Order in the matter of IPO of Taksheel Solutions Limited

WTM/PS/56/IVD/ID-08/OCT/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under Sections 11(1), 11(4), 11A and 11B of the Securities and Exchange Board of India Act, 1992 In the matter of IPO of Taksheel Solutions Limited In respect of Taksheel Solutions Limited its directors Mr. Pavan Kumar Kuchana, Mr. Ramaswamy Kuchana, Mr. Venkata Ramana Nadimpalli, Mr.Vijay Kumar Devarkonda and Mr. Pramod Chada Date of Hearing: February 06, 2013 Appearances: For Noticee: Mr. Zal Andhyarujina, Advocate Mr. Ankit Lohia, Advocate Mr. Neerav Merchant, Advocate Mr. Manish Chhangani, Advocate Mr. Aditya Bhansali, Consultant, Mindspright Legal Mr. Pavan Kuchana, Managing Director, Taksheel Solutions Limited For SEBI: Mr. Sharad K. Sharma, General Manager Ms. Anitha Anoop, Deputy General Adviser Mr. S. Prabhakar, Assistant General Manager Mr. Pradeep Kumar, Assistant Legal Adviser Mr. Jayeeta Ray, Assistant Legal Adviser (Presenting Officer)

1. Taksheel Solutions Limited (hereinafter referred as 'Taksheel') came out with an Initial Public Offering (hereinafter referred to as 'IPO') of 55,00,000 shares of ` 10 each. The said IPO opened on September 29, 2011 and closed on October 04, 2011. The issue price was fixed at ` 150 each, aggregating to ` 82.50 crore. The shares of Taksheel, issued in its IPO, were listed on the Bombay Stock Exchange (hereinafter referred to as 'BSE') and the National Stock Exchange (hereinafter referred to as 'NSE') on October 19, 2011. Securities and Exchange Board of India (hereinafter referred to as 'SEBI'), upon noticing wide fluctuations in the price of the scrip of Taksheel, initiated a preliminary investigation. The preliminary investigation inter alia revealed that Taksheel made various mis-statements in the Red Herring Prospectus (hereinafter referred to as 'RHP')/ Prospectus, failed to disclose vital pieces of information and had funded the traders who had traded in its scrip on the date of listing and made losses.

It was also revealed that there were inaccurate and untrue statements in the electronic media when the issue was open for subscription. The preliminary findings also raised serious concerns about the status of clients and vendors of Taksheel.

2. The preliminary investigation also revealed that Taksheel had siphoned off part of the IPO proceeds, in a circuitous route, to certain entities and operators, which were the top net buyers on the stock exchanges on the date of listing day in order to absorb the huge losses incurred by them. In view of the prima facie observation of the said investigation, SEBI, vide an ad interim ex-parte order dated December 28, 2011 (hereinafter referred to as the 'interim order') inter alia prohibited Taksheel, Mr. Pavan Kumar Kuchana (Promoter/ Chairman & Managing Director), Mr. Ramaswamy Kuchana (Promoter/Director), its Independent Directors namely Mr. Venkata Ramana Nadimpalli, Mr. Vijay Kumar Devarkonda, Mr. Pramod Chada from buying, selling or dealing in securities in any manner whatsoever, till further orders. Taksheel was also prohibited from raising any further capital from the securities market, in any manner whatsoever, till further directions. Taksheel was also directed to call back the Inter Corporate Deposits ('hereinafter referred to as 'ICDs') placed with Silverpoint Infratech Limited (hereinafter referred to as 'Silverpoint'), proceeds of IPO invested by Taksheel in the India Bulls Mutual Fund- Liquid Fund shall be redeemed and deposit the same along with all the IPO proceeds remaining with Taksheel, in an interest bearing escrow bank account with a scheduled commercial bank, till further orders and the confirmation regarding the same was to be given to stock exchanges within seven days from the date of the interim order.

3. Taksheel (including its two promoters/directors) vide letter dated February 24, 2012, requested inspection of the documents relied upon by SEBI in passing of the interim order. Accordingly, inspection of the documents was carried out by Taksheel and its promoters/directors on March 13, 2012 and copies of all documents were also provided to their satisfaction. Subsequently, Taksheel filed its detailed reply vide letter dated September 12, 2012. Mr. Pavan Kumar Kuchana and Mr. Ramaswamy Kuchana, vide their respective letters both dated September 12, 2012 replied in the lines of Taksheel's letter.

4. The Independent Directors of Taksheel namely Mr. Venkata Ramana Nadimpalli and Mr. Vijay Kumar Devarkonda vide separate letters both dated January 31, 2012 had requested for extension of the time to file the reply in the matter. However, no further communication was received from these two independent directors. Mr. Pramod Chada also did not file any reply to the interim order.

5. The submissions of Taksheel in brief are as follows:

a. Taksheel had maintained a healthy growth before the passing of the interim order and its profits had been continuously surging upwards. However, after the interim order, the operations of Taksheel have come to stand still and it is not able to complete the pending assignments/ work orders. b. The directions issued against Taksheel are neither preventive/ remedial nor curative but penal. The bulk of the direction contained in paragraph 88(c) of the interim order are impossible to fulfil. The compliance of the such directions would require Taksheel to inter alia commit a breach of concluded contracts, thus making the company liable to pay the damages for such breach. c. All the independent directors of Taksheel have already resigned including several of its employees. d. Status of the land allotment at Warrangal: The land at Warangal was allotted by Andhra Pradesh Industrial Infrastructure Corporation Limited (hereinafter referred to as 'APIICL') for SEZ development on February 23, 2006. Initially it could not comply with certain conditions within the time frame provided. The fact that Taksheel paid electricity and telephone bill shows that it was never aware of the cancellation and at no point the land was taken back by APIICL.

