Order in respect of Mr. S. Rajagopal and Mr. V. K Ramani Independent Directors of Zylog Systems Limited.

WTM/GM/EFD/26/JUNE/2017 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 11 AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 In respect of Mr. S. Rajagopal and Mr. V. K Ramani Independent Directors of Zylog Systems Limited.

1. Zylog Systems Limited (hereinafter referred to as ‘the company / ZSL’) is a company incorporated under the Companies Act, 1956 having its registered office at 155, Thiruvalluvar Salai, Kumaran Nagar, Sholinganallur, Chennai – 600 119.

2. Securities and Exchange Board of India (SEBI) received several complaints from investors alleging that ZSL has not paid the dividend declared by it. The shares of ZSL are listed on The National Stock Exchange of India Limited (NSE) and The Bombay Stock Exchange Limited (BSE). It is observed that ZSL declared dividend to its shareholders at the rate of Rs.5 per equity share of the face value of Rs.5/- each and the same was approved in the Annual General Meeting held on September 25, 2012. The total amount of dividend declared was Rs.16,44,64,200.

3. On receiving such complaints, SEBI issued a letter dated February 13, 2013 asking the company to furnish information regarding declaration and payment of dividends under the Companies Act, 1956 and reasons for default. ZSL vide its letter to SEBI dated February 20, 2013 submitted that they have not been able to pay dividend to the shareholders due to strain on liquidity position of the company. ZSL further submitted that Shri Sudarshan Venkatraman, Shri Ramanaujam Sesharathnam, Shri Parthasarathy Sirkanth, Shri Madurai Gajanathan, Shri S. Rajagopal, Shri V. K Ramani and Shri Vasanthakumar Ayyavu Palanichamy were the Directors of the ZSL as on the date of declaration of dividend i.e. September 25, 2012.

4. Therefore, SEBI issued Show Cause Notices (SCNs) dated October 20, 2016 to all the directors, calling upon them to show cause as to why suitable directions under Section 11 and 11B of the SEBI Act should not be issued against them for violation of Sections 205(1A) and 207 the Companies Act, 1956. In terms of the provision of section 205(1A) of the Companies Act, 1956, ZSL and its directors were statutorily required to deposit the amount of dividend declared into a separate bank account within 5 days of such declaration. As per section 207 of Companies Act, 1956, ZSL and its directors were under obligation to disburse the dividend declared to shareholder entitled to the payment of the dividend within 30 days from the date of declaration of dividend. The SCN alleged that the directors of the company were knowing about the declaration of the dividend and the non-payment of the declared dividend to the shareholders of the company; therefore, all the directors have failed to comply with the obligations and duties as required under section 205(1A) and 207 the Companies Act, 1956.

5. In response to the aforesaid SCN, Mr. S. Rajagopal & Mr. V K Ramani (hereinafter collectively referred to as Noticees) vide letter dated October 31, 2016 and November 4, 2016 inter alia submitted that:- a. The default of non-payment of dividend within the statutory period occurred at the company’s administrative level without their knowledge or consent as both of them were independent directors and not associated with the day to day activities of the company.

b. Mr. S Rajagopal stated that he was unaware of the default till November 12, 2016, when the same was brought to his notice as per the certificate furnished by the Company Secretary and Managing Director stating that Dividend for the year 2011-12 has not been paid yet.

c. In order to support his contention, Mr. S Rajagopal, who was also the Chairman of the Audit Committee of the company submitted a copy of the minutes of the meeting of the Audit Committee of the company held on November 14, 2012. In the said minutes, it is recorded at para 3 as under:- “The committee also viewed seriously the inaction/ failure of the company in meeting the commitment related to the Dividend Distribution Tax which is a statutory obligation. Further the committee also noted that failure by the company to make the Dividend Payment within the prescribed time. As desired the matter needs to be brought upto the Board of Directors of the company with a direction to the management to make all the statutory payments including Dividend to be made forthwith.”

d. Mr. V K Ramani submitted that he came to know about the non-payment of Dividend when the same was taken up in the board meeting of November 14, 2012. He further submitted that he was inducted as an independent director of the company on February 11, 2011 for his technical competence in the IT field.

e. Both the noticees relied upon the copy of the board minutes dated November 14, 2012 wherein the following points were recorded:-

 It was observed that there has been a delay in the payment of TDS and other statutory dues. Mr. S. Rajagopal requested the management to meet statutory commitments forthwith.

 The board took note of the observations made by the Audit Committee on the financial position of the company.

 Mr. S Rajagopal desired that drastic steps be taken with regard to the following “To ensure statutory dues are paid forthwith without delay and keep morale of staff high and salaries and dividends paid forthwith.

 Certain serious observations are made with regard to statutory requirements which are as under:

(i) Dividend declared for the year 31.03.2012 remain unpaid to the tune of Rs. 16.64 cr.

(ii) Dividend distribution tax had not been remitted.

(iii) Tax deducted at source not remitted.

(iv) PF contribution not remitted.

6. In view of the above, both the noticees submitted that as independent directors they have acted promptly and diligently. Immediately after the board meeting on November 20, 2012, Mr. S. Rajagopal resigned from the company. Similarly Mr. V K Ramani resigned on January 2, 2013 from the company.

7. Considering the facts and circumstance of the case and the reply submitted by noticees, an opportunity of hearing was granted to both the directors on March 30, 2017. In response to the opportunity of hearing, Mr. S. Rajagopal vide letter dated February 22, 2017 submitted that since, he has already filed his detailed reply along with necessary document to support his arguments, he requested that the proceedings initiated against him be dropped. Mr. V K Ramani appeared on March 30, 2017 and reiterated his reply submitted vide letter dated November 4, 2016.

8. I have considered the charges alleged in the SCN and replies filed by the noticees. I note that the Independent Directors do have an important role to play in guiding the management so that the interest of the Company and the minority shareholders are protected. Further, the Independent directors will also have to ensure that the functioning of the Company is in full compliance with the applicable laws. In this case, I have noted that noticees after noticing the violation of non-payment of dividend have taken strong stands to convince the Company’s Board about the necessity of ensuring that the statutory dues and the dividends are paid without any delay, in the Board meeting held on November 14, 2012. As the company failed to comply, the two noticees resigned from the Company’s Board.

9. Considering the above facts and circumstances of the case, I am of the view that since both the noticees did not have any role in the day-to-day management of the company and have discharged their responsibility as Independent Directors putting in their best efforts, I do not deem it fit to pass any directions under section 11 and 11B of the SEBI Act, 1992 against Mr. S Rajagopal and Mr. V K Ramani. The SCN is disposed of accordingly.

Date: June 20, 2017 G MAHALINGAM Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA