Order in the matter of Zenet Software Ltd

WTM/MSS/ISD/49/2010 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF IPO IRREGULARITIES - DEALINGS BY: 1. Zenet Software Limited (Zenet) 2. Tauras Infosys Limited (Tauras) 3. Excell Multitech Limited (Excell) 4. Seer Finlease Pvt. Limited (Seer) and 5. Sujal Leasing and Finance Pvt. Limited (Sujal) IN THE INITIAL PUBLIC OFFERS OF: 1. IL&FS LTD. (ILFS) 2. IDFC LTD. (IDFC) 3. FCS SOFTWARE SOLUTIONS LTD. (FCS) 4. GATEWAY DISTRIPARKS LTD. (GATEWAY) 5. SHOPPERS STOP LTD. (SHOPPERS) 6. DATAMATICS TECHNOLOGIES LTD. (DATAMATICS) 7. NANDAN EXIM LTD. (NANDAN) 8. YES BANK LTD. (YBL) 9. SPL INDUSTRIES LTD. (SPL) 10. NATIONAL THERMAL POWER CORPORATION LTD. (NTPC) 11. DISHMAN PHARMACEUTICALS LTD. (DISHMAN), AND 12. TATA CONSULTANCY SERVICES LTD. (TCS). Date of Hearing: December 16, 2009 Appearances: For Noticees: Mr. Ajai A., Advocate, Corporate Law Chambers India For SEBI: Mr. Murugan N., Assistant Legal Adviser (Presenting Officer) Mr. B. J. Dilip, Deputy General Manager Mr. Vishal Padole, Assistant General Manager, and Ms. Kshama P. Wagherkar, Assistant Legal Adviser. ORDER UNDER SECTIONS 11, 11 (4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 1. On noticing certain irregularities in the transactions in the shares that were issued through initial public offers (IPOs) made during the period 2003-2005, before their listing on the stock exchanges, the Securities and Exchange Board of India (SEBI), pending investigations, vide an ad interim ex-parte order dated April 27, 2006, which itself was a show cause notice, directed certain persons, including Zenet Software Limited (Zenet), Tauras Infosys Limited (Tauras), Excell Multitech Limited (Excell), Seer Finlease Pvt. Limited (Seer) and Sujal Leasing and Finance Pvt. Limited (Sujal) (collectively referred to as ‘noticees’) not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions. The noticees did not reply to the show cause notice. Nor did they appear for personal hearing offered to them on November 4 and 19, 2008.

2. In the mean time, Tauras, Excell, Seer and Sujal amalgamated with Zenet in terms of a scheme of amalgamation approved by the Hon’ble High Court of Gujarat, vide order dated March 12, 2007. In terms of Para 4 of the scheme of amalgamation, the legal proceedings pending against the transferor companies, namely, Tauras, Excell, Seer and Sujal on the date of amalgamation shall be proceeded against the transferee company (Zenet Software Limited). Henceforth in this order, ‘Zenet’ refers to the erstwhile Zenet Software Limited, while ZSL refers to the Zenet Software Limited post-amalgamation of four entities, namely, Tauras, Excell, Sujal and Seer with Zenet.

3. On completion of the investigations, SEBI issued five separate, but similar Show Cause Notices (SCNs) in respect of the role and transactions of the five erstwhile entities (Zenet, Tauras, Excell, Seer and Sujal) who now constitute ZSL as under: SCN No. and Date Matter Alleged Violation Proposed Direction (Role of) Disgorgement (Rs.) Others 148192/19.12.2008 Seer Section 12A (a), (b), 4,70,71,546 + Interest Appropriate directions, 148202/19.12.2008 Excell (c) of the SEBI Act 3,82,42,880 + Interest including debarment 148205/19.12.2008 Tauras and Regulations 3 and 3,37,06,635 + Interest from securities market, 148208/19.12.2008 Zenet 4(1) of PFUTP 7,69,78,727 + Interest realization of shares in 149790/02.01.2009 Sujal Regulations, 2003 2,34,38,339 + Interest frozen demat accounts. Total: 21,94,37,857+ Interest It is was alleged in the SCNs that the noticees acted as financiers to two key operators (KOs), namely, Ms. Roopalben Panchal (Roopal) and M/s. Sugandh Estates and Investment Pvt. Ltd., (SEIPL) to enable them to apply for shares in the retail category in 12 IPOs, namely, IL&FS Ltd. (ILFS), IDFC Ltd. (IDFC), FCS Software Solutions Ltd. (FCS), Gateway Distriparks Ltd. (Gateway), Shoppers Stop Ltd. (Shoppers), Datamatics Technologies Ltd. (Datamatics), Nandan Exim Ltd. (Nandan), Yes Bank Ltd. (YBL), SPL Industries Ltd.(SPL), National Thermal Power Corporation Ltd. (NTPC), Dishman Pharmaceuticals Ltd. (Dishman) and Tata Consultancy Services Ltd. (TCS). It is alleged that the KOs transferred the shares received on allotment in these IPOs to the demat accounts of the noticees. They either transferred the corresponding refunds received from the issuers to the noticees or retained the same for making applications in the subsequent IPOs. Thus, the noticees, in collusion with the KOs, employed fraudulent, deceptive and manipulative practices to corner the shares meant for retail individual investors (RIIs) in 12 IPOs. They collectively made an unlawful gain of Rs.21,94,37,857 on sale of the shares so cornered. These acts were in violation of Section 12A (a), (b), (c) of the SEBI Act,

1992 and Regulations 3 and 4(1) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (PFUTP Regulations). Accordingly, the SCNs called upon ZSL to show cause as to why suitable directions under Section 11(4) read with Section 11 and Section 11B of the SEBI Act, including directions to restrain it from buying, selling or dealing in securities in any manner for a suitable period, to disgorge an aggregate amount of Rs.21,94,37,857 plus interest, and to realize shares in frozen demat accounts, not be issued against them. It also offered opportunities of inspection of documents and personal hearing.

