Order in respect of Zigma Software Limited

ORDER Under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 read with Regulations 3 (b), (c), (d), 4 (1) and 4 (2) (e) and (r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 in respect of Zigma Software Limited.

1. Securities and Exchange Board of India (“SEBI”) had conducted an investigation into the sudden spurt in volume and price in the scrip of Zigma Software Limited (hereinafter as "the Noticee") during the period June 01, 2005 to September 30, 2005 to ascertain any instances of contravention of provisions of SEBI Act, 1992 (“SEBI Act”) read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 (“PFUTP Regulations”).

2. The price spurt in the above said scrip took place in two sets of periods i.e. from June 01, 2005 to July 12, 2005 (the pre-stock split period) and July 13, 2005 to September 30, 2005 (the post stock split period). Investigations revealed that the Noticee had made various positive corporate announcements during this period such as announcements of quarterly results, dividend, stock splits, bonus issue of shares, real estate project at Bangalore and preferential issue of shares. During the investigation it was noted that the Noticee made several corporate announcements which were allegedly false and misleading and only aimed at creating artificial demand for the scrip to attract the general investors to purchase the shares.

3. Based on the findings of investigation, a Show Cause Notice ("SCN") dated July 08, 2009 was issued to the Noticee under sections 11,11 (4) and 11B of the SEBI Act to show cause as to why appropriate action including restraining it from buying, selling or dealing in securities for a specified period, should not be issued against it for the violations alleged in the SCN viz., Regulations 3 (b), (c), (d), 4 (1) and 4 (2) (e) and (r) of the PFUTP Regulations.

4. As per the SCN, it was inter alia alleged against the Noticee that – i. The announcement made by ZSL pertaining to bonus issue, Real estate project at Bangalore and the preferential issue of shares were not implemented. ii. The audited figure of the Noticee for year ended March 2006 shows a net profit of Rs. 3.13 crores after tax on a total income of Rs. 27.36 crore and the difference between the audited and unaudited results was more than 20%. The Noticee did not give any explanation for the variation in the quarterly results to the BSE in this regard as required under clause 41 of the Listing Agreement. iii. The total shareholding of the Noticee as on Mach 31, 2005 and June 30, 2005 was 1,48,18,800 shares of face value of Rs. 10 each and became 14,81,88,000 shares of face value Re.1 each as on September 30, 2005 on account of stock split from Rs. 10 to Re 1 per share. It is alleged that the promoter entity-G R Magnets Limited and associate company of the Noticee - JRP Holdings Limited offloaded substantial shares in the market by the end of the investigation period to innocent investors inducing them to purchase the same by attractive announcements which were totally misleading and the same were not implemented by the Noticee. iv. Therefore, it is alleged that the Noticee facilitated promoter and its associated entities to dump shares of the Noticee by inducing uninformed investors to invest in shares of the Noticee. In view of the various actions and omissions, it is alleged that the Noticee violated the provisions of regulation 3 (b), (c), (d) & 4(1) and 4(2) (e) & (r) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

5. In response thereto, the Noticee vide letter dated August 01, 2009 sought inspection of relevant documents and its certified copies. The Noticee inspected the documents on November 25, 2009 and on the same day, the certified copies of the relevant documents were forwarded to the Noticee. Subsequently, SEBI vide letter dated November 26, 2009 issued a corrigendum to the SCN. As no reply to the SCN was received from the Noticee, a reminder was sent vide email dated August 23, 2011.

6. Thereafter, the Noticee was granted opportunities of personal hearings on January 14, 2015 and February 04, 2015. The Noticee vide e-mail dated February 04, 2015 sought extension of time upto 4 weeks to prepare for the hearing. The same was allowed and vide hearing notice dated March 04, 2015 the Noticee was granted another opportunity of hearing on April 15, 2015. During the hearing, the Notice was required to submit written submissions/ point wise reply to the SCN along with supporting documents, more particularly the following: • Application by the Noticee for in-principle approval from BSE for the bonus issue decided in the Board Meeting dated July 18, 2005; • Application by the Noticee for in-principle approval from BSE for listing of preferential warrants as proposed by the company in its Board Meeting dated August 20, 2005; • Information submitted by the Noticee to BSE that the real Estate project for Bennett Coleman & Co was not implemented; • Explanation submitted by the Noticee to BSE under Clause 41 of the listing agreement for the substantial variation in audited and unaudited financial results for the FY 2005- 06; • Income Tax Returns filed by ZSL for the financial years 2004-05, 2005-06, 2006-07.

