Securities and Exchange Board of India (SEBI): S.K. Mohanty, Whole Time Member, in a detailed 167 paged order, following the principles of the preponderance of probabilities, held that the charges relating to violation of all the provisions laid down in detail in the show cause were found to have been substantially established.

In the pertinent matter, there were 13 Noticees, that were directly or indirectly an active part of the entire chain of events. It was when the SEBI noticed a sharp fall in the price of the scrip of Zylog Systems Limited (ZSL) that it conducted a preliminary investigation on the basis of which an ex-parte ad-interim order was passed restraining Noticees 2-7 from buying, selling or dealing in the securities markets, either directly or indirectly, in any manner, till further directions. The said directions were issued on the basis of certain prima-facie observations regarding multiple violations of the Securities Law, including misleading disclosures made by ZSL and its promoters, promoters using Company’s funds to deal in the shares of ZSL, dependent/relative of director using funds of ZSL to deal in its shares, non-compliance of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (the ‘SAST Regulations, 2011’), non-disclosures by ZSL and its promoters and directors etc. ZSL is a Chennai based information technology enabler and solutions provider for enterprises worldwide.

The show cause notice directly indicated with instances and enlisted 26 such observations:

The Company had, directly as well as through various connected entities, transferred funds to both Sthithi and Sripriya which were used by these entities for their dealings in the scrip of ZSL. The disclosed shareholding of the promoters did not match with their shareholdings as per their demat statements. It appeared that ZSL was being run and managed by four key persons viz. Sudarshan, Ramanujam, Srikanth and Srihari, who were known to each other well before the IPO of the Company was launched. At the same time, Srikanth was shown as an Independent Director in the RHP despite being directly and closely related to Srihari and Sripriya, and despite being a director in the wholly owned subsidiary of ZSL etc. The said appointment of Srikanth as Independent Director continued till 2010. Various irregularities in running the affairs of the Company, oral instruction being given to the staff handling desk functions, inadequate narration in the books of accounts of the Company for various fund transactions etc. suggested that the operations of ZSL were not being conducted in compliance with the Corporate Governance norms, amongst other things.

During the course of investigation, the price of the scrip of ZSL had witnessed heavy on account of increased supply of shares due to invocation of pledge and subsequent sale of shares of promoters by IFCI Ltd. and Karvy Financial Services Limited) on account of non-payment of interest due to be paid by the promoters. Despite being aware of that, ZSL informed BSE that it was having ‘business as usual’ and promoters were increasing their stake in the Company. Therefore, it was alleged that, despite facing severe financial stress and continuous selling of shares from the accounts of the promoters, ZSL made a contrarian disclosure falsely stating that promoters were increasing their shareholding and the Company was having ‘business as usual’. False and misleading statement in media were witneseed and thereby violating the provisions of Section 12A(a), (b), (c) of the SEBI Act, 1992 read with regulations 3(a), (b), (c), (d) and 4(1), 4(2)(a), (f) and (r) of the PFUTP Regulations, 2003. The promoters failed to make disclosures regarding their transactions in the scrip of ZSL as well as their pledge related transactions in the said scrip.

The Tribunal in its detailed order took note of all the points and the overwhelming factual evidences that the Noticees no. 2 to 7 were acting as one common group in respect of their dealings in the scrip of ZSL in furtherance of their common fraudulent scheme.

The following issues were dealt in detail by the Tribunal:


  1. Whether false and misleading disclosures/statements were made in the RHP as well as in subsequent filings, submitted to the stock exchanges?
  2. Whether Noticees no. 2 to 7, jointly or severally concocted an elaborate fraudulent scheme in furtherance of a common objective and, thereby, violated the provisions of SEBI Act, 1992 and PFUTP Regulations, 2003?
  3. Whether the Noticees no. 2 to 7, acting in concert with one another, have violated the provisions of regulation 3(2) of the SAST Regulations, 2011 and section 12A(f) of the SEBI Act, 1992?

