Order in the matter of Indian Infotech & Software Ltd

WTM/MPB/ISD/ 134 /2018 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: MADHABI PURI BUCH, WHOLE TIME MEMBER ORDER Under Sections 11, 11(4), 11A and 11B of the Securities and Exchange Board of India Act, 1992 in the matter of M/s Indian Infotech & Software Limited (PAN: AAACI0350E):

1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”), in the interest of investors, vide its letter dated August 7, 2017 took the pre-emptive interim measures under section 11(1) of SEBI Act, 1992, in respect of listed shell companies including M/s Indian Infotech & Software Limited (hereinafter referred to as “IISL” / “Company”). SEBI placed trading restrictions, on the promoters/directors so that they do not exit the company at the cost of innocent shareholders. In view of the said objective, SEBI vide the said letter dated August 7, 2017 also placed the scrip in the trade to trade category with limitation on the frequency of trade and imposed a limitation on the buyer by way of 200% deposit on the trade value, so as to alert them trading in the scrip. The said measures were initiated by SEBI pending final determination after verification of credentials and fundamentals by the exchanges, including by way of audit and forensic audit if necessary. The measures also envisaged, on the final determination, delisting of companies from the stock exchange, if warranted. By virtue of these measure, trading in scrip was not suspended but allowed under strict monitoring so that investors could take informed investment decisions, till SEBI and Exchanges completed their detailed examination of such companies.

2. Thereafter, SEBI vide Interim Order dated September 21, 2017 (hereinafter referred to as “Interim Order”), had modified, subject to para 24(iv) of the interim order, the actions envisaged in SEBI’s letter dated August 07, 2017 and the consequential actions taken by Stock Exchanges, against M/s Indian Infotech & Software Limited as under:

Order in the matter of M/s Indian Infotech & Software Limited (i) The trading in securities of IISL shall be reverted to the status as it stood prior to issuance of letter dated August 7, 2017 by SEBI. (ii) Exchange shall appoint an independent forensic auditor inter alia to further verify: a. Misrepresentation including of financials and/or business of IISL, if any; b. Misuse of the funds / books of accounts of the company, if any. (iii) The promoters and directors in IISL are permitted only to buy the securities of IISL. The shares held by the promoters and directors in IISL shall not be allowed to be transferred for sale, by depositories. (iv) The other actions envisaged in SEBI’s letter dated August 07, 2017 in para 1 (d), as may be applicable, and the consequential action taken by Stock Exchanges shall continue to have effect against M/s Indian Infotech & Software Limited

3. The prima facie observations in the Interim Order are as under: “………. 18. Based on the replies given by the company in response to SEBI’s queries, prima facie observations are as under:

(a) From the details provided by the company, for the quoted investments of Rs. 8.47 crore approx., it is observed that all the shares are sold to a single entity (Dhanaasha Infracon Pvt. Ltd.) in an off-market transaction in the year 2015-16, at the value appearing at balance sheet of Rs. 8.47 crore. However, from the Holding Statement of the company as on March 31, 2015 and March 31, 2016, received from depositories and Transaction Statement during this period, it is observed that the company was still holding the shares as on March 31, 2016. Further as per the depository records, these shares appear in the name of company even till September 18, 2017 and no transaction has taken place with respect to these shares during the period April 2015 to March 2017. This prima facie raises serious doubts on the authenticity of the sale transaction. Hence there is prima facie evidence of misrepresentation of financials of the company.

Order in the matter of M/s Indian Infotech & Software Limited (b) During the course of hearing IISL was advised to provide the valuation certificate on the basis of which goodwill amount was calculated with respect to the goodwill amount appearing in the Balance sheet as on March 31, 2016 amounting to approximately Rs. 51 crore (carried forward from previous years). However, the company has only provided the calculation of the goodwill amount and failed to provide the valuation certificate. This calls into question the genuineness of the value of goodwill reflected in the financials. (c) On the RBI website as on August 31, 2017, the company is appearing under category ‘Investment Company’. However, Statutory Auditor Certificate says that the company is Loan Company. Further, their Annual Report (2015-16) says that approximately 85% of the turnover of the company is from IT and Software Products. Thus, there are significant contradictions in respect of the claimed business of the company and prima facie misrepresentation of its business. (d) With respect to the query related to the income (sales of goods/services) of approximately Rs. 91 crore and the purchase of traded goods of approximately Rs. 106 crore in the financial year 2015-16, the company, in its reply, stated that in the financial year 2015-16, the company as an NBFC Company also traded in various equity shares of Listed and Unlisted Company both through the Online Platform and Offline mode.