7. Subsequently, the Noticee filed written submissions vide letter dated April 27, 2015 alongwith the supporting documents. The Noticee vide abovementioned reply and during the aforesaid hearing inter alia made the following submissions:– i. "SEBI has failed to provide us with complete list of supporting documents requested vide our various letters in the year 2009 nor was the same shown to our representatives during physical inspection. Almost 5 Years have passed. Hence, it gives us apprehension that the SEBI Proceedings carried is incomplete and faulty and various assumptions of allegations so made in the SCN are baseless and without any supporting evidences.

ii. To term “corporate announcements” as misleading is wholly unjustified. Being a listed company, it is bound to adhere to the listing agreement with the stock exchanges. To give corporate announcement is a procedure normally carried out. The announcements which were made were genuine and based on strategic decisions taken by the company for its growth and benefit to the investors. Our sincere efforts to successfully implement all the announcements made are apparently visible through all our correspondences/annexures attached for your ready reference.

iii. SCN talks about the announcements not carried out but it is deliberately silent about the announcements which have been successfully carried out by the company. Hence, the Investigation Report appears to be biased and failed in taking into consideration the scenario during the investigation period, in totality. The Investigation Authority should not “cherry pick” only those cases which appears to them to slap charges against the company and ignore events which have really benefited the investors. We found this attitude of the Investigating Officers as prejudiced and unacceptable to us. Hence, the SCN is based on the Investigation report, which itself is incomplete and partial.

iv. SCN fails to explain how company was involved in the so called fraudulent and unfair practice. In fact, SEBI fails to explain whether there was any unfair trade practice by anyone.

v. There is no evidence which suggests that company has any role in increase in price and volume. In fact there is no charge against anyone for manipulation /price rise /spurt in volume.

vi. Please note none of the Directors of the company was holding any shares in ZSL except Mr. Yashwant Rampuria who was holding a very negligible number of shares in ZSL i.e. 800 shares and has never traded or made any profits out of it and is also currently holding the same number of shares.

vii. There are no charges in SCN against anyone which suggests synchronized-structured-manipulated-reversal-cross Trades with meeting of Minds. No pattern of insider trading is established.

viii. Promoter and its associate companies had no representation in the management of ZSL. Further the AO in its Order (March 29, 2012)has clearly pronounced that promoter and its associates has no nexus with ZSL and has no role in the corporate announcements made by the company.

ix. There is duplication of proceedings. AO proceedings have been carried out against the Director, promoters and its associates and WTM debarment proceedings against the company.

x. AO has found beyond reasonable doubt that the charges as leveled against the Directors, promoters and its associates does not stand established. Vide the said order, all the charges of alleged violation of Regulation 3(b), (c), (d), & 4(1) and 4(2) (e) & (r) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities Market) Regulations, 2003 has been dropped against them.

xi. Taking all our submissions and the AO order into consideration, the WTM Proceedings for the same charges against the company does not hold any grounds and hence should be dropped immediately.

xii. Please note that company is regular in complying the various clauses of the listing agreement."

Consideration of Issues and Findings 8. I have considered the SCN issued to the Noticee, corrigendum to the SCN and the submissions made by his authorized representative during the personal hearing before me, the written submissions filed vide letter dated April 27, 2015, correspondence between SEBI and BSE all other relevant materials available on record. In light of the same, I shall now proceed to deal with the charges levelled against the Noticee in the SCN.

9. The relevant provisions of the PFUTP Regulations are reproduced hereunder for the ready reference:- Prohibition of certain dealings in securities 3. No person shall directly or indirectly— ... (b) use or employ, in connection with issue, purchase or sale of any securities listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock 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 thereunder. 4. Prohibition of manipulative, fraudulent and unfair trade practices:- (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2)Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (e) any act or omission amounting to manipulation of the price of a security; (r) planting false or misleading news which may induce sale or purchase of securities

10. As per SCN read with corrigendum, it is alleged that the Noticee made the following corporate announcements out of which the announcements pertaining to Bonus Issue, Preferential issue of shares and Real Estate project listed below were not implemented. i. On June 20, 2005, the Noticee announced the sub-division (split-up) of face value of equity share capital from Rs.10/- per share to Re.1/- per share. ii. On July 12, 2005, the Noticee informed stock exchanges about the consideration issue of bonus shares in the board meeting scheduled on July 18, 2005; iii. On July 18, 2005, the Noticee announced Issue of bonus shares in the ratio of 1:2; iv. On July 18, 2005 the Noticee considered to take up APDRP (Accelerated Power Development and Reform Programme) project; v. On July 18, 2005, the Noticee announced its Quarterly Results for the period ending June 30, 2005 (alleged variance of more than 20% in Unaudited and Audited Results); vi. On August 25, 2005, the Noticee announced Issue of Preferential shares for Rs. 48 crores; vii. On August 25, 2005, the Noticee announced 20% Dividend for the year 2004-05; viii. On August 29, 2005, the Noticee announced taking up of a project for real estate Development.