4. SEBI followed up with ZSL seeking replies to the SCNs and offering opportunities for inspection of documents and personal hearing. ZSL kept on seeking extension of time for these over and over again on various pretexts. It replied to the SCNs vide five separate letters dated March 16, 2009. While SEBI was in the process of proceeding further in the matter, ZSL applied to SEBI for settlement of the proceedings under all the five SCNs through the consent procedure. SEBI, vide letter dated October 9, 2009, declined to settle the said proceedings as the terms offered were not appropriate. Accordingly, the proceedings revived. ZSL appeared for personal hearing on December 16, 2009 through its Advocate who submitted that the written submissions made to SEBI may be taken as final submission and that ZSL did not have any additional submissions to make.

5. I have carefully considered the SCNs, the replies dated March 16, 2009 and the oral submissions. Accordingly, I proceed to dispose of the proceedings on merits. Since the nature of allegation is the same under all the five SCNs which are directed against the same entity, I am disposing of these together by a common Order.

6. It is alleged in the SCNs that noticees provided finance to the KOs, who acquired the shares under the RII category of 12 IPOs and transferred the said shares so acquired in off-market to the noticees at issue price and refunded the balance money. Table A presents a summary of transactions of each of the noticees, as borne out from the SCN, based on which allegations have been made therein. To illustrate, Zenet transferred a sum of Rs.17.36 crore by cheque to SEIPL towards application money for 3,500 applications @ Rs.49,600 each in the retail category of NTPC. It received 7,48,546 NTPC shares at issue price of Rs.62 valued at Rs.4,64,09,852 (7,48,546 * Rs.62) from SEIPL on November 03, 2004, before its listing on November 05, 2004. It also received a refund of Rs.12,71,90,148 from the KO. Thus, Zenet received back the entire money, it had provided for making 3,500 applications under the RII

Table A: Transactions by Financiers (Zenet, Tauras, Excell, Seer and Sujal) KO IPO Amount (Rs.) Issue Details No. of Refunds from KO through Excess provided by Zenet Issue Retail Application Retail Allotment Applica- Shares Money Roll Over paid or Price Size Size ions (Rs.) (Rs.) for Balance (Rs.) No. of Amount No. of Amount made No. of Value of other IPOs with KOs Shares (Rs.) Shares (Rs.) Shares Shares (Rs.) (Rs.) 1 2 3=(11+12+13+14) 4 5 6 = (4*5) 7 8 =(4*7) 9 10 11=(4*10) 12 13 14 Transactions by Zenet SEIPL NTPC 17,36,00,000 62 800 49600 214 13,268 3,500 7,48,546 4,64,09,852 12,71,90,148 0 IDFC 1,30,90,000 34 1,400 47,600 266 9,044 275 73,150 24,87,100 1,06,02,900 0 FCS 17,36,77,500 50 900 45,000 100 5,000 3,860 61,000 30,50,000 17,06,27,500 0 Roopal Dishman 21,03,43,750 175 250 43,750 50 8,750 4,808 81,600 142,80,000 11,23,13,750 8,37,50,000 (Datamatics) Datamatics 2,87,000+Roll over 110 450 49,500 50 5,500 1,698 69,650 76,61,500 7,63,75,500 =8,40,37,000 Gateway 4,53,60,000 72 630 45,360 90 6,480 1,000 87,390 62,92,080 3,90,67,920 0 Shopper 2,18,75,000 238 200 41,650 25 5,950 525 9,800 23,32,400 0 1,95,42,600 (Nandan) Nandan 3,49,57,400+ Roll 20 2,250 45,000 250 5,000 1,212 1,20,000 24,00,000 5,21,00,000 0 over = 5,45,00,000 YBL 2,65,00,000 45 1,050 47,250 150 6,750 560 92,855 41,78,475 2,18,75,000 4,46,525 SPL 2,45,00,000 70 700 49,000 100 7,000 500 32,900 23,03,000 2,21,97,000 (IDFC) ILFS 2,30,15,000 125 350 43,750 50 6,250 826 10,650 13,31,250 2,16,83,750 (IDFC) IDFC 3,65,90,000 + Roll 34 1,400 47,600 266 9,044 1,970 2,75,000 93,50,000 8,42,77,950 0 -1,31,57,200 over =8,04,70,750 FCS 6,56,75,000 50 900 45,000 100 5,000 1460 31,000 15,50,000 6,41,25,000 0 Transactions by Tauras SEIPL ILFS 3,91,56,250 125 350 43,750 50 6,250 895 20,350 25,43,750 43,750 3,65,68,750 (IDFC) IDFC 86,51,250+Roll 34 1,400 47,600 266 9,044 950 2,52,700 85,91,800 3,66,28,200 0 over = 4,52,20,000 FCS 3,87,82,500 50 900 45,000 100 5,000 862 19,300 9,65,000 3,78,17,500 0 Roopal TCS 9,21,00,000 850 49 41,650 17 14,450 2,211 65,600 5,57,60,000 3,60,00,000 3,40,000 Shoppers 1,19,50,000 238 200 41,650 25 5,950 287 5,375 12,79,250 0 1,06,70,750 (Nandan) Nandan 1,43,29,250 + Roll 20 2250 45,000 250 5,000 556 55,000 11,00,000 2,39,00,000 0 over =2,50,00,000 YBL 3,30,00,000 45 1050 47,250 150 6,750 700 80,590 36,26,550 2,10,00,000 83,73,450 (ILFS) ILFS 1,39,04,500+ Roll 125 350 43,750 50 6,250 510 10,650 13,31,250 2,09,46,700 over= 2,22,77,950 (IDFC) IDFC 2,09,46,700 34 1,400 47,600 266 9,044 440 1,30,000 44,20,000 1,69,95,950 0 -4,69,250 FCS 3,48,75,000 50 900 45,000 100 5,000 775 16,500 8,25,000 3,40,50,000 0