Further, company stated that there was a typo error in the Annual Report for Financial Year 2015-16 printed by the Company wherein the “Purchase of Shares” is mentioned as “Purchase of goods”, “Sale of Shares” is mentioned as Sale of Goods”. However, as per the ‘Extract of Annual Return’ as on the financial year ended March 31, 2016 attached by the Company to the Director's report in the Annual Report 2015-16, the principal business activities disclosed by the company was of “IT & Software Products and Interest Income” and not investment in shares. Further, it is observed that not only for the year 2015-16, but also in the annual reports for the year 2014-15 and 2013-14, the Revenue from operations schedule shows the income (sales of goods/services) of companies and the purchase of traded goods. Hence, the explanation given by company regarding typo error in the Annual Report for the year 2015-16 is not reliable.

Order in the matter of M/s Indian Infotech & Software Limited

As per the explanation given by company for the year 2015-16, that the amount of Rs. 91 crore reflect the purchase of shares and not purchase of goods, however, from the Cash flow statement for the year ended March 31, 2016, the Cash flow with respect to purchase of Investments appears to be Rs. 37.50 lakhs only. Hence, from the above it prima facie appears that the company had made wrong presentation about the business in its annual report and Annual Return for the year 2015-16 and also the explanation provided by the company with respect to the purchases/sale of goods/services appearing in Annual report for the year 2015-16 is insufficient and unreliable. Thus there are significant contradictions in respect of the claimed business of the company and prima facie misrepresentation of its business. (e) The HDFC bank statement account no. 00600350115229, Branch Mumbai- Fort, Manekji Wadia Bldg, Ground Floor, Fort. and Yes bank statement account no 020185700000189, Branch – SEEPZ Andheri, received from the company show that, there are numerous entries of funds received by IISL from multiple entities and transferred to other entities on the same day leaving a negligible closing balance in the bank account. This does not appear to be consistent with a normal lending pattern of NBFCs. Further, in respect of its borrowings, the company has failed to provide any documentary evidence of the same. Thus, prima facie there is suspicion that the company is being used as a conduit to facilitate accommodation transactions. ………..”

4. Vide said interim order, SEBI had advised IISL to file its reply/objections to the said interim order within 30 days from the date of receipt of the said interim order and also indicate in its reply whether it desires to avail an opportunity of personal hearing on a date and time to be fixed on a specific request made in that regard, if any. The said interim order also mentioned that if IISL had failed to file the reply or request for an opportunity of personal hearing within the said 30 days, the preliminary findings of the said interim order and ad-interim directions mentioned at para 24 of the said interim order shall stand confirmed automatically, without any further orders.

Order in the matter of M/s Indian Infotech & Software Limited

5. Vide email dated September 22, 2107 the copy of interim order was forwarded to IISL. Vide letter dated September 27, 2017, the copy of interim order was also sent to IISL at ‘Indian Infotech & Software Limited, Room No. – 122, Block D, 1st Floor, Sitala Devi Chs Ltd, DN Nagar, Ambivali, Andheri (West), Mumbai, Maharashtra – 400053’ through hand delivery, however the same was returned undelivered with remark ‘office lock’. The copy of interim order was once again sent to IISL at the aforesaid address through speed post on October 04, 2017, however the same was returned undelivered with remark ‘unclaimed’