Taksheel had made regular expenditures towards the site. Before the opening of the IPO, Taksheel had already started its non SEZ Software Development Centre at Warangal from June 29, 2011. Therefore, on the date of filing of DRHP, there was no mis-statement made by Taksheel with regard to the actual status of land. As on August 31, 2012, a total work force of more than 115 individuals were working at the Warangal Facility. e. Status of Employees: Taksheel has denied the allegation of creating an impression of pan global presence of their employees working in various projects. The fact that Taksheel has an office in U.S.A and Singapore clearly shows that Taksheel has presence beyond India. It has been said that Taksheel had inadvertently failed to modify the offer document at the time of vetting and therefore could not avoid the mistake in it. Further, it has also been said that Taksheel had employees only in the Hyderabad and Warangal centres. f. Status of funds required towards objects of the issue: Taksheel had raised funds through ICDs as alternate means of finance to meet its working capital requirement for its on-going business.

It has been said that the ICDs were taken by Taksheel in the months of May-June 2011 and September 2011 i.e. after the filing of the DRHP. It had disclosed the facts of raising of ICDs to PNB Investment Services Limited (hereinafter referred to as 'PISL'), the Merchant Banker to the issue along with the names of the entities from whom the amount was borrowed, however, PISL was of the view that there was no requirement to mention the details of ICDs raised in the offer document. After the completion of the IPO, Taksheel's Board decided to repay the ICDs raised through the IPO proceeds. It has also been said that they had not made any payment towards interest and the same are still due. Taksheel has also argued that the ICDs were outstanding overdrafts and its decision to repay the same is for the purpose that were mentioned in the prospectus. g. The Merchant Banker is a professional and an expert adviser, who drafts the prospectus and Taksheel has merely relied on it. h. Arrangement with regard to Buy Back of shares: With regard to the buy back arrangement with one Mr. Dinesh Kumar Singhi, it has been submitted that in terms of the Sale Purchase Agreement (hereinafter referred to as 'SPA'), Mr. Singhi had received an allotment of 10 lakh shares of Taksheel and he had to be provided with an exit route if Taksheel fails to come out with an IPO within the 18 months from the date of allotment.

It has been said that Mr. Singhi had not exercised such right on the expiry of the said 18 months and decided not to exercise the same till the IPO and subsequently consented for putting his shares under lock-in. Further, the same clearly took away his right to exercise the right of buy back and now Mr. Singhi can only dispose of his shares in the secondary market. i. Order placed with Wiselink: As regards the order placed with one Wiselink Technologies Pvt. Limited (hereinafter referred to as 'Wiselink') it has been said that Taskheel was in need of a software and for that purpose, it called for quotations. The two quotations that were received were found to be on the higher side and therefore, economically not viable. Thereafter, Taksheel received quotations and drawings of the software from Mr. Vinod Babu, VP, Taksheel. Taksheel decided to give the contract to Wiselink. Mr. Vinod Babu had tendered his resignation on September 28, 2011 which was accepted by Taksheel and therefore he was not a Key Management Personnel (hereinafter referred to as 'KMP'). Taksheel has also submitted that the mention of the purchase order dated September 30, 2011 in the prospectus, was skipped inadvertently.

According to Taksheel, the issue had already opened by the date of purchase order and the investors who wanted to subscribe in Taksheel had already relied on the RHP. Further, Taksheel has said that it was not possible to seek refund of the advance given to Wiselink as it had already initiated work on developing the software and placed orders necessary to execute and develop the same. j. Purchase of software product from Verisoft: Taksheel has denied relation with Verisoft Business Solutions Pvt. Limited (hereafter referred to as 'Verisoft'). It has been said that both the father-in-law and mother-in-law of Mr. Pavan Kuchana had ceased to be the directors of Verisoft in the year 2008. (Taksheel vide its submissions dated March 05, 2013 has submitted that they ceased to be the directors of Verisoft in the year 2009). Therefore, Taksheel at the time of filing of the offer document was not under any obligation to show Verisoft as a promoter group company. k. Trading pattern & diversion of funds: Taksheel had no role in controlling the trading pattern of its shares on the date of listing or any other day.

It had placed ICDs with Silverpoint Infratech Pvt. Limited (hereinafter referred as 'Silverpoint') in order to earn interest over funds that were lying idle after the IPO. There is no allegation that there were any connection between Taksheel and other entities as shown in the diagram at page 28 of the interim order. Only ` 6.70 crore from total amount of ` 80.50 crore was utilized for the first day transactions in the shares of Taksheel. From the same, no pattern emerges for the utilization of funds. l. Status of Taksheel's Clients & Vendors: Taksheel has submitted that most of its clients and vendors are based in the USA and they use the office address of their auditors for incorporation and for all correspondences. It has been said that the clients and vendor had approached it for making websites as there is difference between the cost of making websites in India as compared with the cost in USA. As Taksheel does not make websites in its general course of business, therefore the task of creating websites was forwarded to Viru Tech Solutions Limited (hereinafter referred to as 'Viru Tech'). m. LFG and Merrill are the two ultimate clients of Taksheel through its channel partners.

During the interview of Taksheel at CNBC, Mr. Pavan had disclosed the names of LFG and Merrill as these are widely popular names and were remembered instantaneously. Taksheel has also submitted that it is not aware of the ultimate client in most of the cases and therefore it cannot provide the details about the ultimate clients. n. The vendors of Taksheel are small in their size and capacities and require working capital assistance for executing outsourced work to them. As and when Taksheel delivers and installs the work including that of the vendor, invoices are raised by Taksheel on its clients. During the process of invoicing, only a portion of the cost pertaining to vendor's delivery is amortised as cost. Balance of payments made to vendors over and above costs amortised are reflected in balance sheets as 'advance to vendors'. Taksheel has also submitted that many of their vendors are also its clients.