Transactions by Excell SEIPL TCS 12,87,72,000 850 49 41,650 17 14,450 3,090 49,640 4,21,94,000 8,65,78,000 0 ILFS 87,50,000 125 350 43,750 50 6,250 200 3,650 4,56,250 82,93,750 (IDFC) IDFC 36250 +Roll Over 34 1,400 47,600 266 9,044 175 46,550 15,82,700 67,47,300 0 = 83,30,000 FCS 2,30,62,500 50 900 45,000 100 5,000 153 11,100 5,55,000 2,25,07,500 0 Roopal Nandan 1,85,00,000 20 2,250 45,000 250 5,000 411 40,000 8,00,000 1,77,00,000 YBL 4,60,00,000 45 1,050 47,250 150 6,750 974 1,61,180 7,25,310 3,88,75,000 -1,28,100 SPL 6,79,34,000 70 700 49,000 100 7,000 1,387 65,300 45,71,000 6,33,60,000 3,000 (IDFC) ILFS 1,13,05,000 125 350 43,750 50 6,250 259 44,000 55,00,000 58,05,000 (IDFC) IDFC 21073000+ Roll 34 1,400 47,600 266 9,044 1,900 6,58,000 2,23,72,000 6,79,04,000 -38,000 Over = 9,02,38,000 FCS 8,19,50,000 50 900 45,000 100 5,000 1,460 40,000 20,00,000 7,99,50,000 0 Transactions by Seer SEIPL IDFC 3,57,00,000 34 1,400 47,600 266 9,044 770 199500 67,83,000 2,89,17,000 0 Roopal Shoppers 3,18,00,000 238 200 41,650 25 5,950 764 14,250 33,91,500 2,84,08,500 (Nandan) Nandan 45091500+Roll over 20 2,250 45,000 250 5,000 1,713 1,60,000 32,00,000 7,03,00,000 = 7,35,00,000 YBL 9,50,00,000 45 1,050 47,250 150 6,750 201 3,32,875 1,49,79,375 8,00,20,625 (ILFS) ILFS 25,81,250 + Roll 125 350 43,750 50 6,250 1888 55,550 6,94,3750 24,42,000 7,32,16,125 Over = 8,26,01,875 (IDFC) IDFC 1,07,025 +Roll Over 34 1,400 47,600 266 9,044 1,541 4,65,000 1,58,10,000 5,75,13,150 0 = 7,33,23,150 FCS 6,50,00,000 50 900 45,000 100 5,000 1,445 30,000 15,00,000 6,35,00,000 0 Transactions by Sujal SEIPL YBL 7,08,75,000 45 1,050 47,250 150 6750 1,500 1,58,100 71,14,500 6,37,60,500 0 ILFS 8,33,43,750 125 350 43,750 50 6,250 1,905 40,600 50,75,000 2,87,500 7,79,81,250 (IDFC) IDFC 1,00,78,750 + Roll 34 1,400 47,600 266 9,044 1,850 4,92,100 1,67,31,400 7,13,28,600 0 over = 8,80,60,000 Roopal Nandan 86,21,850 20 2,250 45,000 250 5,000 192 20,000 4,00,000 82,21,850 0

