TMI Blog2013 (7) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 30, 2011 just in 45 days. In our considered opinion September - October 2011 would have been the right time for SEBI to act, to protect interests of investors, provided it had jurisdiction to do the same in respect of the FCCBs in question. This, however, was not done for almost 15 months for reasons not made known to this Tribunal and any sort of urgency having already disappeared, Respondent No. 1 should have given an opportunity to the Appellants by supplying a copy of the complaint and calling upon them to present their defence. This has admittedly not been done and no cogent and convincing reason has been put forth for depriving the Appellants of such a valuable right of being heard before passing the impugned order in question. Hence, This court set asides the impugned order and remanding the matter to Respondent No. 1 for fresh consideration in accordance with law by supplying a copy of the complaint to the Appellants in advance and also by deciding the jurisdictional issues raised by the Appellants in the present Appeal before hand. Ordered accordingly. - Misc. Application No. 30 of 2013 and Appeal No. 59 of 2013 - - - Dated:- 23-7-2013 - Jog Singh (Member) And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Vu Technologies P Ltd (Promoter) AACCV1663P 5. Rajkumar Saraf (Promoter and Chairman cum Director) AURPS4374C 6. Akash Rajkumar Saraf (Promoter and Managing Director) AAFPS8849C ii. The board of directors of ZIL is hereby directed to furnish, within 30 days from the date of this order, bank guarantee(s) of a minimum tenure of one year, for USD 33.93 million (i.e. the amount of sale proceeds of MSD Division that has been diverted as described in para 15 above), in the name of Securities and Exchange Board of India, without using the funds of ZIL or creating any charge on assets of ZIL. The bank guarantee may be invoked in case any adverse inference is drawn by SEBI in its final order with regard to the actions of Board of directors/promoters of ZIL in diverting the sale proceeds of MSD Division and SEBI deems it necessary to compensate ZIL. 26. This order is without prejudice to the right of SEBI to take any other action that may be initiated against ZIL and its directors/promoters in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall neither alienate nor create third party interest in the properties owned and possessed by ZIL. List this matter for final hearing on May 7, 2013. 4. The brief facts are that there are seven Appellants in the present appeal and Appellant No. 1 i.e. Zenith Infotech Ltd. ( ZIL ) is a public limited company incorporated under the Companies Act, 1956 with its registered office at Navi Mumbai. Its shares are listed on the Bombay Stock Exchange Ltd. ( BSE ) and the National Stock Exchange Ltd. ( NSE ). ZIL claims to be a leading international company specialising in delivering innovative IT solutions for virtual infrastructures, data storage and backup, and disaster recovery etc. It has about 900 employees in its offices spread across the globe. It had two sets of businesses: firstly; Cloud Computing Business ( CCB ) and secondly; Managed Services Division Business ( MSD Business ) prior to its (i.e. MSD's ) sale to Continuum Managed Services, LLC ( CMS ), on or about September 23, 2011. 5. Appellant Nos. 2 to 7 are the promoters of ZIL and Appellant No. 2 is also the Chairman-cum-Director of ZIL, whereas, Appellant No. 3 is also its Managing Director. Appellant No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a matter of record. Due to this phenomenon, most of the FCCB holders decided not to convert their FCCBs into shares and instead sought repayment/redemption of the FCCBs on maturity and due to economic crash in 2008, increase in cost of USD vis- -vis Rupees and non-conversion of FCCBs into shares of ZIL, the ZIL did not have resources to repay FCCBs on maturity. In the circumstances, the Board of Directors of ZIL resolved to raise funds by various means. Accordingly, an Extraordinary General Meeting ( EGM ) was convened on January 29, 2011 to obtain the shareholders' approval to borrow money upto ₹ 1500 crore and/or sell or lease the business, divisions, subsidiary of ZIL on such terms and conditions as the Board of Directors of ZIL might deem fit for an amount not exceeding ₹ 1000 crore. A special resolution to this effect was passed at the EGM under Section 293(1)(d) and other connected provisions of the Companies Act, 1956 and the FEMA Act. The Appellants submit that at the time of maturity of the FCCBs, there was a sharp decline in the share price because of adverse market conditions caused mainly due to the phenomenal increase in the rate of USD value vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellants did not have adequate liquid funds to redeem all the FCCBs in one go. The negotiations for extension of time with the investors etc. for repayment failed in early October 2011 and as such Appellant No. 1 informed the BSE on October 13, 2011 of its default on FCCBs which were due on September 21, 2011. 9 The Appellants submit that on October 14, 2011 certain shareholders, claiming to be FCCB holders, filed Suit No. 2034 of 2011 before the Learned City Civil Court at Dindoshi to stop the sale of the MSD Business and understandably they also approached various regulators including SEBI. Next, the trustee of the said FCCBs also filed Suit No. 2865 of 2011 and Company Petition No. 28 of 2012 in the Hon'ble Bombay High Court on October 21, 2011 seeking various reliefs in respect of the FCCBs against Appellant Nos. 1 to 3. The Appellants, therefore, submit that the holders of the FCCBs, through their trustee, have already elected to exercise their right as per law in respect of their interests and redemption of said FCCBs by approaching the Hon'ble High Court and, therefore, they are precluded from raising a parallel dispute before any other forum. It is specificall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said property or the value of