7. Opportunities of personal hearing were afforded to Taksheel and its two promoters/directors on October 18, 2012, January 15, 2013 and February 06, 2013. Mr. Pavan Kuchana, Managing Director of Taksheel appeared for the personal hearing along with Mr. Zal Andhyarujina, Advocate, Mr. Ankit Lohia, Advocate, Mr. Neerav Merchant, Advocate, Mr. Manish Chhangani, Advocate and Mr. Aditya Bhansali, Consultant, Mindspright Legal and reiterated the submissions made by Taksheel in its reply. Taksheel also filed its written submissions vide letter dated March 05, 2013, along with the documents relating to Request for Proposal (hereinafter referred to as 'RFP') for 'Mobile Interactive Location based system' in respect of the transaction of Wiselink, which was sought from Taksheel during the personal hearing.

8. I have considered all the replies and submissions of Taksheel and its directors and the relevant material available on record. The limited issue to be considered in this Order is to decide whether, based on the material available on record and after considering the submissions, the directions issued by SEBI vide the interim order needs to be continued, revoked or modified in any manner, in so far as it relates to the aforesaid entities/persons.

9. I note that Taksheel had raised ` 82.50 crore through the IPO. The stated primary objective of the IPO was to set up a new software development centre at Hyderabad and Warangal. The other objectives, as stated by Taksheel, were the acquisitions and other strategic initiatives and financing of the incremental working capital requirements. Taksheel had received ` 80.50 crore (after deduction of issue related expenses) as issue proceeds. Taksheel was found to have transferred a substantial amount from the issue proceeds to various entities which included the repayment of loan borrowed by Taksheel through Inter Corporate Deposits (hereinafter referred to as 'ICD') and placing ICD with Silverpoint. Taksheel had also transferred ` 5.06 to one Wiselink. The interim order has alleged that Taksheel and its director(s) had made various misstatements in the offer documents, hidden vital pieces of information and made inaccurate/ untrue statements in the electronic media when the issue was open for subscription.

10. To start with, let me discuss the allegations (starting from mis-statement, non disclosures/ wrong disclosures in the DRHP/ RHP/ Prospectus) in seriatim as discussed in the interim order:

a. Status of the land allotment at Warangal: Taksheel had executed the agreement for sale of 5 (five) acre of land with APIICL on February 23, 2006 situated at Warangal, which was handed over to it on February 24, 2006. However, due to lack of progress in the work on the land and failure on the part of Taksheel to utilize the land for the specified purpose, the allotment was cancelled by APIICL, in the year 2008. The interim order has stated that Taksheel vide its letter dated September 05, 2011 to APIICL had acknowledged that due to financial reasons, it had failed to comply with the conditions and accordingly, the allotment was cancelled.

I note that on the request of Taksheel, the Government of Andhra Pradesh had decided to extend the time for implementing the project and thereby the allotment of land was restored to Taksheel as on November 28, 2011, on payment of respective fees. Taksheel in the prospectus had submitted that it had applied for extension of time for construction and is awaiting the approval. This statement of Taksheel appears to be incorrect and misleading as on the date of RHP, i.e. September 19, 2011 and Prospectus i.e. October 10, 2011, the actual status of the land was 'allotment cancelled'.

b. Status of employees: Taksheel in the offer document has stated that its employees work in United States, Europe and other countries. The interim order mentions that this statement in the offer document by Taksheel gives an impression that it had pan global presence and its growth is beyond boundaries of India. However, Taksheel during the course of personal hearing has admitted that it does not have employees other than those in Hyderabad and Warangal. It has also been said in the reply of Taksheel that it has office in USA and Singapore. As regards the mention of Europe in the offer document, it has been said that the same is due to a typographical error by PISL, the Merchant Banker to the issue. Taksheel in its reply to the interim order has stated that it inadvertently failed to modify the offer document at the time of vetting. Having considered these, I hold the view that Taksheel had the responsibility to make true and proper disclosures/statements the Prospectus so as to enable the applicants to take an informed investment decision. Taksheel has allegedly failed to do so.

c. Status of funds required towards objectives of the issue: Taksheel during the period of May-June 2011 and September 2011 (i.e. after the filing of DRHP but before RHP), raised an amount of ` 34.50 crore in the form of ICDs from different entities, the details of which are given below: Table A Name of entity Address of entity Date of Interest Tenure Actual amt. Secured/ agreement Rate p.a (in days) recd. (```` in unsecured crore) Amarnath 1/104, Sarthak, opp. C.T. Centre, May 03, 2011 14% 180 20 Unsecured Securities Ltd. Behind Swastik Cross Rd., Ahmedabad, Gujarat- 380 009 Gujarat Tool 402, Sheel Complex,4th Floor, Mayur May 29, 2011 14% 180 7.5 Unsecured Room Ltd. Colony Near Mithakali Underbridge, Navrangpura, Ahmedabad Shitalnath 402, Sheel Complex,4th Floor, Mayur June 07, 2011 14% 180 2.50 Unsecured Buildcon Pvt Ltd. Colony Near Mithakali Underbridge, Navrangpura, Ahmedabad Swastik Securities 33, C.R. Avenue, 9th Floor, Room Sept 11, 2011 14% 180 2 Unsecured & Finance Ltd. No. 909, Kolkata - 700 012 Rohan Finance & 29A, Weston Street, 3rd Floor, Room Sept 11, 2011 14% 180 2.5 Unsecured Securities Ltd. No.C-2, Kolkata- 700 012 Total 34.50 The interim order has stated that such ICDs amounted to 41.81% of the total IPO proceeds and the amount far exceeded the total working capital requirements for 2011-12 as well as the entire general corporate purpose expenses budgeted by Taksheel for 2011-12 and 2012-13.

