Securities Appellate Tribunal
Rajkumar Saraf & Anr. Vs. Sebi vs Sebi on 8 November, 2023
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved On: 11.07.2023
Date of Decision : 08.11.2023
Misc. Application No. 49 of 2020
And
Appeal No. 48 of 2020
1.Rajkumar Saraf 5th Floor, Saraf House, SVP Road, Chowpatty, Mumbai- 400 007
2. Akash Rajkumar Saraf 5th Floor, Saraf House, SVP Road, Chowpatty, Mumbai- 400 007 ...Appellants Versus Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai- 400 051 ...Respondent Mr. P. N. Modi, Senior Advocate with Mr. Neville Lashkari, Mr. Nirav Shah, Advocates i/b DSK Legal for the Appellants. Mr. Pradeep Sancheti, Senior Advocate with Mr. Mihir Mody, Mr. Arnav Misra, Advocates i/b. K. Ashar & Co. for the Respondent.
WITH Misc. Application No. 295 of 2020 And Appeal No. 282 of 2020
1. Rajkumar Saraf 5th Floor, Saraf House, SVP Road, Chowpatty, Mumbai- 400 007
2. Akash Rajkumar Saraf 5th Floor, Saraf House, SVP Road, Chowpatty, Mumbai- 400 007 ...Appellants 2 Versus Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai- 400 051 ...Respondent Mr. P. N. Modi, Senior Advocate with Mr. Neville Lashkari, Mr. Nirav Shah, Advocates i/b DSK Legal for the Appellants. Mr. Pradeep Sancheti, Senior Advocate with Mr. Mihir Mody, Mr. Arnav Misra, Advocates i/b. K. Ashar & Co. for the Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member Per: Justice Tarun Agarwala, Presiding Officer
1. The appellant has filed the Appeal No. 48 of 2020 challenging the order of the Whole Time Member ("WTM" for convenience) of the Securities and Exchange Board of India ("SEBI" for convenience) the order dated March 14, 2018 restraining the appellants from accessing the securities market for a period of two years for failure of the Company Zenith Infotech Limited ("Zenith / Company" for convenience) to make adequate/ timely disclosure amounting to fraud on the shareholders. The appellants have also filed Appeal No. 288 of 2020 against the order dated July 28, 2020 passed by the 3 Adjudicating Officer ("AO" for convenience) of the SEBI imposing a penalty of Rs. 1.40 crores on the same allegations.
2. The facts leading to the filing of the present appeals is, that the appellant no. 1 is the father and Chairman of the Company. Appellant no. 2 is the son and the Managing Director. In September 2006 and August 2007, the Company issued foreign currency convertible by the Foreign Currency Convertible Bonds ("FCCB's" for convenience) for USD 33 million and USD 50 million which were due for redemption in September 2011 and August 2012 respectively. On January 29, 2011 a resolution was passed by the Extraordinary General Meeting (EGM) of the Company authorising the Board of the Company to raise money for the purpose of redeeming the FCCBs by borrowing money or selling a business / division since 2006 FCCB's were due for redemption on September 21, 2011.
3. It is alleged that the Company made extensive efforts and managed to sell its Managed Services Business division ("MSD") for which purpose an agreement was executed on September 23, 2011. On September 27, 2011 the sale proceeds 4 of USD 54.7 million were received in the accounts of the Company and its wholly owned subsidiary Zenith Dubai.
4. The FCCB's became due for redemption on September 21, 2011 and since the money was not paid the FCCB Trustees issued a notice of default on September 30, 2011 for the payment of 2006 FCCB's as well as 2007 FCCB's totaling USD 89 million. It was alleged that the sale proceeds for MSD business was adequate to repay the 2006 FCCB's, but not for 2007 FCCB's. It is also alleged that negotiations with representatives of FCCB holders took place but no concrete solution came out. On the other hand, the FCCB holders filed complaints with SEBI and also filed a suit of winding up of the Company before the Bombay High Court in which various orders were passed from time to time and, eventually, by an order of the Bombay High Court dated December 13, 2013 the Company was ordered to be wound up and an Official Liquidator was appointed who took charge of the assets and records of the Company including its subsidiaries. Appeal filed by the Company against the winding up order was also dismissed.