Table B: Computation of unlawful gains by the Financiers (Zenet, Tauras, Excell, Seer and Sujal) KO IPO Date of Receipt of Shares from KOs Sale of Shares Unlawful Listing Gain (Rs.) Date of No. of Transfer Date of Sale No. of Sale Price 10=8*(9-6) Receipt Shares Price Shares (Rs.) (Rs.) Sold 1 2 3 4 5 6 7 8 9 10 Unlawful gains by Zenet (ZSL) SEIPL NTPC 05.11.04 03.11.04 7,39,558 62 04.11..04 7,32,522* 75.55 99,25,673 10.11.04 3,424 09.11.04 16,024 75.39 2,14,561 23.11.04 4,066 19.01.05 642 22.04.05 428 30.05.05 428 IDFC 12.08.05 09.08.05 73,150 34 10.08.05 73,150* 69.50 25,96,825 FCS 19.09.05 19.09.05 61,000 50 19.09.05 2,100* 179.10 2,71,110 22.09.05 58,900 213.65 96,38,985 Roopal Dishman 22.04.04 22.4.2004 81,000 175 22.04.04 12,000 541.25 43,95,000 27.4.2004 550 8,000 452.39 22,19,120 19.5.2004 50 23.04.04 30,000 457.26 84,67,800 20,000 455.39 56,07,800 27.04.04 100 468.03 29,303 29.04.04 550 473.95 1,64,422.50 20.5.05 50 449.96 13,748 22.04.04* 10,000 541.25 36,62,500 27.04.04* 900 541.25 3,29,625 Datamatics 7.05.04 5.5.2004 66,600 110 07.05.04 34,300 127.20 6,17,050 17.5.2004 3050 19.05.04 1,575 06.05.04* 33,775 127.20 5,80,930 Gateway 31.03.04 30.03.05 87,390 72 31.03.05 87,390 95.49 20,52,791 Shopper 23.05.05 19.05.05 9,800 238 20.05.05* 9,800* 372.60 13,19,080 Nandan 13.06.05 10.06.05 1,20,000 20 18.06..05 to 60,200 62.52 25,59,704 21.07.05 59,800 80.55 36,20,890 YBL 19.10.05 11.07.05 92,855 45 12.07.05 92,855 61.98 15,76,678 SPL 26.07.05 25.07.05 23,900 70 26.07.05 23900 105.86 8,57,054 26.07.05 9,000 27.07.05 9000 3,22,740 ILFS 27.07.05 27.07.05 10,650* 125 27.07.05* 10650 185.15 6,40,597.5 IDFC 12.08.05 09.08.05 2,75,000 34 10.08.05* 167580 69.5 59,49,090 12.08.05 1,97,420 62.14 30,22,799 FCS 21.09.05 21.09.05 31,000 50 19.10.05 31000 214.97 5114070 Total 7,57,69,947 Unlawful gains by Tauras (ZSL) SEIPL ILFS 27.07.05 25.7.05 20,350 125 22.09.05 8,350* 189.98 5,42,583 12,000* 185.15* 7,21,800 IDFC 12.08.05 09.08.05 2,51,902 34 12.08.05 2,52,700 65.20 78,84,240 12.08.05 266 02.09.05 532 FCS 21.09.05 19.09.05 19,300 50 23.09.05 19,300 215 31,84,500 Roopal TCS 25.08.05 24.08.04 to 65,600 850 25.08.04 4,500 989.13 6,26,085 24.08.05 26.08.04 4,000 989.64 5,58,560 26.08.04 10,000 991.57 14,15,700 27.08.04 7,840 961.90 8,77,296 10.09.04 500 981.65 65,825 38,760* 987.95 53,46,942 Shoppers 23.05.05 19.05.05 5,375 238 23.05.05 5,375 412.96 9,40,410 Nandan 13.06.05 10.06.05 55,000 20 18.07,05 55,000* 68.69 26,77,950 YBL 19.10.05 11.07.05 80,590 45 12.07.05 80,590 62.3 13,94,207 ILFS 27.07.05 25.7.05 10,650 125 27.07.05 10,650* 189.98 6,92,037 IDFC 12.08.05 09.08.05 1,30,000 34 12.08.05 13,0000 65.2 40,56,000 FCS 21.09.05 21.09.05 16,500 50 23.09.05 16,500 215 27,22,500 Total 3,37,06,635 Unlawful gains by Excell (ZSL) SEIPL TCS 25.8.04 24.08.04 to 49,640 850 24.08.04 to 10,000 989.80 13,98,000 24.08.05 24.08.05 11,500 991.07 16,22,305

5,000 1031.07 9,05,350 2,400 1030.50 4,33,200 20,400* 987.95 28,14,180 ILFS 27.07.05 26.7.05 3,650 125 22.08.05 3,650 189.80 2,36,520 IDFC 12.08.05 12.08.05 46,650 34 12.08.05 46,650 65.40 14,64,810 FCS 21.09.05 20.09.05 11,100 50 23.09.05 11,100 214.73 18,28,503 Roopal YBL 19.10.05 11.07.05 1,61,180 45 21.08.05 1,61,180 60.97 25,74,045 SPL 26.07.05 25.07.05 65,300 70 26.07.05 65,300 105.03 22,87,459 ILFS 27.07.05 25.7.05 10,650 125 22.08.05 10,650 189.80 6,90,120 IDFC 12.08.05 09.08.05 6,58,000 34 12.08.05 4,90,420 65.40 1,53,99,188 1,67,580* 69.50 59,49,090 FCS 21.09.05 21.09.05 40,000 50 23.09.05 40,000 214.73 65,89,200 Nandan 13.06.05 10.06.05 40,000 20 11.07.05 40,000 59.50 15,80,000 Total 4,57,71,970 Unlawful gains by Seer (ZSL) SEIPL IDFC 12.08.05 09.08.05 1,99,234 34 12.08.05 1,99,500 67.31 66,45,345 12.08.05 266 Roopal Shoppers 23.05.05 19.05.05 14,250 238 23.05.05 14,250 411.86 24,77,505 Nandan 13.06.05 10.06.05 1,60,000 20 28.06.05 21,000 46.14 5,48,940 12.07.05 65,000 59.00 25,35,000 13.07.05 62,703 59.85 24,98,714 14.07.05 11,297* 59.24 4,43,294 YBL 19.10.05 11.07.05 3,32,875 45 12.07.05 3,32,875 61.13 53,69,274 ILFS 27.07.05 25.7.05 55,550 125 12.08.05 55,550 189.99 36,10,195 IDFC 12.08.05 09.08.05 4,65,000 34 22.09.05 4,65,000 67.31 1,54,89,150 23.09.05 FCS 21.09.05 21.09.05 30,000 50 12.07.05 16,063 214.18 26,37,223 13,937 231.44 25,28,729 Total 4,47,83,369 Unlawful Gain of Sujal (ZSL) Roopal Nandan 13.06.05 10.06.05 20,000 20 18.07.05 20,000 64.19 8,83,800 SEIPL YBL 19.10.05 11.07.05 1,58,100 45 12.07.05 1,58,100 61.59 26,22,879 ILFS 27.07.05 25.7.05 40,600 125 22.08.05 40,600 194.37 28,16,422 IDFC 12.08.05 09.08.05 4,92,100 34 12.08.05 4,92,100 68.78 1,71,15,238 Total 2,34,38,339 GRAND TOTAL of Unlawful gains by the noticees 22,34,70,260 * Off-market sales category of NTPC IPO, in the form of NTPC shares valued at issue price and refund of cash from the KO.

