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Zylog Promoters Accused of Fraud by SEBI, Stock Down 90% Since Oct-2012

SEBI has found Zylog management potentially guilty  of massive fraud, says SEBI, in an interim ex-parte order (party not present) that disallows them from trading in the stock market. Of interest was the stock’s huge fall from the 300 levels to 68 in October-November 2012, an 80% fall.

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SEBI member R.K. Agarwal has found what looks like serious attempts to mislead investors, including:

  • Misleading disclosures: Zylog promoters disclosed to the BSE in October that they were buying shares and increasing their stake. This is apparently not true, as one promoter company, Sthithi, had just sold over 40,000 shares in the market. Additionally, shares pledged to lenders were being sold to cover margin calls, thus reducing promoter shareholding. (Promoter shareholding as of March 2013 is down to 20% from the 42% it was a year back)
  • Using Company funds to trade its stock: Analyzing bank statements, SEBI has pieced together information that shows a promoter (Sthithi) had received money from Zylog of more than Rs. 10 crores, and this money was directly paid to lenders who had taken Zylog shares as collateral. Effectively Zylog financed the promoter to acquire its shares. Worse, this even happened a year back and no transaction was revealed in that annual report, which is illegal.  And even worse, it wasn’t just a promoter – but also the wife of a director P. Srikanth, a Mrs. Supriya, had taken money from the company and then traded in the company’s shares; again, this was not disclosed.
  • Violation of Takeover code: If you’re already outraged, this won’t help; the takeover code for companies requires promoters make an open offer if their purchases exceed a certain percentage of the company. One of the promoters had “gross” purchases that should have called for an open offer, but that didn’t happen.
  • Wrong or No Disclosures: The company reported the shareholding pattern wrong, including promoter shareholding and the number of shares pledged. While the company claimed in Dec 2012 that 73% of promoter shares were pledged, the reality (from promoters’ demat statements) was over 96% pledged. Further, many of the pledges were invoked and revoked in 2012, but there was no information provided stock exchanges. And finally, sales and purchases of shares by the promoters needs to be revealed – it was not.

SEBI hasn’t finished its investigation yet, but the interim order bans the promoters Sthithi, Sudarshan Venkataraman, Ramanujam Sesharathnam, Parthasarathy Srikanth, Supriya Srikanth and S.P. Srihari from buying, selling or dealing with shares till further notice.

My thoughts: It’s commendable that SEBI has gone into such detail. But if true, this is securities fraud and the promoters must go to prison. The fact, if proven, that a promoter entity trades so much in the company’s stock, sometimes getting money from the company to do so, without the required disclosures, is all evidence of activity intended to fraud other shareholders. Such an offence should be penalised with a jail term, and SEBI does not have the power to send anyone to jail.

This probe should include an entity like the CBI Banking Securities and Fraud Cell, and the Serious Frauds Investigation Office.

SEBI should also fine the promoters appropriately. I don’t think there’s any money left, thought.

Zylog as a company looks great on paper for this price (Rs. 26.25 now, hitting lower circuit every day). The market cap of this company is just Rs. 87 crores, for what seems to be a Rs. 2,500 cr turnover and Rs. 115 cr. net profit. (See March results)

Value Research had first placed a “Buy” call on this stock in 2011 (price: Rs. 236), valuing it on the financial numbers revealed. In 2012, they said it was “sustaining momentum” (Price: Rs. 290). But in 2013, after the stock fell to Rs. 60 (!) they advise that

At this point of time one should avoid making fresh investments into it. Existing shareholders should wait for the March 2013-end balancesheet before arriving at a decision. It will make the picture clearer whether the company will be able to ease out the working capital requirements and meet out the debts.

I can’t blame VR for believing company provided info – it is all you have, really. But this is one of those times I have to say this: Keep a stop loss and respect it. You never know what really happens, but the price, it talks.

The above information makes it very difficult to believe anything revealed by the company.

  • I trade Currencies monitoring technical patterns and never trade stocks as I believe they need to be fundamentally picked. Now with such fudged data fundamental picking of stocks is also too risky. This article is a great piece of advice for investors in stocks. Especially the last lines….
    “Keep a stop loss and respect it. You never know what really happens, but the price, it talks.” & “The above information makes it very difficult to believe anything revealed by the company. “Funnymentals”, indeed.”

  • Doubt any criminal proceedings will happen. Previous such instances have lead to a fine and thats it !!!
    Pathetic system for investors and rewarding for promoters

  • Shankar says:

    Had a great escape with minor profits too. When scouted around about the promoters got very -ve feedback from financial instituition’s so dropped it.

  • Nakul says:

    -Don’t you think one can enter this stock at this level? with a book value of Rs.264.
    -But there is a steep fall in the Net profit of the quarter march ’13 (63.39 Lakhs) when compared to Net profit of previous quarter december ’12 (3,727 lakhs).
    -Would u suggest a buy after few more Lower circuits once the price is bottomed out .