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5. In view of the complaints received by SEBI and upon investigation an ex-parte ad-interim order dated March 25, 2013 was passed restraining the promoters from accessing the securities market and further directing the Company and its Board of Directors to furnish a bank guarantee for Rs. 33.93 million USD which was the amount alleged to have been diverted by the Company. The Company filed an appeal before this Tribunal which was allowed and the ex-parte ad-interim order dated March 25, 2013 was set aside. SEBI filed an appeal before the Supreme Court and the order of the Tribunal was stayed. Subsequently, SEBI passed a confirmatory order dated April 11, 2014.
6. Subsequent to a detailed investigation, a show cause notice dated September 19, 2016 was issued to show cause why suitable directions under 11B and 11(4) of the SEBI Act including disgorgement of ill-gotten gains should not be issued for alleged violation of Section 12A and Regulations 3 and 4 of the PFUTP Regulations as well as for non-compliance of Clause 36 and 21 of the Listing Agreement etc.
7. The show cause notice alleged as under:-
(i) ZIL not only failed in its duty to make timely disclosure of price sensitive information on 6 the exchange but also misrepresented material facts of default of redemption in the disclosures made pursuant to the clarification sought by BSE.
(ii) The announcement made by ZIL to the exchanges with respect to the sale of MSD business did not provide any information on the fact that Zenith Dubai owned a part of the MSD business and that a major portion of the sale proceeds would be transferred to Zenith Dubai.
(iii) ZIL had not made any submission on the reasons that compelled them to utilise the monies realised from the sale of MSD Division for purposes other than redemption of FCCBs. ZIL failed to provide the documents sought and thus was unable to justify the reason for said distribution of the sale proceeds. (iv) ZIL also failed to fulfil its obligation to notify the exchanges at least 21 days in advance, the redemption date and the amount payable on redemption of FCCBs and simultaneously issue cheques to the FCCB holders so as to reach them before the date of redemption.
(v) ZIL concealed material price sensitive information, which obligated ZIL to disclose the default in redemption of FCCBs and the pending litigations, since they were price sensitive information.7
(vi) ZIL and its promoters/directors through their decision and announcement dated December 27, 2010 made a promise to the shareholders without intending to perform the same and the promoters/directors of ZIL stripped the assets of ZIL for the benefit/interest of companies/entities controlled by them in a fraudulent and deceitful manner. ZIL and its promoters/directors not only failed to use the sale proceeds of MSD business for the purpose authorised by the shareholders but have also taken away the assets of ZIL either for their own benefit or for that of the entities owned and controlled by them without authority of shareholders and in blatant disregard of their approval.
(vii) The submissions made by ZIL with respect to the utilisation of funds did not corroborate with the findings of the investigation.
(viii) The fact that ZIL provided false and misleading disclosures to the exchanges further strengthens the inference that the conduct of the promoters/directors in not utilising the sale proceeds of MSD business in accordance with the shareholders' approval was malafide.
8. The WTM after considering the material evidence of record found that the charges levelled against the appellants stood proved. The WTM found that the Company failed to 8 make disclosures and perpetrated a fraud in the securities market which was orchestrated and assisted by the appellants, namely, the Chairman and Managing Director of the Company. The WTM found that the funds from the sale of the MSD division of the Company had moved to entities exclusively owned by the promoters/ directors. The WTM accordingly passed the order prohibiting the appellants from accessing the securities market for a period of two years. On the same charge, the AO also found that the appellants have violated various provisions of the Listing Agreement and accordingly imposed a penalty.
9. We have heard Shri P. N. Modi, the learned senior counsel for the Appellants and Shri Pradeep Sancheti, the learned senior counsel for the Respondent.
10. The basic finding against the appellants is, that the Company had failed to make the disclosures and misrepresented material facts and the promoter and director of the Company siphoned the assets of the Company for their own benefit in a fraudulent and deceitful manner.