Zenet undertook similar transactions in respect of other IPOs as well and received the shares around the listing date and refund of the balance money provided. At times, the balance money over and above the value of shares transferred in one IPO was retained by KOs for making applications in subsequent IPOs. For example, the balances of Rs.2,21,97,000 and Rs.2,16,83,750, after transfer of SPL and ILFS shares to Zenet, were retained by KO for making applications in IDFC IPO. Similarly, the balances of the moneys provided by Tauras, Excell and Seer for ILFS IPO was retained by KO for making applications in IDFC IPO. The noticees together provided a sum of Rs.200 crore to KOs for making applications in 12 IPOs. They received back Rs.35 crore by way of shares priced at issue price and the balance Rs.165 crore by cheques. The finance provided (column 3 of the Table) is equal to the product of columns 6 and 9, which indicates utilization of funds for each IPO, which is equal to the sum of columns 11 to 14, which indicates return of money. Table B presents the unlawful gains made on sale of such shares by each of the noticees.

To illustrate, Zenet received 7,48,546 NTPC shares at issue price of Rs.62 for a total consideration Rs.4,64,09,852. It sold these shares for a total consideration of Rs.5,65,50,086 and thereby made an unlawful gain of Rs.1,01,40,234. Zenet made similar gains in respect of other IPOs as indicated in Table B. Similar is the story about the transactions by other four noticees, namely, Tauras, Excell, Seer and Sujal, as indicated in Tables A and B.

7. The figures in Tables A and B indicate a total unlawful gain of Rs.22,34,70,260 which is different from the unlawful gain of Rs.21,94,37,857 alleged in the SCNs. I find that the SCNs have a few computational errors which have overstated / understated the unlawful gains in a few IPOs. For example, the SCN dealing with role of Excell listed receipt of 40,000 Nandan shares, but did not include the gains from sale of these shares in the unlawful gain. This understated gain of Excell by Rs.15,80,000. Similarly, the SCN dealing with the role of Zenet took the entire proceeds from sale of 59,800 Nandan shares as unlawful gain without deducting the cost price. The actual unlawful gain from sale of these shares is Rs.36,20,890, and not Rs.48,16,890. This overstated the unlawful gain of Zenet by Rs.11,96,000. Based on the transactions listed in the SCNs, the actual unlawful gain works out Rs.22,34,70,260.

8. I find that ZSL has replied to the SCNs dealing with the role of Zenet, Tauras, Excell, Seer and Sujal. A summary of the submissions made by ZSL in its replies is as under: i. ZSL had stated in its replies to SCNs that the replies were part replies and that it reserved the right to file further reply after inspection of documents. However, at the time of hearing, it submitted that it has no further submission to make. ii. The noticees did not have any relationship with the KOs except that of a lender and a borrower. They had agreed that the loan would be repaid partly in kind (shares) and partly by money. The shares given towards repayment would be transferred at IPO price so as to earn a return of 3% per month. iii. The KOs did not apply for shares in various IPOs at the behest of the noticees. This is evident from the fact that the noticees provided loans after the closure of the IPOs and the shares received by them from the KOs do not have any correlation with the amount advanced. iv. The noticees did not make all the alleged payments and receipts to and from KOs. v. They did not make an unlawful gain of Rs.21,94,37,857, as alleged in the SCNs. They made a gain of Rs.11,86,63,048, net of expenses and taxes.

vi. ZSL needed the statements of the KOs and would like to cross examine them on those statements.

9. The charge hinges on the relationship between the noticees and the KOs. Was it a relationship of only that of a lender and a borrower of money, as claimed by ZSL? I note from the submissions of ZSL that the noticees had an understanding to the effect that they would extend money to the KOs on demand. The KOs, after acquiring shares with the said money, would transfer the same to the demat accounts of the noticees towards security / repayment of loan. However, the same would be transferred at issue price so as to generate a return of 3% per month. The KOs would return the excess money over and above the shares transferred by cash to the noticees. The noticees would then sell the shares which were received towards security / repayment and appropriate the entire gain therefrom. Thus, the amount would be repaid by the KOs by way of transfer of shares received in allotment at issue price and the balance amount of the loan by cash. This understanding would ensure a return of 3% per month. They further submitted that they did not have knowledge that the money was being used by KOs to make applications for shares in IPOs.