In this regard, I note that: 11. The Noticee vide letter dated April 27, 2015 submitted the following explanation as regards the alleged non implementation of corporate announcements:

i. Bonus Issue: "The Company has duly made an announcement (dated July 18, 2005) to issue of Bonus shares in the ratio of 1:2. At EGM held on March 07, 2006, members passed resolution and approved issue of Bonus shares in the ratio 1:2. Necessary ROC formalities regarding increase in Authorised Capital for issuance of Bonus Shares, filing of Special Resolution, payment of applicable fees etc. were completed. The company thereby applied to stock exchange for In-Principle approval which was not granted on technical ground as the time period of application has lapsed. Thereby, the company made an application (dated November 10, 2008) to SEBI for condonation of delay and grant NOC to issue bonus shares. Company did not receive NOC from SEBI to enable it to issue Bonus shares. Hence, it’s proved from all the facts and supporting documents enclosed that there were no mala-fide intentions on the part of the Company to deceive the investors. Due and reasonable effort was made to execute the announcement related to Bonus Shares, hence the same cannot be termed as misleading."

ii. Preferential Issue "Preferential Issue was proposed in the Board Meeting held on August 24, 2005. Thereon, the company put all the efforts to carry out preferential issue for which the Authorised Share Capital of the company was also increased from Rs.16.5 Crores to Rs. 63 Crores after obtaining the shareholders approval. Necessary fees were paid to ROC for increase in Authorized Capital to enable company to come out with preferential allotment. It should be noted that company would not unnecessarily increase its authorized share capital to a significant amount and pay relevant fees until and unless it is backed with some corporate actions. In the present case, the company genuinely wanted to carry out preferential issue but it could not happen as In-Principle approval not received from BSE. Series of letters were exchanged between Company and BSE regarding preferential Issue. Due and reasonable effort was made to execute the announcement related to issue of Preferential shares, hence the same cannot be termed as misleading. Even the provision of SEBI (DIP) guidelines related to pricing of preferential shares requires that The issue of shares on a preferential basis can be made at a price not less than the higher of the following: i. The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; OR ii. The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date."

iii. Real Estate Development Project "It is pertinent to note that the Company duly made announcement to BSE on August 29, 2005 regarding the real estate project in Bangalore. in the case of Intimation to BSE made on August 29, 2005 to consider and decide taking up a project at Bangalore for Real Estate. The area has been declared as Green Belt and construction of apartment not permitted. Substantial Payment of Rs.76 lakhs has been made to reputed and esteemed organization M/s Bennett, Coleman & Co. Ltd., (Times of India group) for the development project. Company has invested substantial amount in the project, however still not received refund of the amount. The intimation by Bennett, Coleman & Co. Ltd. to BSE regarding frustration of contract is its unilateral decision and hence the same should not be considered as valid. The continuity to hold the said amount of Rs. 76 lakhs itself proves that the contract is still subsisting and not revoked. Copy of agreement is already given to SEBI and the same is confirmed by Bennett, Coleman & Co. Ltd. Proof of Payment of Rs. 76 lakhs to Bennett Coleman & Co. Ltd. is enclosed". iv. Variance of more than 20% in Unaudited and Audited Results "There is no difference in any actual item of Income-Expenditure between unaudited and audited result beyond 20%. Profit before Tax as per total of 4 quarter is Rs. 2.87 crores and as per annual result it is Rs. 3.23 crores. Difference is Rs.0.36 crores i.e 12.54%, which is less than 20%. There was no change in income. In expense there is variance of Rs.0.12 Cr. i.e 0.60%. There was change in operating profit of Rs.0.16 Cr. i.e. 2.10%. Change in depreciation by Rs.0.51 Cr. i.e 10.76%. Hence all variance is within 20% in compliance of clause 41 of listing agreement. The difference in PAT is due to change in figure of Income Tax. There is no major variance in any item. During the year only provision for Income Tax is made in Accounts. There can be difference in provision for Income Tax and actual figure of Income Tax. This difference could be due to many reasons such as different rule of depreciation as per Income Tax Act and as per Companies Act, MAT calculations, various deductions, exemptions, differential tax rates head wise, item wise and region/area wise etc.

