Case BriefsTribunals/Commissions/Regulatory Bodies

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:

Issues: 

  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]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal: The Bench of Justice Tarun Agarwala (Presiding Officer) and Justice M. T. Joshi (Judicial Member), reserved its order on the controversial issue of the dubious role of the Pradip Kumar Khaitan (respondent 4) as an independent director in Dhunseri Ventures Ltd.

Background

The Dhunseri Ventures Ltd. is a Company incorporated at Kolkata under the laws of India holding CIN No. L15492WB1916PLC002697 and is listed on the BSE (BSE Code 523736) and the NSE (NSE Symbol COMPANY). The Appellant, one of the supportive shareholders of the company for over a period of 20 years, had filed a complaint before the SEBI pointing out change in designation of respondent 4 from being a Non-Independent Director (Year 2010 to 2014) of the company to an Independent Director (22-05-2014 to 03-07-2015) and thereafter, being designated as a Non- Independent Director again (03-07-2015 to 17-12-2019) despite having familial relations with the Promoters of the company.

The Appellant had highlighted that despite the relationship which could never qualify respondent 4 as independent and despite being non-independent’ director prior to being designated as an independent director, he had acted as an Independent Director and actively participated in functioning of the company for a period before reverting to the Non- Independent Status and finally resigning from the designation of Non-Independent Director in 2019. The Appellant had also pointed out that apart from being non-independent on account of the relationship with the Promoters, respondent 4 also had material pecuniary relationship with the company which further established his non-independence and raised serious doubts on his functioning as an independent director.

The appellant alleged that in spite of detailed representations from the Appellant before SEBI and BSE, a computer-generated Order was passed by the SEBI disposing his complaint on the SCORES platform in a cryptic, unreasoned and mechanical manner. While the Order acknowledged that the information furnished by the Appellant pointed to allegation of violation of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) it simply refused to register any formal complaint against the company without assigning any reason for the same in complete violation of the principles of natural justice apart from being self-contradictory.

The appellant contended that SEBI had closed his detailed complaint in a perfunctory manner by treating the furnished information as a mere “market Intelligence” and at the same time also stating that appellant would not be able to ascertain the status of information furnished by it before SEBI though the information would be kept confidential and analysed by it (SEBI). The order further stated that the existence of any examination of the information furnished by the appellant would neither be confirmed nor denied by it (SEBI).

Submissions before SAT

The Appellant had challenged the order dated 11-11-2020, communicated by SEBI to the appellant with respect to Complaint bearing No. SEBIE/MH20/0006790/1 (BSE reference No. 20200700003) filed by the Appellant on 07-07-2020 pointing out inter alia the non independent and dubious role of respondent 4 in the company and consequential violation of provisions of the Listing Agreement, Companies Act 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations) and interest of the shareholders.

The appellant argued that the Impugned Order was illegal and had been passed without any application of judicial mind as it did not take into consideration that respondent 4 had been appointed as a non-independent director, despite having familial relations with the Promoters of the company. It was contended by the appellant that the promoter group of the company is the Dhanuka Family in Kolkata. Respondent 5 (C. K. Dhanuka) is the Non-Independent Promoter chairman of the company while respondent 4 was one of the Directors till the date of his resignation on 17-12-2019.

The fundamental question raised by the appellant was to establish the role of Independent Directors as representatives of minority shareholders’ interests vis-à-vis the promoters. The appellant alleged that this was a peculiar case where respondent 4 had tried to outsmart the regulator, SEBI, and impersonated as an “Independent” director in the company. It was further contended by the appellant that there was an overreliance on the submissions made by the company and a complete lack of independent judgement by the SEBI; as it (SEBI) claimed that Mrs. Tarulika Khaitan (daughter of respondent 5) as not related to respondent 4 by virtue of being his “son’s wife” since respondent 4 was her “father-in-law” and reciprocal relationship is not prescribed under SEBI.

Contending that such a dichotomy would defeat the principles of natural justice, especially when Clause 49 reads, “Independent director shall mean a non-executive director of the company who…” clearly display that no relationship should exist from the proposed independent director’s point of view, the appellant argued that respondent 4 was clearly a “relative” in as much as “Son’s wife” is included in the List of relatives in terms of Clause 77 of Section 2 of Companies Act, 2013 which disqualified him as an Independent Director in terms of Clause 49 – I. (A) (iii) (b) of the Listing Agreement. Therefore, respondent 4 could never have been lawfully appointed as an “Independent Director” in company and that he kept juggling between “Independent” and “Non-Independent” directorships in other listed companies. Hence, the appellant urged the Tribunal to take corrective action and bar respondent 4 from acting as a “Director” in any listed company for the protection of minority and public shareholders.

Having heard the appellant in person and noticing that respondent 4 had not made appearance of filed any reply; the tribunal had reserved the order.[Arvind Parasramka v. SEBI, Appeal No. 70 of 2021, order dated 10-05-2021]


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance before the Tribunal:

For the Appellant: Mr. Keshav Parasramka, Appellant in Person.

For SEBI: Adv. Vishal Kanade with Adv.  Anubhav Ghosh and Adv. Ravishekhar Pandey

For BSE: Adv. Abhiraj Arora with Adv. Karthik Narayan and Adv. Rashi Dalmia

For Dhunseri Ventures Ltd.: Adv. Mainak Bose with Adv. Nikhil Jhunjhunwala