I find that this story has many inconsistencies. For example, the lenders needed security not at the time of extending loan, but only after the shares were acquired by the borrowers; lender needed to secure only a small part of the loan, that too, in some cases; the borrowers provided the shares valued at issue price towards security; the lenders sold the shares received towards security in a few days instead of returning the same to the borrowers; the lenders appropriated the entire gains from the sale of shares; receipt of shares at issue price generated 3% monthly return irrespective of the sale price; etc. Leaving aside the inconsistencies, I find this story highly incredulous. The noticees, who claim to be professional money lenders and would appear so by virtue of the amount extended by them to the KOs (probably to others also), extended loans without knowing the end use, but agreed to repayment of the loan in a few days by way of transfer of shares received on allotment at issue price. Generally, a money lender knows the end use, but does not appropriate the entire gains from the end use.

In this case, if ZSL is to be believed, the noticees did not know the end use, but they had precise understanding with the borrowers that the KOs would transfer the shares acquired with their money and they would transfer the shares at issue price. This makes it obvious that the noticees knew that the money was being used for acquiring shares in IPOs. The striking features of these transactions are that the money was provided to KOs around the closure of the IPOs. The KOs used the money for making IPO applications, and thereafter received corresponding allotment of shares and refunds in cash. They transferred the corresponding refunds as well as the shares received on allotment to the noticees around the date of listing. The timing and manner of movement of shares and funds from and to KOs, by no stretch of imagination, can be associated with normal lending of money. The movement of precise amount of money and quantity of shares between the KOs and the noticees repeatedly over 12 successive IPOs (and may be others not covered in the SEBI investigation) leaves no doubt in my mind that the noticees financed the IPO applications in the RII category made by the KOs with a view to corner the shares.

10. ZSL has not contested the receipt of shares and their disposal by the noticees. The fact is that the noticees together received huge volumes of shares in the off-market from two specific persons around the date of listing over successive IPOs as under: IPO No. of shares received from Total SEIPL Roopal ILFS 64,600 1,20,850 1,85,450 IDFC 11,17,200 15,28,000 26,45,200 FCS 91,400 1,17,500 2,08,900 GATEWAY - 87,390 87,390 SHOPPERS - 29,425 29,425 DATAMATICS - 69,650 69,650 NANDAN - 4,75,000 4,75,000 YBL 1,58,100 6,67,500 8,25,600 SPL - 98,200 98,200 NTPC 7,48,546 - 7,48,546 DISHMAN - 81,600 81,600 TCS 49,640 65,600 1,15,240 This fact itself, leave aside the timing and amount of movement of money between the noticees and the KOs, signifies prior understanding between them. Why should these two persons transfer the shares at issue price around the date of listing to the noticees when they had option to sell them at a much higher price in the market? How do these two persons search out in the off-market the noticees who are not interested in making IPO applications directly, but willing to buy these shares in huge quantities from off-market? Why only these two persons, and not any body else, could find out the noticees in off-market? Why the noticees received the shares only from these two persons and from no one else? This is clearly not a relationship of a lender and borrower of money.

11. ZSL has submitted that the noticees provided loans after the closure of IPOs and hence they could not have financed the IPOs. It has, by way of example, submitted that IDFC IPO closed on July 22, 2005, while the money was provided by noticees to the KO on July 26, 2005. It is clear from this and other instances cited by ZSL that the noticees provided money before the closure, on the day of closure and after the closure of the issue. What is, however, material is that they provided the money at the right time, i.e., before it was due for collection by the respective issuers. Taking the same example of IDFC IPO, I find that the noticees provided money to KOs on July 26, 2005 and the money from the bank account of KOs was debited on July 27, 2005 towards application money. It is a matter of common sense that one parts with money only when it is required and, therefore, natural that the noticees provided money in some cases after the closure of the issues, but before it was due for payment to the issuers. I find this argument of ZSL rather as an attempt to mislead the proceedings.

12. ZSL has submitted that the shares received by the noticees do not correspond to the amount financed. It is obvious because every application in IPO does not fetch an allotment. If all IPO applications financed by the noticees had received allotment, the KOs could have transferred the shares corresponding to the amount of finance. Besides, it is the noticees alone who have the full and exact information of the transactions. Investigation may not have been able to lay hands on all the transactions, more so, when the noticees were not cooperative. The investigation had specifically sought from ZSL, vide letter dated August 20, 2008, the details of their transactions. It, however, did not co-operate. Nevertheless, I find amazing correspondence in many IPOs. For example, Zenet extended Rs.1,30,90,000 to SEIPL. This enabled SEIPL to make exactly 275 applications in the retail category of IDFC IPO, where the application size was 1,400 shares @ Rs.34 (275 * 1,400 * 34 = Rs.1,30,90,000). Each application received an allotment of 266 shares in the retail category. 275 applications fetched an allotment of 73,150 shares (275 * 266).

The KO transferred the entire allotment to Zenet at issue price for a total value of Rs.24,87,100 (73,150 * Rs.34). It paid the balance money of Rs.1,06,02,900 (Rs.1,30,90,000 – Rs.24,87,100) by cash to Zenet. Thus, Zenet got back the money it had advanced to SEIPL for IDFC IPO. I find this kind of correspondence in many cases. I find almost correspondence in a few cases. For example, Zenet extended Rs.17.36 crore to SEIPL. This enabled SEIPL to make exactly 3,500 applications in the retail category of NTPC IPO, where the application size was 800 shares @ Rs.62 (3,500 * 800 * 62 = Rs.17.36 crore). Each application received an allotment of 214 shares in the retail category. 3,500 applications fetched an allotment of 7,49,000 shares (3,500 * 214). The KO transferred almost the entire allotment (7,48,546) to Zenet at issue price for a total value of Rs.4,64,09,852 (7,48,546 * Rs.62). It paid the balance money of Rs.12,71,90,148 (Rs.17,36,00,000 – Rs.12,71,90,148) by cash to Zenet. In the cases cited as examples here, ZSL has not contested any payment / receipt to / from KO. However, more important is the correspondence between the amount provided by the noticees, the amount utilized by KOs in respective IPOs and the refunds made by KOs by way of cash and shares.