Taksheel in the offer document has failed to disclose that an amount exceeding the entire working capital was intended to be paid by it out of the IPO proceeds. From the table A above, it can be seen that the financial arrangement/ loan by way of ICDs availed by Taksheel was prior to the dates of filing of RHP and the Prospectus i.e. September 19, 2011 and October 10, 2011 respectively. It has been alleged that Taksheel had made a mis-statement in the prospectus about the projected amount towards general corporate purposes, which continued to be shown as likely expenditure in a calibrated manner till 2012-13, even though, it had used the same during the year 2011-12 itself. Further, it is also seen that the amount raised by Taksheel in the form of ICDs was immediately paid to the purported vendors of Taksheel located at USA to the extent of `30.15 crore towards payments. Taksheel later utilised the IPO proceeds for repayment of the said ICDs raised prior to the IPO.

Taksheel in its reply has submitted that the ICDs were raised as alternate means of finance to meet its working capital requirement. It has been said that Taksheel had filed its DRHP during December 2010, with an understanding that the same would be cleared within a period of one or two months. However, as the approval did not come within the expected time, it decided to look for alternate means of finance and in furtherance of the same it raised ICDs. Further, it has also been said that Taksheel vide email dated August 25, 2011, had disclosed the facts relating to raising of ICDs to the extent of `30 crore and its purpose to PISL along with the names of the entities from whom the amount was borrowed. However, PISL was of the view that there was no requirement to mention the details of ICDs raised in the offer document. Taksheel has submitted that it was being guided by the merchant banker and that it had fulfilled its obligations by duly informing PISL about the existence of ICDs. Further, after the completion of the IPO, Taksheel decided to repay the ICDs raised through the IPO proceeds. It has been said that ICDs were raised for a period of 6 months, however the repayment of the principal amounts were made before the due date. It had paid the interest for two (2) months as it raised certain ICDs in the month of September 2011. It has also been said that they had not made any payment towards interest and the same are still due. Taksheel has also argued that the ICDs were outstanding overdrafts and its decision to repay the same is for the purpose that was mentioned in the prospectus. In order to balance the situation and minimise the effect of the interest to be paid and also as a measure of hedging it had decided to lend ` 23 crore to Silverpoint for a period of 6 months from the IPO proceeds. Taksheel has also argued that ICDs cannot be categorized as bridge loan and thus it is not violative of Regulation 57 of ICDR Regulations.

Having considered the above submissions, I note that Taksheel had entered into the ICD agreements with the entities named in table A above in the months of May 2011, June 2011 and September 2011. Taksheel had raised funds through ICDs, which is a material event. As the same were done before the filing of the RHP as well as the prospectus (i.e. September 19, 2011 and October 10, 2011 respectively), the same was required to be disclosed in the offer document. Incidently, I also note that the Board of Directors of Taksheel had ratified the amounts borrowed through ICDs during the meeting held on October 13, 2011.

Further, as per the ICD agreements, Taksheel was to repay the loan amount within a period of 6 months and the interest rate was fixed at 14% p.a. Taksheel in its reply has stated that it had not paid any interest as some of the amount borrowed by it was repaid within a period of 2 months. The submission of Taksheel that it repaid the loan amount within a period of 2 months appears to be incorrect, as admittedly the loans were availed by Taksheel during the months of May 2011 and June 2011 and were repaid out of the IPO proceeds (received in October 2011) i.e. between 4-6 months of availing loans. As regards the ICDs raised in the month of September 2011, it appears that the same was repaid after 2 months from the date of availing of the loan. This sequence of facts shows that the submission of Taksheel that the ICDs was repaid in 2 months time and that no interest was payable by it are mere afterthoughts.

d. Arrangement regarding buy back of shares: The interim order has discussed about an agreement by Taksheel with one Mr. Dinesh Kumar Singhi, who had subscribed to its 10 lakh shares constituting 6.12% of the pre-issue paid-up capital. The agreement also contained a clause for the buy-back, under which an exit route had to be provided if Taksheel fails to come out with an IPO within the 18 months from the date of allotment of shares. In such an event, Taksheel or its promoters were bound to repurchase these shares at ` 170 per share aggregating to a total repurchase consideration of ` 1,700 lakh.

Taksheel in its reply has submitted that Mr. Singhi had not exercised such right on the expiry of the said 18 months as per the agreement and had decided not to exercise the same till the IPO and subsequently he consented for putting his shares under lock-in, which took away his right and now, Mr. Singhi can only dispose off his shares in the secondary market. Further, the arrangement of buy back has been cancelled by him by providing the consent for lock-in of shares. According to Taksheel, Mr. Singhi is holding those shares till the date of their reply.

I note that the letter of Mr. Singhi appears to provide for the consent for lock-in and that the same does not provide for the relinquishment of his rights under the agreement. Further, these facts need to be examined in the background of diversion of huge funds to the extent of ` 3.50 crore from the IPO proceeds to Mr. Singhi through Wiselink, a related party, in a circuitous route as discussed in the later part of this order.

e. Order placed with Wiselink: Taksheel had placed a purchase order to Wiselink amounting to ` 10.12 crore on September 30, 2011 which was about 13% of the total issue size, towards the design and development of Mobile Interactive Solution Software (MISS). As per the purchase order, 50% advance payment had to be released by Taksheel to Wiselink within 45 days of the purchase order for the development of designs and drawings. The preliminary investigation revealed that one Mr. Vinod Babu was on the Board of Directors of Wiselink and also its authorized signatory. Mr. Vinod was also found to be a KMP (Key Management Personnel) of Taksheel working as Vice President, Technology.