The entire order does not only consist of the violations and the clear cut evidences to prove the same and the manner but also relieves the person not so involved in the scheme. For instance, it remarked,

“…remuneration and qualification are two crucial criterions to evaluate and adjudge the significance of a position held by a person in an organisation and his importance and status in participating in the management of a company. I find it difficult to believe that both Srikanth and Srihari, being more qualified and earning much more than Viswanathan, can claim that they were working under Viswanathan and were executing his commands in the Company, more so when it has already been observed on the basis of overwhelming factual evidence that both Srikanth and Srihari being very close to the promoters, have played crucial roles in giving effect to various transactions in shares and funds in the names of different conduit entities at their behest…”

The tribunal referred to SEBI v. Monarch Networth Capital Ltd., (2016) 6 SCC 368, wherein the Supreme Court, while wherein  while dealing with the issue of principles of natural justice, has, inter alia, observed that :

…Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in C.A. No. 282/2014 (Monarch Networth Capital Ltd.) is concerned, we do not think the same to be justified in any manner. The relevant extracts of the trade log which have been perused by us, in view of the clear picture disclosed with regard to the particulars of the offending transactions, must be held to be sufficient compliance of the requirement of furnishing adverse materials to the affected party.

It further stated that,

“…the non-disclosure of relationships of Srikanth with Sripriya and Srihari appears to be a deliberate act on the part of the Company and is strongly suggestive of the fact that these three Noticees being part of the scheme cooked together by promoters of the Company and the appointment of Srikanth as an Independent Director was nothing but a eyewash as Srikanth cannot be held to be ‘independent’ at any point of time in any manner whatsoever even before the Company had floated its IPO…”. And that “…operations of ZSL were not being conducted in compliance with even the basic norms of Corporate Governance…”.

The tribunal also took note of the details about Srikanth as available on the MCA website indicating instances wherein Srikanth’s directorship with other companies was not disclosed in RHP, and mentioned them categorically. And further mentioned how “anyone can see a pattern of wrong disclosures regarding the directorship of Srikanth in various disclosures filed by ZSL and such wrong disclosure in the RHP of ZSL is not a one-off incident”. Vouching for the correctness of the statements despite knowing them to be outright false and misleading was also pointed out very clearly.

And the following were dealt in conjunction.

  1. Common Objective
  2. Role of other Noticees
  3. Funding of Sthithi and Spriya
  4. False and misleading disclosures by the Company and Promoters

It also stated that,

“…I note from the First Information Report filed by the Union Bank of India at Banking Securities and Fraud Cell, Central Bureau of Investigation at Bengaluru with respect to ZSL and its subsidiary ZSIL that the account of ZSL was already reported as fraudulent account by various other banks viz. Syndicate Bank, Dena bank, Federal bank and Andhra Bank on account of diversion of funds/non-creation of assets and submission of fake bills etc. I also note from the said FIR that Union Bank of India has declared ZSL as a wilful defaulter…”.

Directed Noticees 2-7 to make a public offer within 45 days of the present order, through a merchant banker, to acquire the shares of the Company from public shareholders in terms of the provisions of SAST Regualtions, 2011.

Directed Noticees 2-7 to pay interest at the rate of 10% per annum along with the offer price, for the period starting from the date when these Noticees became liable to make open offer for the first time i.e. from July 10, 2012, till the date of payment of consideration, to the shareholders. Further restrained from accessing the securities market including by issuing prospectus, offer document or advertisement soliciting money from the public and are further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner.

Restrained Noticee no. 3-7 from holding the post of director, or any key managerial position or associating themselves in any capacity with any listed public company and any public company.

Noticees 8-13 are restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities (including units of mutual funds), directly or indirectly, or being associated with the securities market in any manner.

In regards with Noticee 1, it was of the opinion, “…the Hon’ble Madras High Court vide its Order dated July 03 2014, has appointed the Official Liquidator, as the Provisional Liquidator of the Company, however, no further order on winding up of the Company has been passed till date. I find that at this stage, direction of any nature against the Company may not serve any purpose…”.

[Zylog Systems Ltd., In Re., 2021 SCC OnLine SEBI 145, decided on 14-06-2021]

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