6. IISL vide letter dated October 17, 2017 has submitted its reply to the interim order which are inter alia as under: “…….. (a) In this point, the main observation you had pointed out that the company was holding quoted Investments of Rs. 8.47 Cr which was sold to a single entity M/s Dhanaasha Infracon Private Limited in an off-market transaction in the year, however the holding Statement received from depositories that such stock it still held by the company as on dated and as such it raise doubts on the authenticity of such sale transaction and act as prima facie evidence of mis-presentation (misrepresentation) of Financials. On this, we like to point out that, in the queries you had asked as to how the company had sold quoted stock when such shares was debarred from the exchange and in our reply we had clearly stated that as the company was uncertain when the debarment will be lifted & to avoid huge investment loss, the company sold this investment immediately and received the consideration. But as the stock was debarred from the exchange the said securities is still lying in our demat account & we are in process of transferring the same. We have received entire sale proceed of such quoted investment, which is reflected in the bank account statement. The shares are still lying with us as the corresponding party does not have a demat account. We will transfer the said shares to Dhanaasha. It is pertinent to mention that presently Dhanaasha does not have demat account and they are in the process of opening

Order in the matter of M/s Indian Infotech & Software Limited it. We are therefore under an obligation to effect transfer the said shares in the name of Dhanaasha. Kindly note the Company has not incurred any loss on the said transactions.

(b) In this point, you made observation that the company was to submit the valuation certificate of Goodwill booked by the company for Rs. 51 Cr in the Financial Statement as on 31st March, 2016 and only calculation of goodwill was submitted and this calls into question the genuineness of the value of goodwill reflected in the financials. On this we could again like to point out our reply submitted wherein we had mentioned that such goodwill was booked due to amalgamation done by the company and the goodwill is booked as per the Amalgamation Order passed by the Honorable High Court of Mumbai dated 04 May 2012. The same was booked in the Financial Statement as on 31st March, 2012 which was recorded as date of amalgamation and from 2012 such goodwill is carried over in the books of accounts and which stands in the Audited Financial Statement i.e. the same calculation was given to the statutory auditor of the company along with the High Court Order. As the calculation was done as per the High Court Order as such No Goodwill Valuation Certificate required to be obtained by the company and the same calculation of Goodwill was submitted before you as well.

(c) In this point, you had mentioned that as on RBI Website as on 31st August, 2017, the company’s name is appearing as “Investment Company”, whereas Statutory Auditor certificate says that the company is “ Loan Company”, further the Annual Report (2015- 16) says that approximately 85% of the turnover of the company is from IT and Software Products thus there is significant contradiction in respect of the claimed business of the company and prima facie mispresentation (misrepresentation) of its business On this, we had clearly mentioned in our reply that the company is an NBFC carrying as “Loan Company” and we had also submitted the MOA & AOA of the company along with the RBI Certificate and SAC submitted to RBI in which also it is clearly mentioned that the company is “Loan Company”. The Annual Report (15-16) which is referred in the said order and in the Annexure 1 of the Director Report where it is mandatory for every company to mention its business activity carried out along with the current circumstances of the industry and also the business opportunity and threat in which it is clearly mention

Order in the matter of M/s Indian Infotech & Software Limited that the company is an NBFC Company and carrying the NBFC activity and our MOA & AOA of the company also states that the company is carrying out the business activities of lending. There is typographic error in the Annual Report (15-16) under MGT – 9, which is error, but the fact is majority of the revenue is generated from lending business activities. Hence, we have not mispresented (misrepresented) before any regulatory or any of its stakeholders.