Taskheel in its reply has said that it was in need of MISS, the software and for that purpose, it had received quotations from two companies. According to Taksheel, the said quotations were perused in consultation with Mr. Vinod Babu (VP, Taksheel) and Mr. Ravi Kusam (VP, Taksheel) and the price quoted was found to be on the higher side and economically not viable. As per Taksheel, it then received quotations and drawings of the software from Mr. Vinod Babu. Taksheel then decided to give the contract to Wiselink. Thereafter, Vinod Babu tendered his resignation on September 28, 2011 and the same was accepted by Taksheel. Thus, he was no more a KMP of Taksheel and the transaction was not a related party transaction. Taksheel has submitted that the mention of the purchase order dated September 30, 2011, was skipped inadvertently in the prospectus. Further, it has also been said that the issue had already opened on September 29, 2011, i.e., prior to the date of purchase order and the investors who wanted to subscribe had already relied on the RHP. According to Taksheel, it would not be possible for Wiselink to cancel the order and refund the money at this stage as a lot of work had already been done on the software, on the date of reply filed by Taksheel.

With respect to the resignation of Mr. Vinod Babu, Taksheel has submitted in its reply that the resignation was on September 28, 2011. However, I note that the list of employees (as on October 31, 2011) of Taksheel at Hyderabad Centre, submitted by Taksheel vide its letter dated September 12, 2012 finds the mention of Mr. Vinod Babu as VP of Taksheel and that he is receiving a salary of ` 1,10,000 p.m. Further, the Prospectus of Taksheel dated October 10, 2011, also finds mention of Mr. Vinod Babu as the KMP of Taksheel. These facts show that the submission of Taksheel regarding the resignation of Mr.Vinod Babu on September 28, 2011 is incorrect. I note that Taksheel had placed the purchase order with Wiselink on September 30, 2011 and the same appears to be a vital piece of information in so far as investing public is concerned. Further, it appears that Taksheel had not informed its Board of Directors about the placement of the said purchase order with Wiselink and the payment of advance at the relevant time. Taksheel thus appears to have entered into a transaction with related party i.e. Mr. Vinod Babu who was its VP, Technology at the relevant time, which was also not disclosed in the RHP/ Prospectus. The interim order, in paragraph 36, has mentioned that other than a sketchy one-page purchase order, to which a power-point proposal for purported design and development of MISS for the company is enclosed, no other detail about the project, deliverable milestones, payment terms for remaining 50%, warranty clauses, dispute resolution mechanism finds mention in the purchase order.

f. Purchase of software from Verisoft: Taksheel had allotted 50 lakh shares to one Verisoft on October 01, 2009. These shares were issued for the consideration other than cash at a premium of ` 10 per share for the sale of a software product namely Mobile Virtual Network Enabler to Taksheel. The preliminary investigation has revealed that Ms. G. Lalitha and Mr. Gudimalla Janardhan Rao who are the directors of the Verisoft are the mother-in-law and father-in-law of Mr. Pavan Kumar Kuchana, CMD of Taksheel. It has been said in the interim order that Verisoft is intricately connected to the promoter/ directors of Taksheel and the same has been suppressed in the offer document.

Taksheel has said that Verisoft is not related to Taksheel, as both the father-in-law and mother-in-law of Mr. Pavan Kuchana had ceased to be the directors of Verisoft and transferred the majority of Verisoft holding, at the time of filing of the offer document and hence, it had no obligation to show Verisoft as a promoter group company. As regards the discrepancy in the number of shares issued for purchase of software from Verisoft, Taksheel has submitted that it is a typographical error.

The interim order, in paragraph 43, has mentioned that no details about Verisoft and its product such as valuation details, details of negotiations regarding price, balance sheet, profit and loss account, list of other clients of Verisoft, etc. were available with Taksheel. It is seen that Taksheel vide its reply dated September 12, 2012 has stated that the father-in-law and mother-in-law of Mr. Pavan Kuchana had ceased to be the directors of Verisoft w.e.f year 2008 (later submitted to be year 2009 vide written submissions dated March 05, 2013). A reading of the copy of the respective resignation letters shows that both these persons had resigned only on March 11, 2009. I note that Taksheel has submitted a copy of the agreement dated October 01, 2009 entered between Verisoft and Taksheel. I have perused the said agreement and note that Ms. G. Lalitha, director had represented Verisoft in it. This date is clearly much after the claimed date of resignation (i.e. March 11, 2009). The said contradictions in the submissions made by Taksheel read with the documents submitted leads one to infer that Taksheel has attempted to mislead the investigation on this issue.

11. ICD placed with Silverpoint: I note that Taksheel had lent ` 23 crore in the form of ICD, from the IPO proceeds, to Silverpoint on October 19, 2011, which was located at Kolkata. Taksheel in its reply has submitted that it had placed an ICD with Silverpoint in order to earn interest over idle lying funds after the IPO. It has also been said that Taksheel during the same time was in the process of identifying possible acquisition and expansion of its business. It identified the Governance, Risk and Compliance (GRC) division of one Genex Technologies Limited (hereinafter referred to as 'Genex') and contemplated buying the same upon conducting its technical and financial feasibility. On completion of the negotiations, Taksheel decided to arrange for the funds and had decided to call back the ICD placed with Silverpoint, so that it can finalize the Business Purchase Agreement (BPA) with Genex. However, Silverpoint showed its inability to return the amount as it had deployed the funds elsewhere. According to Taksheel, Genex insisted and agreed for entering into a BPA, on receipt of the part payment and a guarantee by Silverpoint for the entire purchase consideration.

