SEBI while asking the Sarafs of Zenith Infotech to provide a bank guarantee of $34 million, said the promoters and directors of the company have in a devious manner attempted to take away assets of a listed company, directly and indirectly, for their own benefit causing loss to shareholders
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. In addition, the market regulator asked the board of directors of Zenith Infotech to furnish within 30 days a bank guarantee of $33.93 million valid for one year.
SEBI 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.
Here are the observations made by SEBI...
1. Zenith Infotech had raised $33 & $50 million by issuing ‘FCCBs’ which were due for redemption in September 2011 and August 2012, respectively.
2. Zenith Infotech in its EGM held on 29 January 2011 took approval from its shareholders to sell its assets for repayment/redemption of FCCBs due for maturity.
3. On 26 September 2011, Zenith Infotech announced to the exchanges that it has sold one of its division, managed services division or MSD, to Zenith RMM LLC.
4. It was observed that the substantial portion of sale proceeds of MSD Division of Zenith Infotech was diverted for the benefits/interests of promoters and/or directors and subsidiaries, which was not remotely connected to the authorization of the shareholders.
5. Further, it was observed that the Zenith Infotech and its promoters/directors not only disregarded shareholders’ resolution but also adopted fraudulent device and artifice to defraud the shareholders by concealing and misrepresenting information to the exchanges.
6. The aforesaid apparent asset stripping of Zenith Infotech for the purpose of benefitting the interests of its promoters /directors and related entities led to the following consequences:
a. Shareholders/investors have lost considerable value as a result of sharp price fall in the scrip of Zenith Infotech from approximately Rs190 on 23 September 2011 to approximately Rs45 on 30 November 2011 i.e. a fall of approximately 75% in just 45 trading days. The price of the scrip has further gone down to Rs19 as on 7 March 2013.
b. The shareholders’ value has eroded because of the misconduct of the promoters/directors.
c. The company is still fastened with the liability to pay back the FCCB holders on account of redemption thereof. This will further have a financial burden on shareholders' wealth in Zenith Infotech.
In 2006, Zenith Infotech, run by Akash Saraf as managing director and chief executive, issued foreign currency convertible bonds (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.
Creditors, including hedge funds, said that Zenith Infotech owes them more than $90 million or about Rs450 crore. “We tried contacting both, Akash and Raj Saraf but could not get any satisfactory answers from them. In fact, we found out that at the time of the maturity of first tranche, the company had shown Rs150 crore as cash in its balance sheet,” said one representative of the creditors, who did not want to be identified.
He said, “Despite having the cash, Zenith Infotech has not paid our dues at that time. Later on 26 September 2011, it decided to sell one of its two divisions, called managed services division (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 the court orders, 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.
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The cash segment is possibly the most important part of equities market. However, SEBI and BSE are paying less attention to it
The Securities and Exchange Board of India (SEBI)’s recent directive for opening a separate trading window for the so-called ‘illiquid’ shares may reduce the liquidity of cash segment where the bulk of trading takes place, according to experts.
It is estimated that there are more than 2,100 so called 'illiquid' scrips trading on BSE as of December 2012. This number is likely to go up over 60% or over 3,000 scrips listed on BSE, once SEBI's directive is enforced from 1st April. Irony is some of these companies may even be good companies!
Nevertheless, this is not all. Exchanges, backed by the regulator, are simply gunning for more derivatives business rather than attracting retail investors and keeping the cash segment healthy and safe).
In a surprise move last year, SEBI issued a circular, permitting stock exchanges to boost liquidity in the derivative segment. “In consultation with BSE, MCX-SX, NSE and USE, it has been decided to permit Stock Exchanges to introduce one or more liquidity enhancement schemes (LES) to enhance liquidity of illiquid securities in their equity derivatives segments,” the circular said.
It is pertinent to note that volumes in the derivative segment have only grown to astounding heights since futures & options (F&O) segment was introduced to the market. Almost 80% of incremental volumes come from options and almost all of it happens in the National Stock Exchange.
To compete with NSE, BSE is currently running its 9th series of LEIPS or Liquidity Enhancement Incentive Programme, which focuses on SENSEX futures contracts (which indirectly has been linked to only Sensex stocks). The whole idea of this is to incentivise market makers (MMs) and general market participants (GMPs) like stock brokers and institutions to trade in the F&O segments comprising the index and bring in more revenue for the exchange.
The recent circular from SEBI stated, “The programme incentivizes both Market Makers (MMs) and General Market Participants (GMPs) by payment of cash for their participation as per prescribed terms and conditions.”
A look at the terms and conditions of the LEIPS XI programme, shows that market makers stand to gain Rs1,800, from BSE, for every Rs1 crore transacted in the futures market.
Market experts say that turnover for the derivative segment is meaningless without a robust cash segment.
BSE houses several thousands of micro- and small-cap companies that are present in the cash segment. While many of these companies are fraudulent or are “operator-driven” stocks, there are some genuine ones out there as well: family businesses and small-scale entrepreneurs who have tapped primary market to raise cash in the past. These companies would be stigmatised if moved to a separate window.
Earlier we had written a story about how SEBI's idea to shoo away equity investors in order to curb manipulation which is rampant. Click here for the story.