(d) In this point also you had mentioned that there is prima facie evidence of mispresentation (misrepresentation) of business seeking the various ground In the first para you had mentioned that there is approximate sale of Rs. 91 Crs. and purchase of Rs.106 Crs. in the FY 2015-16 and the same is reflected in our reply that the Company is carrying out NBFC activity and also traded in various stocks both in quoted and unquoted through Online and Offline Platform. In the second para you again reflected the Extract of Annual Report i.e. mentioning MGT -9 attached in annual report and in the third para you had reflected to the Cash Flow of the Company and mentioned that “Investment Purchase of 37.5 Lakh” Only Now we like to mention you that as per the definition of goods “share/stock can be regarded as goods” and our Company is NBFC company - hence the purchase and sale you are mentioning is the sale and purchase of stock/shares as goods mentioned in its Annual Report and again the Annual Report is prepared in accordance of the format prescribed in Schedule V of the Companies Act and those stocks are considered as goods for the company. Yes we admit the genuine mistake in the MGT – 9 we had done but Cash Flow statement show the correct picture as such purchase and sale of stock was done as goods and not as Investment made by the company. There is difference in investment and purchase and sale of goods. The company never acquired such stock as investment made in that company but that stock were purchased as goods only to earn profit between the sale price and purchase price and there is always the possibility of suffering of loss on sale price and purchase price as well. Thus the company correctly reflected the same in Cash Flow and mere misunderstanding or difference of opinion cannot be regarded as Mispresentation (misrepresentation) of Business. And as such we strongly object this point as the Company has given the clear

Order in the matter of M/s Indian Infotech & Software Limited picture to all its stakeholder and the Company never objected to provide the evidence of the same to any of its stakeholders at any point of time.

(e) In this point you had reflected the Bank Account maintained by the company and the negligible balance maintained by the company and referred to the transactions carried out by the company and thus regard the same as accommodation entries. On this we strongly object the reservation you made on our company, as the company is maintaining the negligible balance and the transactions made by the company cannot be treated as accommodation entries just because the company does not maintain the balance in its account. The Company is having current account with the bank which does not provide any interest on the amount kept with them, whereas Company earns interest if such funds are deployed as loans & advances. Our aim is not to keep any idle money, whereas our business model is such that the revenue should be generated from the funds owned by the Company. We also believe that if we maintain heavy balance in the bank account, Company cannot generate revenue which may affect shareholders interests. The company is an NBFC company and in today market there is wide scope of loan requirement and the company is able to deploy its fund for this purpose. At the same time there is no reference of any of the clients which are dummy/ shell company in the said order as we had provided with all names of the parties which we are dealing or provided loan to such entities and we have submitted the maximum records in the time frame given by the company. We had submitted to you the comprehensive statement of loan provided with its interest rate, date of the agreement and all other detail and we also mentioned that we will submit the further supporting papers if required by the board and as such the observations made by you in the said order are incorrect.

7. Vide interim order, IISL was advised to indicate in its reply whether it desires to avail an opportunity of personal hearing, if any. From the reply of IISL dated October 17, 2017, it is noted that Company has not specified that whether it desires to avail an opportunity of personal hearing. SEBI vide email dated November 22, 2017 had advised IISL to confirm whether it desire to avail an opportunity of personal hearing or not. However, till date IISL

Order in the matter of M/s Indian Infotech & Software Limited had not submitted any reply to the same. Thus, I note that ample opportunity has been given to IISL to state whether it desire to avail an opportunity of personal hearing. Despite having been given ample opportunities, IISL had failed to avail of the same. I am, therefore, proceeding with the matter based on IISL replies & other material available on record and the issue for consideration before me is whether the directions in the Interim Order need to be continued, revoked or modified in any manner.

8. Based on the replies given by the company in response to Interim order dated September 21, 2017, the observations are as under: (a) In response to the observation made at para 18(a) of Interim Order, IISL stated that it had sold the said quoted investment to Dhanaasha Infracon Pvt. Ltd. (DIPL) and received the entire sale proceed of such quoted investment, which is reflected in the bank account statement. IISL admitted the shares are still held with them because DIPL does not have demat account. DIPL is in the process of opening demat account and IISL is under an obligation to effect the transfer of said shares in the name of DIPL. It is noted that IISL had not provided any documents to substantiate its claim of sale of shares. IISL had also not provided the bank account statement highlighting the receipt of consideration or any documentary evidence showing receipt of sale proceeds. In the absence of any documentary evidence, I do not find any merit in the said submission of IISL. Further the transaction claimed by the IISL is not in line with any commercially prudent transaction. Therefore, I find that there is no evidence on this point to contradict the prima facie findings. Further though company has not provided any proof of sale of shares and clear proof of consideration for the sale of shares from the bank statement as stated earlier, it is observed that if the claim of the company is found to be true, then the same may be in breach of the requirement / stipulation that off market contracts cannot be entered into except by way of spot delivery contract as defined in section 2(i) read with section 13 of Securities Contracts (Regulation) Act, 1956(SCRA) and Notification issued under section 16 and 28 of SCRA. This aspect needs to be audited. (b) In response to the observation made at para 18(b) of Interim Order, IISL stated that the goodwill was booked as per the Amalgamation Order passed by the Honorable High