Silverpoint, also agreed to act as guarantor and requested that it can make payments only after 3 to 4 months. It also said that a tri-partite BPA was then entered between Takheel and Genex, in which Silverpoint stood as a guarantor. Post execution of the BPA, Genex transferred various software/codes. In the meantime, on the lines of the interim order, Taksheel requested Silverpoint to return the ICD placed with it. However, Silverpoint refused the request of Taksheel by citing the reason that it had already stood as irrevocable guarantor to Genex in the BPA. Thereafter, Taksheel followed up with Genex to keep the transaction on hold and to terminate the guarantee clause of the BPA in order to comply with the directions issued by SEBI. Genex refused to hold back or cancel the BPA as it has already complied with most of its obligations and supplied all the resources and proprietary information. It has been said by Taksheel that it had received a 'no dues' letter from Genex and another letter from Silverpoint stating that it has completed its obligations under the ICD and the BPA by paying ` 24 crores to Genex and the transfer of ` 46 lakh to Taksheel i.e., the balance of interest on the amount of ` 23 crores lent to it after deduction of necessary taxes.

The submission of Taksheel, if considered in the light of paragraphs 71 and 72 of the interim order which states that as per the balance sheet of Silverpoint, it had earned a profit of ` 2.89 lakh (post tax) as on March 31, 2010 and has a total investment of ` 36.62 crore appears to be incorrect. It has been observed that as per the offer document of Taksheel, IPO proceeds will be temporarily invested in high quality interest bearing liquid instruments, pending deployment. This means that the borrower should have a good degree of creditworthiness and should be able to meet its financial commitment easily. In the present facts, it is seen that Silverpoint had to repay the interest along with the principal within a period of six months and the interest payment itself is more than the amount of profit earned by Silverpoint for the balance sheet for the year April 2009 - March 2010. These facts indicate that Silverpoint did not have sufficient financial strength to repay the principal along with the interest to Taksheel. Thus, the entire financial arrangement of Taksheel with Silverpoint is curious specially when a part of the IPO proceeds had seeped through Silverpoint into the accounts of traders and operators who have incurred huge losses so as to enable them to absorb the losses suffered by trading in the scrip on the day of listing as detailed in the paragraph below.

12. Trading pattern and diversion of funds: The interim order has observed that on the date of listing i.e. October 19, 2011, certain entities namely Rose Valley Merchandise Pvt. Limited, Shreya Multitrade Pvt. Limited, Baba Bhootnath Trade and Commerce Pvt. Limited and Overall Financial Consultants Pvt. Limited had traded in the scrip of Taksheel and suffered huge losses. From the trail of funds, it was observed that Taksheel has funded these entities out of the IPO proceeds in a circuitous route. I note that Rose Valley Merchandise Pvt. Limited and Overall Financial Consultants Pvt. Limited were found connected and together they suffered losses to the extent of ` 6.10 crore. Rose Valley Merchandise Pvt. Limited and Shreya Multitrade Pvt. Limited had traded through Indiabulls and Sunteck Wealthmax Capital Pvt. Limited respectively. Baba Bhoothnath Trade and Commerce Pvt. Limited traded in its proprietary account. Overall Financial Consultants Pvt. Limited had traded through Baba Bhoothnath Trade and Commerce Pvt. Limited, JM Financial Services Pvt. Limited and Grishma Securities Pvt. Limited on the date of listing.

Taksheel in its reply to the interim order has submitted that it was not aware of the above transactions/ arrangements and is not in a position to comment on the alleged movement of funds.

A pictorial representation of such flow of funds as brought out in the interim order is being reproduced below for reference:

Taksheel Solutions- IPO- 19/10/11 - ` 80.50crore

Silverpoint Infratech- 19/10/11 - `23cr Wiselink Tech Pvt Ltd. Key managerial 14/11/11 - ` 3.06cr person of company Anubhav Infra Ltd.- 23/11/11 - ` 2 cr 20/10/11- ` 4.85cr Rosevalley Merchandise P. Ltd. Sug am Vinimay P. Ltd. 20/10 - ` 2cr (Sugam) First day trade 20/ 10/11 - ` 2.147cr 20/10 - ` 4cr (Snehsil) 20/10 - ` 4.85cr (Anubhav) Sne hsil Market.g P. Ltd. 20/ 10/11 - ` 4.445 cr Baba Bhoothnath - 22/10/11-` 1.60cr Sugam Vinimay - 25/10/11-` 2cr Balasaria Holdings P. Ltd. 20/10/11 - ` 5 cr Snehsil Marketing - 25/10/11- ` 3cr First day trade Baba Bhoothnath- 20/10/11 - ` 45 lacs Shreya Multitrade -27/10/11-` 2cr SPA with company Baba Bhoothnath broker settlement acc- ` 45 lacs-21/10/11 First day Dinesh Singhi-trade Suntreck Wealthmax Capital 15/11/11-`1.50cr- (broker of Shreya Multitrde) 1/12/11- `75lacs 28/10/11- `2 cr 8/12/11- `1.25 cr Fugenic comp. Ser -15/11/11-` 30lacs Kriscon Infratech - 15/11/11-` 75lacs Suvela Construction - 23/11/11-` 50 lacs With respect to the above chart, the interim order has noted as under:

a. As discussed in the earlier paragraph, out of the total issue proceeds, Taksheel had lent ` 23 crore to Silverpoint. From the above chart, it can be seen that Silverpoint transferred ` 11.40 crore to the entities namely Snehsil Marketing Pvt. Limited, Sugam Vinimay Pvt. Limited and Anubhav Infrastructure Limited on October 20, 2011 out of the total amount received from Taksheel. On the same day, these three entities had transferred funds to the tune of ` 10.85 crore to Rose Valley Merchandise Pvt. Limited. Rose Valley Merchandise Pvt. Limited on receipt of ` 10.85 crore, transferred ` 1.60 crore to Baba Bhootnath Trade and Commerce Pvt. Limited on October 22, 2011 and ` 3 crore to Snehsil Marketing Limited on October 25,

2011. Of the ` 3 crore received by Snehsil Marketing Limited, ` 2 crore was transferred to Shreya Multitrade Pvt. Limited on October 27, 2011, who in turn had paid the said money to its broker i.e. Sunteck WealthMax Capital Pvt. Limited on October 28, 2011.