the same, or such portion thereof as may be sufficient to satisfy the decree, or to appear and show cause why he should not furnish security. In the event of an order being passed under Order 38 Rule 5 requiring the Defendant to show cause why he should not furnish security, or to furnish the security as ordered and the defendant fails to do so within the time fixed by the Court, the Court is empowered under Rule 6 of Order 38 to order attachment of the property specified or such portion thereof as appears sufficient to satisfy and decree which may be passed in the suit. Sub-Rule (2) of Rule 6 of Order 38 provides that where the defendant shows such cause or furnishes the required security, and the property specified or any portion of it has been attached, the Court shall order the attachment to be withdrawn or make such other order as it thinks fit. The said sub-Rule (2) of Rule 6 of Order 38 is by the Bombay amendment substituted as follows: (2) Where the defendant shows such cause or furnishes the required security or gives an undertaking to the Court to do or not to do a thing, and the property specified or any portion of it has been attac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd report between 152 crores and ₹ 211 crores, is accepted. (ii) The undertaking given by Defendant Nos. 1, 5 and 6 that they will maintain status quo in respect of their fixed assets valued at ₹ 163.4 crores more particularly described in Exhibit-B to the affidavit dated 10th May, 2012, is accepted. (iii) The undertaking given by the Defendant Nos. 1, 5 and 6 that they shall maintain status quo in respect of their investments set out in Exhibit-B to the affidavit dated 10th May, 2012, aggregating to ₹ 66.01 crores, is accepted. (iv) The undertaking of Defendant Nos. 1, 5 and 6 that they shall maintain status quo in respect of the money held in joint escrow account (Wells Fargo Bank, A/c. No. 83722000), is accepted. (v) Defendant Nos. 2, 3 and 4 shall be at liberty to move this Court seeking appropriate orders if at any time they are of the view that they are entitled to claim the Equity Stake in Continuum Managed Services amounting to ₹ 39.86 crores and/or ₹ 32.27 crores held in joint escrow account. (vi) The undertaking given on behalf of Defendant Nos. 1, 5 and 6 that in the event of its subsidiaries returning any loans aggr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inform BSE/NSE, about the fact that Appellant No. 1 was going to default on its obligation to redeem the FCCBs nor did the Appellants inform the BSE/NSE about the default, having taken place. iii) The Appellants misled BSE/NSE vide its letters dated October 13, 2011 whereby they informed BSE/NSE that part of the amount would be utilized for partial repayment of FCCBs. They tried to hide the information about the default in connection with the repayment of FCCBs until intervention by the Stock Exchanges on October 13, 2011. They also did not make disclosure with regard to the Suit and the Winding-up of Petition filed against Appellant No 1. Similarly, the Stock Exchanges were not informed that USD 13 Million were transferred to two, promoters related entities in Dubai. iv) The Appellants did not disclose the price sensitive information as required under the Listing Agreement and the SEBI (Prevention of Insider Trading) Regulations, 1992. They rather employed a device or artifice to fraudulently divert the sale proceeds of its MSD division. As such, the shareholders had lost considerable amount of money as a result of the sharp fall in the price of the scrip of Appellant No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n towards Clause 36 of the Listing Agreement which requires a company to inform the stock exchanges of all events which are likely to have a bearing on its performance/operations as well as price sensitive information. These include litigation/disputes which might have an impact on the present or future operations or profitability or financials of the company in question. Appellant No. 1 failed to inform the stock exchanges about the Suit and Winding-up of Petition filed against it by the FCCB holders for redemption of the FCCBs. With regard to disclosing the price sensitive information to stock exchanges, the Respondent submits that such an obligation is imposed on listed companies by Clause 2.1 read with Clause 7.0 (ii) of the Code of Corporate Disclosure Practices for Prevention of Insider Trading forming part of Schedule II of the SEBI (PIT) Regulations. 14. The finding in the impugned order regarding diversion of funds for the purposes other than the one for which the authority was taken by Appellant No. 1 from its shareholders is sought to be justified by the Respondents explaining the provisions of Section 12A of the SEBI Act, 1992 and Regulations 3 of the SEBI (PFUTP) Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 15. On the basis of the above said provisions, Respondent No. 1 contends that the companies cannot engage in any act, practice or course of business which would tantamount to fraud in connection with the issue or dealing in securities which are listed or proposed to be listed. The Respondents also rely upon the case of Hon'ble Supreme Court reported in 2004 (5) SCC 632, namely, Tamil Nadu Kalyana Mandapmam Assn. v. Union of India (UOI) and Ors. 16. As regards the jurisdiction of SEBI to entertain an issue which is pending before the Hon'ble High Court in a Suit/Company Petition filed by the FCCB holders, the learned senior counsel submits that the same does not, rather cannot, prevent SEBI from exercising its jurisdiction and powers vested in it under the SEBI Act, 1992 and Regulations made thereunder. