCCB) bondholders, including hedge fund.
After the sale of its managed services division (MSD) a couple of years ago, cloud computing was the main business operation of the Mumbai-based ZIL promoted and run by father-son duo of Rajkumar Saraf and Akash Kumar Saraf.
According to a report from the Business Standard, the court decided to allow the sale of business as a “going concern” to protect the interest of employees and on expectation that it is likely to fetch better valuation when compared to an outright winding up. Two different valuers have valued the cloud business to be worth around Rs200 crore.
The single Bench order came in a winding up petition filed by the Bank of New York Mellon, the custodian of FCCB holders, to recover dues of over $100 million (about Rs600 crore). The High Court found evidence of various irregularities including alleged siphoning off of funds following the sale of its MSD business.
Earlier, in March 2013, market regulator Securities and Exchange Board of India (SEBI) has barred Rajkumar Saraf, Akash Kumar Saraf, Devita Saraf, Vijayrani Saraf, VU Technologies Pvt Ltd and Zenith Technologies Pvt Ltd from the securities market till further directions, while asking them to furnish a bank guarantee of $33.93 million valid for one year.
SEBI had said its examination “prima facie'” shows that promoters and directors of Zenith Infotech have in a devious manner attempted to take away the assets of a listed company directly and indirectly for their own benefit or for benefit of entities owned and controlled by them, thereby causing loss to shareholders.
In 2006, Zenith Infotech, run by Akash Saraf as managing director and chief executive, issued FCCBs worth $33 million at a conversion price of Rs310 per share due in September 2011. Next year, the company again issued FCCBs worth $50 million at a conversion price of Rs522 per share and due to mature in August 2012. The first tranche of $33 million came up for repayment as Zenith's share price at that time was below the conversion price on the maturity date.
However, in a regulatory filing, the company admitted that it has defaulted on its $33 million FCCB and was in negotiations with the bondholders to extend time for repayment. Since there was a default in payment of the first tranche, it triggered a cross default provision under which the second tranche also was considered defaulted. This made the total defaults of around $83 million.
One representative of the creditors, who did not want to be identified, had told Moneylife, “Despite having the cash at the time of the maturity of first tranche, Zenith Infotech had not paid our dues. Later on 26 September 2011, it decided to sell one of its two divisions, called managed services division or MSD through a newly incorporated vehicle Zenith RMM LLC in Delaware to US-based private equity fund Summit Partners via an asset purchase agreement.”
Following orders from the court, it was discovered that Zenith received $54 million or about Rs250 crore in cash for selling 85% of its MSD business and would also retain 15% ownership in Zenith RMM with Summit Partners holding the rest. Zenith UAE, which received $27 million or about Rs133 crore from the deal is a very small entity.
In an affidavit filed before the Court, Zenith also revealed that it transferred about $15 million from the proceeds to Vu Technologies, a company run by Devita Saraf, the daughter of Raj Saraf and sister of Akash Saraf. However, till date Zenith failed to explain what happened to the Rs150 crore it showed on its balance sheet and why it did not cleared its dues or repaid money to FCCB holders, the representative had said.
The company is likely to challenge the order in the division bench of the High Court. Akash Saraf, the chief executive of Zenith Infotech told the newspaper that “We will be appealing (against) the order. We will be countering the verdict.”
The Maharashtra government has made ready reckoner for real estate prices, its biggest cash cow, and increased its rates every year without any justification
The Maharashtra government is reportedly mulling a 10% to 25% increase in the ready-reckoner (RR) rates for residential and commercial properties across the state from next month. However, according to experts, such a hike is unrealistic.
"This kind of proposed hike in ready reckoner rates is unrealistic. At present, property prices are down by about 30% and there are no buyers. In addition there is abundant supply and the trend is of a further fall in property prices. In this scenario, proposed hike in ready reckoner rates is unwarranted," said Advocate Vinod Sampat.
According to a report from Business Standard, the (state) government intends to mobilise Rs20,000 crore during 2013-14 through stamp duty and registration fees. "From 1 January 2013, the state government had hiked RR rates in Mumbai by 5%-30%. Property buyers would have to shell out more as based on the revised RR rates, they would also have to pay higher value added tax, service tax and 50% increased stamp duty," the report says.
Ready reckoner rates are used to calculate market value of flats for stamp duty and registration charges. Since 2008, these rates are being calculated on built-up area of the flat.