12. I have noted the submissions of the Noticee that the company had applied to BSE for in-principle approval for the bonus issue. In support of the same, the Noticee submitted a letter (Ref no. ZSL/BSE/Bonus /05-06 dated March 27, 2006 addressed to BSE wherein the Noticee requested BSE to grant the in principle approval for issue and allotment of bonus shares which was approved by its board on July 18, 2005 and its shareholders on March 07, 2006. The Noticee also submitted a copy of letter dated November 10, 2008 (Ref. No. ZSL/SEBI/NOC/BONUS/2008) addressed to SEBI which bears the stamp of SEBI dated November 11, 2008 i.e. Application for NOC pertaining to Bonus Issue of “Zigma Software Ltd”. The said letter inter alia contained the following: “After the necessary correspondence & communications with the authorities of the Bombay Stock Exchange Ltd (BSE), the authorities of BSE required an No objection Certificate (NOC) from the Regulatory Authorities i.e. SEBI". The Noticee vide the said letter requested SEBI "to condone the delay on part of execution of issue and allotment of aforesaid Bonus issue in the 2005 and to grant us NOC to proceed with the matter to re-gain the shareholder's confidence in the company". There is no other evidence available on record to contradict the genuineness and veracity of the documents and submissions of the Noticee. I find from an extract copy of the public announcements dated November 4, 2008 as available on record that ZSL had informed BSE regarding issuance of bonus shares subject to the necessary NOC from regulatory authorities.

13. The Noticee also submitted correspondence with BSE on the issue of prior in-principle approval for preferential issue of warrants. The Noticee furnished letter dated September 20, 2005 addressed to BSE and BSE's letter dated October 04, 2005 in respect of in-principle approval for issuing /allotting the proposed warrants on preferential basis. The Noticee has also submitted copy of its letter dated October 13, 2005 to BSE on the same subject, which bears the stamp of Inward Section of BSE showing October 17, 2005 as the date of receipt. The Noticee further submitted a series of correspondence in this regard i.e. BSE’s letter dated December 23, 2005, Noticee's replies vide letters dated December 26, 2005, January 06, 2006 and January 19, 2007.

It is noted that vide e-mail dated May 14, 2015, BSE confirmed "the 2 letters dated 4th October 2005 and 23rd December 2005 sent to you by the Company (that are addressed to the company by BSE official Shri Prakash Kamath) seem to be genuine as the signing officer is a former official of the Exchange.”

14. It is noted from the copy of documents furnished by the Noticee that they proposed to implement the real estate project for which it paid `76 lacs to Bennett. Coleman & Co. Ltd. It is stated that the project got delayed as the area has been declared as Green Belt and construction of apartments are not permitted. Further, the amount paid to Bennett. Coleman is still lying with them. Hence, the Noticee claims that the contract is still subsisting and not revoked. The Noticee submitted a copy of its bank statement of the bank account with Kotak Mahindra Bank showing a payment of `76 lakhs to Bennett. Coleman & Co. Limited on September 21, 2005. However, it is noted that no further action has been taken in the matter.

15. As regards the non compliance of Clause 41 of the Listing Agreement, it is noted from the Noticee's submissions that there was no variance in income beyond an itemized variance of 20% which was then allowed between the Unaudited and Audited Financial Results as per extant Clause 41 of the Listing Agreement. (The said limit was allowed till the SEBI circular dated July 10, 2007 whereafter the said limit was reduced to 10%.).

16. In sum, the main allegation levelled against the Noticee is that, of the corporate announcements made by the Noticee referred in para 10 page 6, three announcements pertaining to Bonus Issue, Preferential issue of shares and Real Estate project were not implemented. However, the Noticee has submitted evidence to show that at least some steps were taken to implement the announcements. The Noticee submitted details of the measures taken, such as series of correspondence made with BSE for getting the in-principle approval for the issuance of Bonus shares and preferential warrants, bank statement regarding payment made to Bennett. Coleman & Co. Limited for real estate projects, etc. It is noteworthy, however, that the promoter entities and associate entities did engage in trades and substantially diluted their stakes in the company in proximity with the series of corporate announcements. It is also noted that Adjudication proceedings were initiated against the said promoter and associate entities and the Adjudication officer vide Order dated March 29, 2012 exonerated them from the allegations of PFUTP violations. Considering all the facts and circumstances as narrated above and the evidence furnished by the Noticee in respect of the steps taken to implement the corporate announcements, I am of the view that the matter may be allowed to rest with a warning to be more cautious and careful in future in making such corporate announcements.

17. In view of the foregoing, I, in exercise of the powers conferred upon me by virtue of section 19 read with section 11 and 11B of the SEBI Act and regulation 11(1) of the PFUTP Regulations, 2003, issue a strong warning to the Noticee, to be careful and cautious of making corporate announcements and their implementation. Any future lapse shall invite stringent action.

18. The Show Cause Notice dated July 08, 2009 read with corrigendum issued on November 26, 2009 is disposed of accordingly.

Place: Mumbai S. RAMAN Date: July 15, 2015 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA