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Zenith Sarafs Accused of Fraud, Asked to Produce $34 Million Bank Guarantee

Zenith LogoSEBI has ordered the Saraf family of Zenith Infotech to produce bank guarantees of $33 million without using any funds of the company. SEBI has found evidence that could show that the promoters have siphoned off money from the company, to the detriment of bond holders.

The TimeLine

2006-07: The FCCBs were issued in 2006 to convert at Rs. 310 per share, and in 2007, another $50 million was issued to convert at Rs. 522 per share, due to mature in August 2012. FCCBs are debt and can be converted to shares at the conversion price on maturity; failing conversion, the money has to be returned at the “coupon” rate of interest.

2011: Zenith defaults on payment of $33 million FCCBs. Admits it in October, and says it’s trying to settle. This, despite noting in the Sep results that it had 187 crores in cash and bank balances, which would have been adequate to cover the FCCBs. The stock market didn’t like it – the stock fell nearly 50%. 

Zenith stock plummets

Automatically, due to a clause of no-default, even the later $50 million FCCBs became due, and went into default too.

Alongside, Zenith said they’d sold their managed services division (MSD). Bondholders were refused details when they asked about how much they sold it for. Eventually, the Bombay High Court made them reveal it: they had sold it for $54 million to Summit Partners, a PE player.

But it turned out things were more sinister. Just before the MSD sale, Zenith transferred it to a holding company in Mumbai in which the Sarafs (promoters of Zenith) owned 60%. That company was then sold. The money received was shared between Zenith Info (the Indian, listed company) and Zenith Dubai (a fully owned subsidiary).

Now the drama begins. Zenith India and Zenith Dubai together transferred $10.4 million to a singapore based subsidiary, and another $13 million to Vu Dubai and Cloud Dubai, both promoter owned entities, which are now subsidiaries.

SEBI has recognized this as behaviour that is designed to potentially defraud bondholders, and to default on FCCB obligations.

The sequence of events and pattern of transactions in this case prima facie indicate that the ZIL and its promoters/directors not only wantonly defaulted in redemption of FCCBs and disregarded shareholders’ resolution but also adopted fraudulent device and artifice to defraud the shareholders…

The Sarafs have been told to not buy or sell securities till further notice, and to produce a bank guarantee of $33.93 million, to cover the liability.

Those implicated are Rajkumar Saraf (Promoter), Devita Saraf (His Daughter), Akash Saraf (Son) and promoter entities.

The stock is at Rs. 16 today, more than 95% below the Rs. 320 it used to be just before the drama started in 2011.

The implication: This kind of case doesn’t do very well for our system, if it isn’t decided swiftly in favour of bondholders. The Courts, and SEBI, have moved way too slowly. With over a year and a half in default, bondholders must have given up most or all hopes of getting back anything. If promoters have siphoned out money, it should be forcibly brought back immediately (supposedly all the money lies with subsidiaries) and the company sent into liquidation. I have zero hope of this actually happening; what is more likely is long, delayed litigation. The message to other foreign investors (or even Indian investors) is:

If they defraud you, you can do nothing but wait, and wait for a very long time.

It’s a wonder why we don’t have our NASSCOMs and business players scream blue murder about such blatant wilful defaults by Zenith. Oh, but like Sanjay Dutt, they’ll probably ask for pardon instead.

  • Ravi Shankar says:

    This story has been repeating a thousand times in Indian financial markets (not that the western ones are exceptions, they are fewer but bigger and better, Enron,Worldcom etc) I seen a lot of swindling of shareholder money over the years, some of the companies I invested and lost my shirt and even more intimate wear is Pentamedia Graphics, DSQ Software, Silverline technologies etc. Our legal redressal mechanism is a joke. No wonder the stock market is dead, expect a handful of stocks that are keeping the sensex/nifty up, else the midcap segment is mostly dead.
    Did you short Zenith? 🙂 ! We should have a profit sharing arrangement 🙂 !

  • Adheer says:

    This shows how stupid the “sophisticated” the foreign investors are. These investors are probably funds / individuals advised by the likes of Citi, Goldman and others – who are on both sides of the deal.
    The story has been the same .. Suzlon, DCHL and in many other cases. Inflate assets, book fictitious revenues via circular trading, pile on high debt, promoter mischief, appoint CNBC as PR agents etc.
    Add to that a corruption, a confused government policy, too much government interference and moribund judiciary system.
    While on this topic take a look at all the ADAG companies. All are trading substantially below book value – consistently for the last 2-3 years.
    ADLABS which used to trade around 1500 (life time high of 1850) is trading around Rs 45, with a book value of -45.
    RCOM trading at 50 with a book value of 220.
    RELINFRA trading at 325 with a book value of 700.
    RELCAPITAL trading at 310 with a book value of 450.
    I wonder whether the book value is computed based on marked-to-market or market-to-fantasy ?
    In my opinion the next phase would be to depress prices and take these companies private.

  • Shiva says:

    Disgusting to note the quality of the typical Indian company. More than financial analysis, it is becoming necessary to gauge the Corp Governance of these managements. But the question is HOW? Why is the judicial process so lacklustre?? Its been what 4-5 years since the Stayam Confession and still no convictions. The Singaproe based Aberdeen Funds moved a Class action suit and got back a part of their losses. But what about Indian shareholders who were also taken for a ride….We are still a Third world country. period

  • Vamsy says:

    Please do not forget the Pyramid Saimira. This is an excellent case study of how the nexus between the media, criminal conspiracy, book cooking, price rigging by operators and even SEBI officials! I even remember the media yelling like mad to buy the share months before the company was in shambles. How many are behind bars? Laws written only for the common folk. People must be naive to believe that our financial system is worth investing.

  • Krish says:

    I have some colleagues from Latina America and Cyprus and the discussion came whether any hard working normal citizen of USA, Western Europe or India would ever invest in Argentina, Venezula, Russia, Cyprus or Greece. Looks like ill gotten wealth only getting in or out of these countries.
    Once in a while I get calls from my citibank RM to invest in Bonds of Eastern European countries, Africa and a lot of small nations going through political turmoil. Any one dealing with bond market is like playing with fire and it is such a vast financial domain.
    I have no sympathy for the people/institutions who are ready to take any kind of risk and do not bother about losing their capital. I wonder why this so called educated elite or ivy investment companies could not have ordinary folk’s common sense.

  • Adheer Pai says:

    I sometimes wonder whether the FCCB investors got what they deserved ?
    As per their March 2006 statement, Zenith had a sales of Rs 35 crore (and Rs 21 crore as per their March 2005 statement). The average rate of USD/INR in 2006 was around Rs 45 / USD. So the first FCCB of $33M works out to 4.25 times their 2006 annual sales.
    Why would someone lend 4.25X their annual sales to a mediocre company ?
    That would be like Infosys doing a $26 billion FCCB, or Reliance doing a $270 billion FCCB in today’s terms.
    A few months later they go about to raise another $50M. So now they have 10X their annual revenues as FCCB debt. What would have stopped Zenith from piling another $100M in 2008 hadn’t the markets crashed ?
    The average USD/INR in 2007 was Rs 41/USD. If you use this $50M FCCB as a mark-to-market for the first deal, the the $33M FCCB would be worth $60 M within a year – a whopping 81% return in a year (theoretical).
    I suspect the investors in the first FCCB offloaded their holdings to a new set of investors.