During 2008-09, the income from stamp duty was Rs8,384 crore even as the state government refrained from revising ready reckoner rates due to the slowdown. However, over the next years, ready reckoner rates have been revises regularly, thus boosting revenues for the Maharashtra government. During 2009-10 its collected Rs10,901 crore (up 30%) as stamp duty, Rs13,411 crore in 2010-11 (up 23%) and Rs14,800 crore in 2011-12 (10% hike). The collection rose to Rs15,000 crore by end 2012-13, the news report says.
Sunil Mantri, president, National Real Estate Development Council, told Business Standard: “In the last few years, the government has made RR the biggest cash cow, with a rise in its rates every year without any justification. Any increase in RR rates is totally unjustified, especially when the realty sector is passing through a tough time. In fact, my suggestion is that the government should reduce the RR rates and also cut the stamp duty to 2%-3% from the present level of 5%. This will ultimately boost property transactions.”
The proposed increase in ready reckoner rates may not substantially affect transactions of new flats as the builders often sell it about 30%-80% higher than the RR rates. However, for the old flats, especially those in the redevelopment phases, the rates may go up due to proposed increase in construction cost in ready reckoner rates.
Adv Sampat said stamp duty collection is the second highest source of revenues for Maharashtra government. "Despite, the increase in property tax, prices would fall further as there is abundant supply and no buyers," he added.
However, Mumbai’s residential real estate market has always shown higher resistance for price moderation, largely because of the scarcity of land, says Anuj Puri, chairman and country head, Jones Lang LaSalle India in a report. “Currently, given the exceedingly high pricing and slow sales, we expect a marginal price correction in Mumbai’s residential property sector. However, the window of opportunity could be smaller than the previous one, since fence-sitting investors are jumping in quickly even with a modest price correction. With insufficient and belated infrastructure, Mumbai’s prime areas will continue to command premium valuations,” he added.
With the new Regulations from SEBI, the tribe of investment advisors will hardly grow in India as there is too much of responsibilities with limited freedom
The idea that investment advisors need to be regulated is not at all a subject of debate. In the US, Investment Advisors Act was passed in 1940. UK carried out several changes in the regulation of financial advisors from 2012.There are many other countries, which regulate investment advisors also called as financial planners. In India, the need to regulate investment advisors originated from many factors out of which two are very important factors which are as follows:-
a) Holding advisors accountable for what they suggest to the client and;
b) Ensuring that advisory business is not mixed with selling of financial products.
With a view to make financial advisory business more accountable, SEBI came out with “Investment Advisors Regulation”. From 21 October 2013 only those who had registered under the regulation with SEBI would be able to offer investment advisory services.
With the Investment Advisors Regulation coming into force, SEBI has received only limited number of applications for registration, with number of investment advisors barely crossing even 100 in a country, which has probably more investment advisors than investors at the current juncture. One of the obvious reasons is that many people are not keen to give up their business of selling financial products and just be investment advisor where the cash flow is not assured, but the matter does not end here.
Let us look at some of the obvious reasons for poor response to this regulation.
Investment advisors not classified based on business activity
SEBI classifies an investment advisor as either individual, partnership firm or a body corporate. Rather than doing this, SEBI should have classified investment advisors based on the volume of business they handle. For instances in USA, investment advisors that have "assets under management" of $25 million or more need to register with SEC and rest others can register with state securities commission. Though India has no such structure, the idea is to highlight the fact that investment advisors should not be treated at legal structure level but at the level of business they handle. A business investment advisor with higher level of activity can afford more costs than an investment advisor having a handful of clients.
Fees charged and cost of compliance are very high
The investment advisor regulation states the following with respect to the fees to be paid by investment advisors:
But this is not the total cost that an investment advisor has to pay. There are costs associated with infrastructure, maintain of records, audit costs etc. Net worth requirement can also act as a minor deterrent. The advisory business in India is in a nascent stage. It is difficult for investment advisors to charge fees to the clients. Also, with the market being so competitive and in absence of a level playing field, charging any decent fees by investment advisors is very difficult and challenging.
The grey areas in investment advisory guidelines are anti-investment advisor
Read this statement which is directly produced from the act: ” Whenever a recommendation is given to a client to purchase of a particular complex financial product, such recommendation or advice is based upon a reasonable assessment that the structure and risk reward profile of financial product is consistent with clients experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss”. There is so much of subjectivity in this statement that an investment advisor will like to keep away from such products or has a risk of not meeting compliance requirement.
It is indeed doubtful that, with current guidelines, the tribe of investment advisors will grow in India. There is too much of responsibility with limited freedom. The cost is big de-motivating factor and compliance requirements are draconian. The guidelines are too investor-friendly and offer very little to the advisors. It is now, the right time to declare investment advisors as endangered species.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)