The interim order observed that Baba Bhoothnath Trade and Commerce Pvt. Limited, had traded on the listing day of Taksheel and incurred losses of ` 64 lacs on the day of listing. It is noted from the bank account of Baba Bhoothnath Trade and Commerce Pvt. Limited that as on October 20, 2011, an amount of `45 lakh had been credited to Baba Bhoothnath Trade and Commerce Pvt. Limited by Silverpoint, which was then credited to its own settlement account the very next day for meeting the settlement obligation. However, it has been confirmed by Baba Bhoothnath Trade and Commerce Pvt. Limited that they have no client by the name of Silverpoint.

The above discussion and the flow of funds suggest that the bank account of Silverpoint was used as a channel to transfer the IPO proceeds to Baba Bhoothnath to trade in the scrip of Taksheel on the day of listing. It is also noted that Rose Valley Merchandise Pvt. Limited had also transferred ` 1.60 crore to Baba Bhoothnath Trade and Commerce Pvt. Limited out of the ` 10.85 crore received from Taksheel through different entities.

b. In addition to the above, Taksheel had transferred ` 5.05 crore to Wiselink. The interim order has discussed that Wiselink was incorporated in the year 2004 with a nominal capital of ` 2,00,000. A perusal of the bank statement of Wiselink shows that as on October 19, 2011, it had a credit balance of just ` 5,824 i.e. before getting a transfer of ` 5.05 crore from Taksheel. The fund flow as demonstrated above shows that Wiselink had transferred ` 5.05 crore to different entities, including a transfer of ` 3.50 crore to Mr. Dinesh Kumar Singhi, one of the shareholders of Taksheel (pre-issue), who had invested ` 10 crore for the purchase of 10,00,000 shares as discussed earlier. Wiselink is also found to have transferred `1.55 crore to different entities. Taksheel in its reply has said that it had no role in controlling the trading pattern of its shares on the date of listing or any other day.

The fact of negligible balance prior to the obtaining of huge credit of `5.05 crore from the Company is a matter of serious concern and the same raises doubt on the credibility of Taksheel's version of having no role in the trading in its scrip. It appears that Wiselink was just acting as a conduit to the circuitous transfer.

I note that the investigation in the matter is complete and that SEBI is in the process of initiating appropriate actions giving the detailed findings therein about the roles and relationship of the different entities with each other. Thus, at present, I am of the considered view that it would not be appropriate to give any conclusive finding w.r.t. any of the facts or submissions made by the entities.

13. Clients and vendors of Taksheel: The interim order has discussed that Taksheel in reply to the summons issued by SEBI, has submitted a list of 20 entities containing 16 clients and 4 vendors, all of which were having offices in the United States of America.

a. The interim order has pointed out similarities noted in terms of the address, their website creation date, website contents etc. The websites for eight of the said entities were found registered by Taksheel and all of them had common contents by and large. Websites of another 6 (six) entities have been found registered through one Viru Tech and the domains of these websites have been registered by Taksheel.

Taksheel has submitted that most of its clients and vendors are based in the USA and they focus only on the core activity of developments of software and these companies rely on other professionals for their technical department like accounting and compliance. Taksheel also said in its reply that these entities used the office address of their auditors for incorporation and for all correspondences, therefore, the same is common for all. According to Taksheel, the auditor firm and the IT companies are owned/ managed by a group of professionals who are connected in one way or the other. It has also been said that their vendors/clients can also be reached at their other addresses as well and accordingly alternate address of these entities have been submitted. Further, as per Taksheel, its clients and vendor had approached it for making their websites as there is remarkable difference between the cost of making websites in India as compared to USA. It has been said that Taksheel was not in the business of making websites. However, as a matter of courtesy it agreed to make websites for its vendors/ clients and forwarded the work to Viru Tech. Thereby, Taksheel was only acting as a conduit between the entities in US and Viru Tech. As regards similarity in the content of websites, Taksheel has submitted that the websites were created as a draft for the clients/ vendors only on approval basis from entities based at USA. The final version was to be prepared on the basis of the comments of clients/ vendors of Taksheel. According to Taksheel, all websites have been updated at present and they show the acutal sphere of working of these entities.

I note that out of the said 20 entities, 7 clients namely Ermin Technologies Inc., Avalon Tech Systems Inc., USA, AMI Technologies Inc. USA, Rasax Soft Inc. USA, CV Cox Networks Inc. UNSA, Fausta Software Inc., USA and Felix Technologies Inc. constitutes almost 66% of the total revenues of Taksheel. Taksheel has provided the copies of the agreement entered with its purported clients/ vendors alongwith its reply. From the same, it is seen that some of the entities are clients of Taksheel from March 2009 whereas one Crest Solutions Limited, the vendor, is part of Taksheel's vendor list from August 2007. It is strange that these clients/ vendors, all of whom seem to be IT companies, did not have websites in this technologically advanced times. The websites under discussions are found to have been completely modified and therefore the defence taken by Taksheel that all these websites were at the draft stage at the time of passing of the interim order, appears to be an afterthought.

Further, while submitting the details of loans and advances existing as on March 31, 2011, Taksheel has provided the details of advances paid to vendors till such date. Out of the three entities named i.e. Felix Technologies Inc, Naras Technolgies Inc and Alagya Technologies Inc, I note that the first two have been claimed to be the clients by Taksheel. Further, Taksheel has not made clear as to whether Alagya Technologies Inc. is its client or vendor, nor has any details been provided about Alagya Technologies.

