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.”