This is evident from Table A, where the product of columns 6 and 9, which indicates utilization of funds for each IPO equals to the sum of columns 11 to 14, which indicates return of money, which equals to the money provided by the noticees to the KOs in column 3. Another correspondence is the total amount provided by five noticees together with the total refunds (shares plus money) received by them. They jointly provided a sum of Rs.200 crore and received Rs.35 crore by way of shares and Rs.165 crore in cash. Still another relevant correspondence is that the amount provided by the noticees enabled an exact number of applications under the retail category of the IPOs indicating the intent to manipulate retail segment of IPOs.

13. Had Zenet applied in individual capacity as a retail individual investor, it could have got an allotment of 266 IDFC shares or 214 NTPC shares. By making applications through KOs and providing finance to them for the purpose of making applications, Zenet could corner 73,150 IDFC and 7,48,546 NTPC shares. Had Zenet not done this, these 73,150 IDFC shares and 7,48,546 NTPC shares would have been available for allotment to RIIs. Similarly, Zenet and other four noticees acquired shares in different IPOs to the detriment of the RIIs, as indicated in Table A. Thus, the noticees clearly cornered the shares meant for RIIs and in the process, deprived them of their rightful share in allotment in these IPOs.

14. The SCNs allege 164 payments to KOs for a total amount of Rs. 200 crore, 113 receipts from KOs for a total amount of Rs.165 crore. Of these, ZSL has contested 29 payments for an amount for Rs.26 crore and 23 receipts for an amount of Rs. 33 crore. The details are as under: Noticees KOs Alleged in the SCNs Contested by ZSL Payments to KO Receipts from KO Payments to KO Receipts from KO No. Amount (Rs. cr) No. Amount (Rs. cr) No. Amount (Rs. cr) No. Amount (Rs. cr) Zenet SEIPL 31 36,03,67,500 33 30,84,20,548 12 16,58,37,500 10 14,32,92,500 Roopal 25 50,19,63,150 20 45,01,35,120 1 5,00,00,000 5 8,68,75,000 Tauras SEIPL 11 8,65,90,000 7 7,44,89,450 0 0 0 0 Roopal 21 20,01,58,750 10 13,19,45,950 1 30,00,000 1 1,60,00,000 Excell SEIPL 22 16,06,20,750 16 11,58,32,800 0 0 0 0 Roopal 26 24,67,62,000 10 20,44,29,000 13 3,23,75,000 6 8,14,18,150 Seer SEIPL 4 3,57,00,000 2 2,89,17,000 0 0 0 0 Roopal 8 24,30,72,750 7 19,71,80,150 2 1,31,00,000 1 24,42,000 Sujal SEIPL 15 16,42,97,500 6 13,53,76,600 0 0 Roopal 1 86,21,850 2 82,21,850 0 0 Total 164 2,00,81,54,250 113 1,65,49,48,468 29 26,43,12,500 23 33,00,27,650 As stated earlier, ZSL did not submit details of the payments and receipts made between the noticees and the KOs.

Contesting the transactions alleged in the SCNs at this stage raises doubt about its motive. Further, this dispute is of very little help when the shares received from the KOs in off-market and sold by the noticees are not disputed. Rather this supports the case of SEBI that it was not a relationship of lending/borrowing; there was an understanding between the noticees and KOs which ensured transfer of lakhs of shares received on allotment to the noticees at issue price. Nevertheless, I have examined a few contested payments. ZSL has contested, for example, ten receipts and six payments by Zenet in the IPO of FCS. I find that these payments have been made and these receipts received by two front entities, viz., Shree Saibaba Finsec Pvt. Ltd. and Aegis Healthcare Ltd. on behalf of Zenet. The bank statements of these entities reflect these receipts and payments. That these payments and receipts have been made on behalf of Zenet is reflected in the ledger of SEIPL. The corresponding number of shares received by Zenet further substantiates this. Creating layers in funding is a known practice among persons who attempt to circumvent the law.

It is neither possible nor desirable for me to deal with every contested payment/receipt, as this does not have any bearing on the charge.

15. ZSL has contested the amount of gain made by the noticees as under: Noticees Through Unlawful Gain (Rs.) As claimed by ZSL Profits (Rs.), at KO Alleged in the Reworked, as Profit (Rs.) Profit (Rs.) net of prices (1) (2) SCNs (3) stated in Para-7 (5) expense and tax indicated by (4) (6) ZSL (7) Zenet SEIPL 2,26,59,934 2,26,47,154 1,28,11,421 84,81,619 2,28,93,406 Roopal 5,43,18,793 5,31,22,793 4,17,63,518 2,76,69,407 5,23,29,637 Tauras SEIPL 1,23,33,123 1,23,33,123 83,59,208 55,35,897 1,24,36,583 Roopal 2,13,73,242 2,13,73,512 1,54,95,820 1,02,61,627 2,13,73,512 Excell SEIPL 1,07,02,868 1,07,02,868 84,96,390 56,28,594 1,07,02,868 Roopal 2,75,40,012 3,50,69,102 2,68,31,138 1,77,47,398 3,51,17,969 Seer SEIPL 66,45,345 66,45,345 66,45,345 43,98,856 66,45,345 Roopal 4,04,26,201 3,81,38,024 3,56,60,724 2,35,96,346 3,57,07,412 Sujal SEIPL 2,25,54,539 2,25,54,539 2,23,02,071 1,47,57,972 2,24,95,782 Roopal 8,83,800 8,83,800 8,83,800 5,85,332 8,83,800 Total 21,94,37,857 22,34,70,260 17,92,49,435 11,86,63,048 22,05,86,584 There is no dispute about the number of shares received from KOs and sold by the noticees.