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11. The learned counsel for the appellants contended that SEBI has no jurisdiction with regard to the non-redemption of the FCCB's and siphoning of FCCB proceeds which came under the purview of the Reserve Bank of India ("RBI") and the Ministry of Corporate Affairs. It was contended that the misuse and misappropriation of the MSD fund would come under the Foreign Exchange Management Act, 1999 ("FEMA") and / or under the RBI Master Circular and, therefore, SEBI had no jurisdiction to proceed on this issue. It was thus urged, that the redemption / recovery / liquidation of the investments / loans of the subsidiaries were beyond the jurisdiction of SEBI.
12. The contention so raised by the appellants is patently erroneous and cannot be accepted. The question of recovery of the FCCB proceeds and non-redemption of FCCBs are not being considered by SEBI. The role of the appellants in misleading in defrauding the investors regarding redemption of the FCCB's has been considered coupled with the non- disclosures made by the Company under the Listing Agreement. Such non-disclosure and the role of the appellants in misleading in defrauding the investors was within the domain and jurisdiction of SEBI to investigate and pass appropriate orders 10 under the SEBI Act and its Regulations. The contention so raised by the appellants is thus patently erroneous.
13. It was contended that there was an inordinate delay of six years in the issuance of the show cause notice. It was contended that the alleged violations was of the year 2011 whereas, show cause notice was issued on December 11, 2017. In this regard, we find that the ground of delay was only raised against the AOs' proceedings wherein, we find that the AO has clearly stated that the proceedings against the Company and its Directors had commenced as early as on March 25, 2013 by passing an ex-parte ad-interim order and, thereafter, a confirmatory order dated April 11, 2014 was passed. The detailed investigation was completed on May 18, 2017 and, thereafter, the show cause notice was issued on December 11, 2017. In view of the above, we are of the view that there is no inordinate delay in the initiation of the proceedings by the AO.
14. It was urged, that the finding that the shareholders were not given timely / adequate / accurate information by of disclosures to the stock exchange, since the default in payment to the FCCB holders and the use of the sale proceeds of the MSD business for other purposes was not immediately disclosed is patently erroneous. We find that the funds were 11 used for purposes other than FCCB's repayment after default and consequent litigation. We are of the opinion, that the sale of the MSD business was carried out in a manner which resulted in default of FCCB's repayment and consequent litigation and damaged the interest of the Company and its investors. We further find subsequent to the default and litigation the Company went into liquidation.
15. The contention that the funds were not diverted to a subsidiary of the Company Zenith Dubai and that the shareholders were informed and the same does not amount to fraud is wholly erroneous. The contention that the Company Zenith Dubai was a 100% subsidiary of Zenith and the accounts were consolidated into account of the Company and, therefore, the money of Zenith Dubai was equally available to Zenith and consequently there was no misrepresentation or siphoning of funds is wholly erroneous. In the first instance the Company was to sell its MSD division and make the redemption payments to the FCCB holders. Admittedly, this was not done and the amount was diverted to its subsidiary and, thereby, a fraud was played upon the FCCB holders.
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16. It was urged, that the purpose of utilization of the proceeds of the MSD division was subsequently ratified and, therefore, there is no diversion of funds nor any misrepresentation in as much as the shareholders subsequently ratified the use of the funds that was received from the sale of MSD. This contention is patently erroneous in as much as the said ratification was done much after proceedings were initiated by SEBI and, therefore, such ratification cannot be taken cognizance of. Even otherwise, the violation is non-disclosure of the diversion of the funds and the subsequent litigation, etc. The ratification for the end use will not dilute the violation which was committed by the appellants in the first place.
