India's stock market watchdog has set a 30-day deadline for directors of technology vendor, Zenith Infotech Limited (ZIL), to furnish US$33 million which they allegedly pocketed at the expense of shareholders.
In a statement released March 26, the Securities and Exchange Board of India (SEBI) ordered the board of directors of ZIL to provide a one-year bank guarantee of US$33.93 million--which cannot be sourced from the company's funds or assets--to restore value to shareholders whose stock value had plummeted since directors allegedly misappropriated company funds. The vendor provides technology consultancy, systems integration, and recruitment services.
SEBI found that when ZIL directors sold the company's managed services division (MSD) in 2011, they diverted the proceeds away from the purpose approved by shareholders which was to pay off foreign currency convertible bonds (FCCB) due for redemption.
In the early 2000s, Indian companies had turned to FCCB as a way to access foreign capital, raising almost US$20 billion in the four years prior to the global financial crisis in 2008, according to a 2011 report by The Times of India. This resulted in a debt hangover as stock prices failed to reach the agreed amount where the bonds were converted to equity, forcing companies to redeem the bonds in cash at a premium.
In the case of ZIL, US$33 million was due for repayment in September 2011 and another US$50 million in August 2012. In January 2011, the company's shareholders approved the sale of its MDS to Zenith RMM LLC in order to raise the funds needed to redeem the bonds. The sale was completed in September that year.
However, SEBI alleged the company directors pocketed the proceeds for themselves. "It was observed that the substantial portion of sale proceeds of the MSD division of ZIL was diverted for the benefits and interests of promoters and/or directors and subsidiaries, which was not remotely connected to the authorization of the shareholders," it said.
"Further, it was observed that the ZIL and its promoters/directors not only disregarded shareholders' resolution, but also adopted fraudulent device and artifice to defraud the shareholders by concealing and misrepresenting information to the exchanges."
The SEBI said this "asset-stripping" benefited ZIL directors and devastated the company's share value, which dropped 75 percent over 45 trading days from 190 rupees on September 23, 2011, to 45 rupees on November 30. On March 7, 2013, the stock price was 19 rupees.
SEBI said the "misconduct" of the company's directors had "eroded" shareholder value. It singled out ZIL executives Rajkumar Saraf, Akash Kumar Saraf, Devita Saraf, and Vijayrani Saraf, as well as it subsidiaries VU Technologies and Zenith Technologies, which it said "have, prima facie, violated several regulations which pertain to insider trading, and fraudulent and unfair practices". It further banned the named parties from accessing, buying, selling, or dealing with securities in any manner.
"The above examination, prima facie, shows that the promoters/directors of ZIL have in a devious manner attempted to take away the assets of a listed company directly, and indirectly, for their own benefit or for the benefit of entities owned and controlled by them, thereby, causing loss to shareholders."
ZDNet unsuccessfully attempted to contact ZIL via the phone number and e-mail address listed on its stock exchange profile.