Order in the matter of M/s Indian Infotech & Software Limited

Court of Bombay dated May 04, 2012. From the year 2012 such goodwill was carried over in the books of accounts and which stands in the Audited Financial Statement i.e. the same calculation was given to the statutory auditor of the company along with the High Court Order. As the calculation was done as per the High Court Order, therefore No Goodwill Valuation Certificate was required to be obtained by the company. The perusal of the copy of the Bombay High Court Order submitted by IISL, indicates that the "The networth of the Transferor No. 1(Lambodar Nirmit Limited) as per the valuation report of Independent Chartered Accountant is Rs, 73,36,96,520/-………The networth of the Transferor No. 2 (Niki Metal Company Limited) as per the valuation report of Independent Chartered Accountant is Rs, 88,16,70,376/-." It is noted that IISL has not provided the copy of the Independent Chartered Accountant Valuation report which is referred in the High Court Scheme of Amalgamation. Therefore, in the absence of any documentary evidence, I do not find any merit in the said submission of IISL. In view of this, I find that there is no evidence on this point to contradict the prima facie findings.

(c) In response to the observation made at para 18(c) of Interim Order, IISL stated that it is an Non-Banking Financial Company (NBFC) carrying as “Loan Company” and it had also submitted the MOA & AOA of the company along with the Reserve Bank of India (RBI) Certificate and Statutory Auditor Certificate (SAC) submitted to RBI in which also it is clearly mentioned that the company is “Loan Company”. IISL also stated that the company is carrying out the business activities of lending and there is typographic error in the Annual Report (15-16) under MGT – 9, which is error, but the fact is majority of the revenue is generated from lending business activities. From the certificate of registration with RBI, it is noted the certificate of registration was granted to IISL to carry on the business of NBFC without accepting the public deposits. Further, as per the MOA of the company, the main object of the company is “To carry on the business of buying, selling, leasing, letting on hire, hire purchase or easy payment system, all types of industrial, agricultural, commercial and house-hold apparatus, plant equipment, machinery, vehicles, vessels, carriers, household goods and materials, buildings and real estate.

AND to finance industrial enterprise and to promote companies

Order in the matter of M/s Indian Infotech & Software Limited engaged in industrial and trading business.” Thus, it is noted that neither the Certificate granted by RBI nor the MOA of the company specify that IISL is a Loan Company. Therefore, I noted that IISL had failed to submit sufficient documentary evidence to substantiate its claim that it is a Loan Company. Further, the company has failed to address the contradiction in the nature of business as per the RBI website (Investment Company) and the SAC submitted (Loan Company) to RBI. Therefore, I do not find any merit in the said submission of IISL. In view of this, I find that there is no evidence on this point to contradict the prima facie findings. (d) In response to the observation made at para 18(d) of Interim Order, IISL stated that as per the definition of goods, “share/stock can be regarded as goods” and IISL is a NBFC company, therefore the said purchase and sale mentioned at para 18(d) of interim order are the sale and purchase of stock/shares as goods mentioned in its Annual Report and the Annual Report is prepared in accordance of the format prescribed in Schedule V of the Companies Act and those stocks are considered as goods for the company.