17. We find that the appellant No. 1 and appellant No. 2, by being the Chairman and Managing Director respectively, of Zenith Infotech Limited (hereinafter referred to as "ZIL/ Company") contravened Sections 12 A(b) and (c) of the SEBI Act, Regulations 3 (a),(c) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as "PFUTP Regulations"), Clauses 36 and 21 of the Listing Agreement, read with Section 21 of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "SCRA") and Clause 2.1 13 read with Clause 7.0 (ii) of the Code of Corporate Disclosure Practices for Prevention of Insider Trading provided in Schedule II read with regulation 12(2) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as "PIT Regulations, 1992"), by orchestrating and perpetrating fraudulent device involving non-disclosures of requisite information, misrepresentations, concealment of material price sensitive information of default and subsequent litigations, coupled with diversion of sale proceeds to the subsidiaries of the Company, contrary to the publicly stated intent of repayment of FCCB holders thereby defrauding the shareholders and the investors in the securities market regarding the ability to repay the Foreign Currency Convertible Bonds.
18. We find that the provision of law has been validly invoked and the appellants have failed to make out any valid ground for interference with the impugned order.
19. We also find that the WTM correctly came to the conclusion that the appellants, being the Chairman and Managing Director of ZIL, had violated of the SEBI Act, PFUTP Regulations and the PIT Regulations, 1992, by failing to make the requisite disclosures, concealing material price 14 sensitive information, and perpetrating fraud in the securities market.
20. Admittedly, it is a matter of record that on the maturity date for the first set of bonds i.e. September 21, 2011, ZIL failed to make the repayment and the two series of FCCBs issued by ZIL which was due for redemption in September 2011 and August 2012 had terms of cross default stipulating that default in redemption of FCCBs due in September 2011 would entitle the bondholders to accelerate repayment obligation on the other series of FCCBs otherwise due for redemption in August 2012. Thus, the bondholders issued an event of default notice dated September 27, 2011 to ZIL and also issued a notice dated September 30, 2011 for acceleration of the 2012 bonds, declaring the 2012 bonds as due and payable.
21. What is relevant here is the non-disclosure under Clause 21 of the Listing Agreement and not non-payment of FCCBs. Clause 21 mandates companies to make disclosures within 21 days before the FCCBs are due for repayment and simultaneously issue cheques to them so as to reach them before the date of redemption. ZIL failed to comply with Clause 21 of 15 the Listing Agreement by failing to disclose to the exchange. It defaulted in its obligation to repay the FCCB holders.
22. Similarly, sub-clause (7)(vi) of Clause 36 of the Listing Agreement mandates that any action resulting in alteration of the terms of redemption of securities issued by the company must be disclosed promptly. Clause 36 of the Listing Agreement inter alia mandates that a Company shall immediately inform the Exchange, material and price sensitive events, such as litigation/ dispute with a material impact, any action resulting in alteration of the terms of redemption of securities issued by the company.
23. There were three sets of litigations in respect of the non- redemption of FCCBs, namely, Suit filed by bondholders in City Civil Court on October 14, 2011, Suit filed by trustees of bondholders in Bombay High Court on October 22, 2011 and Winding up petition before the Bombay High Court on December 21, 2011, which were material and price sensitive. ZIL failed to make full disclosures relating to material events surrounding the non-redemption of FCCBs including pending litigations which were price sensitive in nature and thus failed to comply with Clause 36 of the Listing Agreement. 16
24. Furthermore, we find that ZIL had made certain corporate announcements with respect to sale of MSD business and proposals for repayment to FCCB holders. However, disclosures were not made to the effect that MSD business of ZIL was partly owned by Zenith Infotech (FZE), Dubai (hereinafter referred to as "Zenith Dubai") a wholly owned subsidiary of ZIL, based in Dubai and that a large proportion of the proceeds arising from the sale of MSD Division of ZIL went to Zenith Dubai, which was a material information in the context of the sale of the MSD business with respect to repaying the FCCB bondholders. Had this information been known to the public, the shareholders would have a clear understanding as to whether or not the FCCB holders would be repaid and assess the future financials of the Company. This was material information that was required to be disclosed under Clause 36 of the Listing Agreement, and failure to disclose the same constitutes a violation of the said Clause.