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of the retail shareholders of ZIL and protect the integrity of the securities market. I am convinced that this is also a case where, pending investigation, effective and expeditious action is required to be taken to prevent any further harm to investors and to thwart any further design, which are prima facie fraudulent, manipulative and unfair, of ZIL and its promoters/directors. This is also a fit case where SEBI needs to send a stern message to prevent companies and their promoters/directors from indulging in such acts of omissions and commissions as observed in this case. In my view, therefore, in the facts and circumstances of this case an urgent preventive and remedial action needs to be taken by way of ad interim ex-parte order. 18. It is also pointed out by Respondent No. 1 that in paragraph 27 of the impugned order the Ld. WTM has granted time to the Appellants to file reply/replies within three weeks and that there is sufficient compliance with the principles of natural justice and, therefore, the Appellants should have approached SEBI instead of preferring the present appeal before this Tribunal. 19. The case of the Respondent Nos. 2 and 3 (Interveners) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .27 crores; 5. In the event any of its subsidiaries return any of its loans aggregating to INR 50 crores, the same shall not be utilized by the Company, Rajkumar Saraf and Akash Saraf; and 6. Shall within a period of 6 months from the date of the said order (i.e. by April 9, 2013) make its subsidiaries return an amount of INR 25 crores and such amount shall be invested in a fixed deposit of a nationalized bank and shall not be utilized by the Company, Rajkumar Saraf and Akash Saraf. 21. The Respondent Nos. 2 3 further submitted that the objective of selling the MSD Business in the Board Resolution dated December 27, 2010 and the explanatory statement dated December 27, 2010 was to pay the amounts due under the FCCBs. It led to a default of the 2011 Bonds and a cross-default with respect to the 2012 Bonds as well. Due to this non-compliance the share price of Appellant No. 1 fell drastically from ₹ 190/- to ₹ 45/- in a span of 45 trading days in the year 2011 itself. Reference has been made to Kaye vs. Croydon Tramways Company, (1898) 1 Ch. 358 where it has been held that a notice which does not fairly disclose the purpose of the meeting is a tricky notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f SEBI are wholly irrelevant in as much as the law laid down by the Hon'ble Supreme Court in both the judgments would be applicable to SEBI at any and every stage at which it exercises its regulatory powers and discharges its duties, whether in passing an ex-parte order or otherwise. 22. Regarding the plea of the Appellants that the matter being sub judice in the Hon'ble High Court, SEBI cannot hold parallel proceedings on the same subject matter, the Respondent Nos. 2 and 3 submit that a matter can be said to be sub-judice in a particular forum only when the forum in which proceedings are pending has the jurisdiction to grant the relief as prayed for in the subsequent proceeding. Whereas in the Suit filed in the Hon'ble Bombay High Court the trustees' are seeking a monetary decree for recovery of amounts due to the bondholders, the action initiated by SEBI is in discharge of its statutory duties. A Civil Court is not only not capable of granting such a relief but, as pointed out by the learned senior counsel appearing for SEBI the Respondents, there is an actual bar on the Civil Courts to grant such reliefs to promoters and directors of the Company. In any event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by such measures as it thinks fit. Section 11(4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:- (a) suspend the trading of any security in a recognised stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of securities market; or (b) to prevent the affairs of any recognised stock exchange or clearing corporation, or such other agency or person, providing trading or clearing or settlement facility in respect of securities, being conducted in a manner detrimental to the interests of investors or securities market; or (c) to secure the proper management of any such stock exchange or clearing corporation or agency or person, referred to in clause (b), it may issue such directions, - (i) to any stock exchange or clearing corporation or agency or person referred to in clause (b) or any person or class of persons associated with the securities market; or (ii) to any company whose securities are listed or proposed to be listed in a recognised stock exchange, as may be appropriate in the interests of investors in securities and the securities market. 25. We have heard learned senior counsel for all parties appearing before us at length and have perused pleadings and documents annexed therewith, including the written submissions and judgments etc. brought to our notice by them. The Appellants have appealed against ad-interim ex-parte order dated March 25, 2013 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed sparingly in most deserving cases of extreme urgency. In the case in hand, on its own showing, we note that Respondent No. 1 had knowledge of the matter from the very beginning. Paragraph 8 of the impugned order itself makes it abundantly clear that the share price of ZIL fell from ₹ 190/- on September 23, 2011 to ₹ 45/- on November 30, 2011 just in 45 days. In our considered opinion September - October 2011 would have been the right time for SEBI to act, to protect interests of investors, provided it had jurisdiction to do the same in respect of the FCCBs in question. This, however, was not done for almost 15 months for reasons not made known to this Tribunal and any sort of urgency having already disappeared, Respondent No. 1 should have given an opportunity to the Appellants by supplying a copy of the complaint and calling upon them to present their defence. This has admittedly not been done and no cogent and convincing reason has been put forth for depriving the Appellants of such a valuable right of being heard before passing the impugned order in question. 28. Lastly, we turn to the contention of the learned senior counsel for Respondent No. 1, Mr. Shyam Meh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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