IISL admit that there is mistake in the MGT – 9, however, the Cash Flow statement show the correct picture as such purchase and sale of stock was done as goods and not as Investment made by the company. Thus, IISL correctly reflected the same in Cash Flow and mere misunderstanding or difference of opinion cannot be regarded as Misrepresentation of Business. From the transaction statement received from the depositories for the year 2015-16, it is noted that there was only one sale transaction i.e. on-market sale of scrip Impex Ferro Tech Ltd of 11.25 lakh shares. The value of this sale as per the price of the scrip on the date of transaction amounts to approx. Rs. 20 lakhs only. As per the reply of company, it is implied that the balance sales as shown by the company in the annual report 2015-16 of approx. Rs. 90.80 crore should be ‘unquoted shares’. Further, it is noted that IISL has not provided any documentary evidence regarding the purchases and sale to show that the purchase and sales as appearing in the annual report are of the shares/securities. It is also noted that IISL vide reply dated September 13, 2017 stated that there was a typo error in the Annual Report for Financial Year 2015-16 printed by the Company wherein the “Purchase of Shares” is mentioned as “Purchase of goods”.

In fact if the company considers that the shares can be shown as goods, there was no need for stating in the Order in the matter of M/s Indian Infotech & Software Limited earlier reply that there was a typo error. Thus, I find that the reply dated September 13, 2017 and reply dated October 17, 2017 to interim order are inconsistent. Therefore, in the absence of any documentary evidence, I do not find any merit in the said submission of IISL. In view of this, I find that there is no evidence on this point to contradict the prima facie findings. (e) In response to the observation made at para 18(e) of Interim Order, IISL stated that as the company was maintaining negligible balance and the transactions made by it cannot be treated as accommodation entries just because it does not maintain the balance in its account. IISL have current account with the bank which does not provide any interest on the amount kept with them, whereas Company earns interest if such funds are deployed as loans & advances. IISL believe that if it maintain heavy balance in the bank account and Company cannot generate revenue which may affect shareholders’ interests.

It is noted that the basis of prima facie suspicion of accommodation entries is because there are numerous entries of funds received by IISL from multiple entities and transferred to other entities on the same day leaving a negligible closing balance in the bank account. It is not solely because there is negligible closing balance. It is noted that the company has not submitted any documentary evidence pertaining to Loans & Advances, therefore, the authenticity of the loans & advances schedule submitted by the company cannot be verified and also the claim that "….the Company earns interest if such funds are deployed as loans & advances…." remains to be substantiated. In the absence of the documentary/supporting documents for the loans & advances, the entries in the bank statement could not be co-related with loan made by the company or interest received by the company. Therefore, the company has not provided evidence to substantiate whether the transfer of funds or receipt of funds relate to the loans and advances and that the funds received were “immediately deployed for lending purpose”.

Thus, in the absence of any documentary evidence, I do not find any merit in the said submission of IISL. In view of this, I find that there is no evidence on this point to contradict the prima facie findings.

Order in the matter of M/s Indian Infotech & Software Limited

9. I note that IISL, at this stage, has failed to submit any documentary evidence in support of its claim and has also failed to give a plausible reason/explanation alongwith suitable documentary evidences for the charges /allegations / prima facie findings as described in the interim order. I also note that further enquiry/audit in the matter is pending.

10. In view of the above, I find that the facts and circumstances of the case as brought out in the Interim Order have not changed, justifying the dis-continuation/modification/revocation of the directions passed in the Interim Order. It is further noted the audit as directed in the interim order shall also cover the transaction covered in para 8 (a) above for ascertaining the facts relating to the possible violation of the provisions mentioned therein.

11. Thus, I, in exercise of the power conferred upon me under sections 11, 11(4), 11A and 11B read with section 19 of the Securities and Exchange Board of India Act, 1992 hereby confirm the directions contained in the Interim Order dated September 21, 2017.

12. Copy of this Order shall be forwarded to the recognized stock exchanges for information and necessary action.

13. A copy of this Order shall also be forwarded to the Ministry of Corporate Affairs and Serious Fraud Investigation Office for their information.

-Sd- DATE: FEBRUARY 08, 2018 MADHABI PURI BUCH PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Order in the matter of M/s Indian Infotech & Software Limited