25. Further, Clauses 2.1 and 7.0 of the Code of Corporate Disclosure Practices for prevention of Insider Trading provided in Schedule II of the PIT Regulations, 1992 stipulates that price sensitive information shall be provided by listed companies to stock exchanges and disseminated on a continuous and 17 immediate basis. The suits and petitions filed by the bondholders claiming settlement of such large financial obligations, which the company found difficult to discharge, were therefore material and price sensitive enough to be disclosed promptly to the stock exchange. ZIL by failing to make any corporate announcements with respect to the pending litigations with the bondholders, violated the said provisions of PIT Regulations.
26. We also find that the Company received 54.7 million USD from sale of MSD business and only 2 million USD was transferred to the account of the Company and the balance amount was transferred to its subsidiary. Such transfer of fund to the subsidiary Company was a fraud played by the appellants.
27. Further, the list of various assets transferred, as part of the sale of the MSD business indicates that the SAAZ software, which appeared to be owned by ZIL, was an important intellectual property forming the backbone of the service delivery from the network operations centre in Mumbai and there was no mention of Zenith Dubai having an ownership. The ownership of MSD business by Zenith Dubai was material information in the context of the sale of the MSD business and 18 had the same been disclosed, the shareholders would have a clear understanding as to whether or not the FCCB holders would be repaid and assess the future financials of the Company, which ZIL failed to make. Thus, we find that ZIL and its promoters / directors, including the appellants herein being the Chairman and Managing Director of ZIL, got the shareholder approval to use funds for repayment of FCCB holders and made corporate announcements to that extent and then diverted the funds to Zenith Dubai, which clearly amounted to fraud.
28. We also find that the WTM in paragraphs 34 and 40 held as under:
"34. Clause 2.1 read with Clause 7.0 of Schedule II of the PIT Regulations also mandate that price sensitive information must be disclosed promptly to the stock exchanges. The size of the FCCB issue and the claim of the creditors certainly had a significant bearing on the financial condition of the company. The suits and petitions filed by the bondholders claiming settlement of such large financial obligations, which the company found difficult to discharge, were therefore material and price sensitive enough to be disclosed promptly to the stock exchange. Thus, I find that ZIL was 19 also in violation of Clause 2.1 read with Clause 7.0 of Schedule II of the PIT Regulations.
40. Equally important in this artifice is the role of ZIL's misrepresentations and omission to make disclosures. The failure to make disclosures in pursuance of Clause 21 and 36 of the Listing Agreement has already been discussed earlier in this Order. In addition, the SCN has alleged that the disclosure made by ZIL to BSE stating that they planned to utilise the sale proceeds of MSD Division for partial repayment of FCCBs was false since the proceeds were not used for the stated purpose. Further, the omission to make disclosure of Zenith Dubai owning part of the MSD business could also be construed as being a misrepresentation of facts. As stated earlier in this Order the corporate announcements made by ZIL neither indicated that Zenith Dubai owned part of the MSD Division of ZIL nor did they suggest prior to or after the diversion that sale proceeds had in fact been received by Zenith Dubai as well. In fact a larger proportion of the proceeds arising from the MSD Division of ZIL went to Zenith Dubai, a fact which was never disclosed to ZIL's shareholders. These omissions and misrepresentations when seen as a whole 20 appear to be an attempt towards concealing the true state of affairs in the company. It would seem that the shareholders and FCCB holders were given the impression that the company had sufficient funds to discharge its debt obligations and that ZIL's operations would continue. This turned out to be incorrect."
29. Thus, the WTM after appreciating the facts and evidence on record has rightly concluded that there were violations of Clause 21, Clause 36 of the Listing Agreement and Clauses 2.1 and 7.0 of the Code of Corporate Disclosure Practices for Prevention of Insider Trading provided in Schedule II of the PIT Regulations.
30. In view of the aforesaid, we do not find any error in the orders passed by the WTM and the AO. Both the appeals fail and are dismissed. The misc. applications are disposed of accordingly.
Justice Tarun Agarwala Presiding Officer Ms. Meera Swarup Technical Member 08.11.2023 PRERNA Digitally by PRERNA signed PK MANISH MANISH KHARE Date: 2023.11.08 KHARE 15:30:19 +05'30'