The interim order at para 78(i) has also raised serious concerns about the nature of relationship between Taksheel and its vendors/ clients, in the light of agreements and payments made.

b. The interim order has further discussed about the clients of Taksheel with reference to an interview in CNBC by Mr. Pavan Kumar Kuchana. I note that SEBI had asked Taksheel to furnish the information containing the details of client-wise revenue generated for all the clients and vendor-wise payments made to the vendors during 2010-11 and 2011-12 (till September 30, 2011). Taksheel in its reply while furnishing the information about client-list and turnover stated that “we are not in a position [Sic] of information regarding details of ultimate clients in respect of the said projects were executed, as we are not privy to the contractual relationship between our client and the ultimate clients.” Thereafter, another clarification was sought by SEBI from Taksheel whereby it was also advised to provide information or details regarding the end-clients as per the list applicable for 2010-11 and 2011-12 (till September 30, 2011). Taksheel in its reply to this again reiterated its earlier stand which is totally contrary to the claim made by Mr. Pavan Kumar Kuchana on CNBC that it has LFG and Merrill as its clients.

Taksheel in its reply has said that LFG and Merrill are the ultimate clients of Taksheel through its channel partners. It has also been said that during the interview, Mr. Pavan had disclosed the names of LFG and Merrill as these are widely popular names and were remembered instantaneously. However, Taksheel has submitted to SEBI that it is not aware of the ultimate client in most of the cases and therefore it cannot provide the details about the ultimate clients.

The reply of Taksheel appears to be contradictory in this regard. As per Regulation 60 of the SEBI (ICDR Regulations) requires that all public communication should contain only factual information and should not contain projections, estimates, conjectures etc. or any matter extraneous to the contents of the offer document. In view of the same, the statement made by Mr. Pavan Kumar Kuchana in CNBC TV appears to be misleading. I note that the investigation in the matter has been completed and SEBI is contemplating appropriate proceedings against the entities that are found guilty. Thus, at present, I am of the considered view that it would not be appropriate to give any conclusive findings as to any of the facts or submissions made by Taksheel.

14. From the above, the following observations inter alia emerge which cast doubt on the bonafides of Taksheel and the manner in which it has utilised the issue proceeds raised in its IPO: a. Taksheel has made mis-statement/mis-representation in the RHP/ Prospectus about the factual status of the land allotted at Warangal, the details of employees and its decision to avail ICDs and the arrangement regarding the buy back of its shares. b. Taksheel has not made the disclosure of the fact in the RHP/ Prospectus that Taksheel has engaged Wiselink for the supply of software. The director of Wiselink was found to be a Key Management Personnel of Taksheel. c. Intricate connections of Verisoft with the promoters of Taksheel. d. The transfer of substantial funds from the issue proceeds to entities who suffered losses on account of their trading in the shares of Taksheel on the listing day is also suspicious. Such transfer by Taksheel is prima facie found to be made for the purposes of recovery of the losses by those entities.

15. Having considered the available facts and circumstances of the case including the alleged default of Taksheel in disclosing the status of land, transactions with key management personnel, availing ICDs, not disclosing the decision taken to repay such ICDs from the IPO proceeds, deviations in the utilization of issue proceeds from that stated in the prospectus, the alleged transfer of funds from Taksheel to certain entities through circuitous transactions, I do not find it necessary to modify or vacate the ad interim directions issued vide Order dated December 28, 2011 with respect to Taksheel, Mr. Pavan Kumar Kuchana and Mr. Ramaswamy Kuchana. I am convinced that the directions in the interim order in respect of the entities need not be revoked, till further directions. Needless to say, the same would be reviewed upon conclusion of all the proceedings in the matter. I note that the interim order was issued after taking into consideration, the prima facie fraudulent, abusive and manipulative activities committed by certain persons identified in the said order. As already mentioned, the investigation in the matter has been completed and SEBI is in the process of initiating appropriate proceedings against the entities that are found guilty.

16. At this stage, I note the submission of Taksheel that all the independent directors of Taksheel have resigned from the post of Independent Directors of Taksheel. The same has also been confirmed from the annual report of Taksheel for the year 2011-12 that Mr. Venkata Ramana Nadimpalli, Mr. Vijay Kumar Devarkonda and Mr. Pramod Chada have resigned w.e.f. February 12, 2012. I note that the Independent Directors were signatories to the Prospectus. Since the said individuals have already undergone the restraint imposed vide the interim order for more than twenty one months, I am of the considered view that the directions issued against them vide the interim order can be vacated.

17. At this stage, I also note that Taksheel has failed to call back the ICDs of ` 23 crore, investment of ` 5 crore made in Indiabulls Mutual Fund - Liquid fund together with all the IPO proceeds lying unutilised with the company and deposit these in an interest bearing escrow account with a scheduled commercial bank. This is a non compliance with the interim order.

18. I, therefore, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(1), 11(4) and 11B thereof, hereby issue the following directions: a. the directions issued vide the ad-interim ex-parte order dated December 28, 2011 in the IPO matter of Taksheel Solutions Limited against Taksheel Solutions Limited [PAN: AAACI 7325P], Mr. Pavan Kumar Kuchana [PAN: ATAPK 6144L] and Mr. Ramaswamy Kuchana [PAN: ALIPK 4206D] is confirmed. The directions would continue to be in force till further orders from SEBI. b. the directions issued vide the ad-interim ex-parte order dated December 28, 2011 in the IPO matter of Taksheel Solutions Limited against Mr. Venkata Ramana Nadimpalli [PAN: AFCPB 5056J], Mr. Vijay Kumar Devarkonda [PAN: AFOPD 6957Q] and Mr. Pramod Chada [PAN: ALHPC 0682L] (the erstwhile Independent Directors of Taksheel Solutions Limited) are vacated with immediate effect.

19. This order shall remain in force till further directions.

Date: October 25th, 2013 PRASHANT SARAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOAD OF INDIA