I find that the difference in gains computed by the ZSL from that in the SCNs has arisen on account of two reasons. First, ZSL has excluded the expenses on transactions and taxes paid on the gains to arrive at the profit. In case of illegal gains, what is material is the total gain, and not net of expenses incurred to make illegal gain. Second, ZSL has used prices different from those used in the SCNs in case of some sales. It has, however, not produced any documentary evidence in support of the prices. I find that most of the sales by the noticees have been made in the off-market. ZSL has indicated a lower price for these off-market transactions in all shares, much lower than the corresponding prices for market transactions in the same shares. For example, as per annexure A to the reply of ZSL to SCN, Zenet sold 16,024 NTPC shares in market for prices ranging from Rs.77.99 to Rs.87.26. However, it sold 7,32,522 NTPC shares in off-market @ Rs.62.58 per share. As per annexure B to the same reply, Zenet sold IDFC shares in off-market @ Rs.35.05 and in market @Rs.62.14 per share. I find it difficult to believe that Zenet always sold the shares in off-market at a much lower price.

If it has actually done so, it has done for a consideration of different nature. In case of off-market transactions, there is no way to verify the prices. Therefore, SCNs have rightly used closing prices on the listing day at which the noticees could have sold the shares in the market.

16. ZSL has stated that Zenet sold 73,150 IDFC shares in market. However, SCN alleges that it was an off-market transaction. ZSL has not supported its claim by way of documentary evidence, while SEBI has supported its claim by demat statements. Therefore, I am inclined to accept the SEBI’s classification of transactions into off-market and on-market categories. Using the market prices for market transactions, as indicated by ZSL, and the closing prices on the listing day for off-market transactions, as used in the SCNs, the amount of unlawful gain works out Rs.22,05,86,584, as indicated in column 7 of the Table under Para 15 above.

17. ZSL has sought a copy of statements of the KOs recorded by SEBI and sought an opportunity to cross examine them. I find that SEBI has relied only upon the bank and demat statements of the noticees and the KOs. SEBI has not recorded any statement of KOs which is being relied upon in any of the five SCNs. Therefore, the need for cross examination of KOs is misplaced.

18. In the facts and circumstances of the case, I find that the noticees financed the KOs to make applications under the retail category of 12 IPOs and received the shares on allotment from the KOs as per the prior understanding with them. By doing this, they deprived the RIIs of their legitimate share in the allotment in the IPOs and made an unlawful gains of Rs.22,39,74,472 to the detriment of the RIIs. The noticees, therefore, manipulated the demand for shares in the RII category of IPOs and distorted the market integrity. I, therefore, conclude that the noticees employed fraudulent, deceptive and manipulative practices to corner the shares meant for RIIs in 12 IPOs stated in tables above, and made unlawful gains by selling the shares so cornered. Hence, I hold that the noticees have violated Section 12A (a), (b) and (c) of the SEBI Act and Regulations 3 and 4 (1) of the PFUTP Regulations.

19. These acts of serious irregularities have enriched the noticees at the cost of RIIs and threatened the market integrity and orderly development of the market and call for regulatory intervention to protect the interest of investors. Accordingly, in exercise of the powers conferred upon me under Section 19, read with Sections 11, 11 (4) and 11B of the SEBI Act, 1992, and after taking into account the period of prohibition already undergone by the noticees pursuant to the interim order, I hereby issue the following directions:

a) Zenet Software Ltd. (PAN AAACZ0978K) shall not buy, sell or deal in the securities market in any manner whatsoever or access the securities market, directly or indirectly, for one year from the date of this Order; and b) Zenet Software Limited shall disgorge the unlawful gains of Rs.22,05,86,584. It shall also pay Rs.8,82,34,634 being the simple interest at the rate of 8% per annum for 5 years (2004-09) on the unlawful gains of Rs.22,05,86,584. Thus, Zenet Software Limited shall pay a total amount of Rs.30,88,21,218 (Rupees thirty crore eighty eight lakh twenty one thousand two hundred and eighteen only) within 45 (forty five) days from the date of this Order by way of crossed demand draft drawn in favour of “Securities and Exchange Board of India”, payable at Mumbai. c) In case the aforesaid amount Rs.30,88,21,218 is not paid within the specified time, Zenet Software Limited shall be restrained from buying, selling or dealing in securities market in any manner whatsoever or accessing the securities market, directly or indirectly, for a further period of nine years, without prejudice to SEBI’s right to enforce disgorgement.

20. This Order shall be served on all recognized stock exchanges and depositories to ensure that Zenet Software Limited is not allowed to undertake transactions as prohibited in Para 19 above.

21. This Order shall come into force with immediate effect.

PLACE: MUMBAI M. S. SAHOO DATE: April 23, 2010 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA