Order in the matter of Zylog Systems Limited

WTM/GM/EFD/64/2017-18 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 11 AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 FOR FAILURE TO REDRESS INVESTOR GRIEVANCES IN THE MATTER OF ZYLOG SYSTEMS LIMITED. In respect of Sr. No. Name of the noticees Designation PAN 1 Mr. Sudarshan Venkatraman Chairman and CEO AWJPS4793B 2 Mr. Ramanaujam Sesharathnam Managing Director AERPR6301N 3 Mr. Parthasarathy Srikanth Executive Director AAQPS9253H 4. Mr. Madurai Gajanathan Independent Director AEGPG7477R 5. Mr. Vasanthakumar Ayyavu Palanichamy Nominee Director ACDPV2342K

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

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

Order in the matter of Zylog Systems Limited.

declared was Rs.16,44,64,200 (Rupees Sixteen crores forty four lakhs sixty four thousand two hundred only).

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

4. Therefore, SEBI issued a common Show Cause Notice (SCN) dated October 20, 2016 to all the directors, calling upon them to show cause as to why suitable directions under Section 11 and 11B of the SEBI Act, 1992 should not be issued against them for violation of Sections 205(1A) and 207 of the Companies Act, 1956. The SCN alleged that the directors of the company had knowledge about the declaration of the dividend and the non-payment of the declared dividend by the company. Thus the directors have failed to comply with the obligations and duties mandated under section 205(1A) of the Companies Act, 1956.

5. Considering the facts and circumstances of the case, replies and submissions of Mr. S. Rajagopal & Mr. V K Ramani, a suitable order was passed on June 20, 2017 against Mr. S. Rajagopal & Mr. V K Ramani.

6. Service of SCN, Reply of the noticees to the SCN and personal hearing :- A. The SCN addressed to Mr. Ramanaujam Sesharathnam and Mr. Sudarshan Venkatraman at their US address was sent by Registered Post Acknowledgement Due, but the same returned undelivered with a remark that the Addressee not available at time of delivery, Addressee advised to pick up the item. However, Mr. Ramanaujam Sesharathnam and Mr. Sudarshan Venkatraman failed to submit any reply to the SCN. B. The SCN issued to Mr. Madurai Gajanathan was forwarded by him to ZSL for defending the contentions in the allegation in the SCN. Mr. Parthasarathy Srikanth confirmed the same. C. In response to the SCN, Mr. Parthasarathy Srikanth vide letter dated December 26, 2016 inter alia submitted that:- a) He was on the board of ZSL at the time when the subject event had transpired but with no powers to influence the decision of the Board of Directors and supersede the instructions and control of the core management comprising of the Chairman & Chief Executive Officer and Managing Director and Chief Operating Officer of the company.

He was also not involved when the response to the SEBI queries as annexed to the Show Cause Notice was submitted to SEBI. b) He was only discharging his role as a Professional Director with no special rights of the decision making authority in the company. c) He had to resign from the board because there was lack of any understanding between the management and there was no accountability in the company. Many actions were unilaterally taken and decided by the management without discussing or any deliberations on the proposed actions by the management. Not only with respect to the dividend issue, but even otherwise, all the decisions were not taken after due consultation or any discussion whatsoever with the other members of the Board. Further, even the compliances were not made by the management which were statutorily required to be made. Even at the time when the Dividend was not yet announced, he had wanted the management to avoid the same as the company too was very weak. Yet, the management decided to proceed with the same which resulted in such a sorry state of affairs. d) His wife is a substantial shareholder in Zylog and have also been deprived of dividends from the company.

No action for such a default was taken as specifically requested by the promoters-directors of the company who had assured us that the dividends would be paid once the financial position of the company is improved. The management has acted according to their whims and caprice with zero accountability and there has been no regret whatsoever by the management of the company. It is for this reason that the shareholders decided to remove the Chairman and Chief Executive Officer and the Managing Director and Chief Operating Officer from the company. In addition to this, the Administrator / Official Liquidator have decided to get a forensic report done in the matter. e) His salary was not paid on time and even unpaid till date and the management has only informed him that the financial position of the company being very week, the management would not be in a position to pay his salary, let alone the perks as assured to him at the time of joining the Board. He resigned from the Board of Directors way back in June 2013, resignation was accepted by the Board in August 2013. D. Similarly, in response to the aforesaid SCN, Mr. Vasanthakumar Ayyavu Palanichamy vide letter and email dated November 16, 2016 and March 30, 2017 respectively inter alia submitted that:- a) He was appointed as the Nominee Director (Non-Executive Director) on the board of ZSL from January 25, 2010 to November 20, 2012 by Ascent India Fund, a Fund managed by UTI Ventures Funds Management Company Private Limited, a SEBI Registered Venture Capital Fund. b) As a Nominee Director, he was not in-charge of day-to-day activities of the Company. c) As a principal shareholder in the Company, his nominators had also not received the dividend and were one of the many shareholders to complain on the non-receipt of the dividend (SEBI Complaint no: SEBIE/TN13/0000131/1). d) He was also unaware about the non-payment of dividend till the compliance certificate was shown in the Board on Nov 14, 2012.

e) The Board of Directors made certain serious observations with regard to statutory requirements including payment of dividend among other issues and directed the management to clear all the statutory liabilities in time. f) He had resigned from the Company on Nov 20, 2012. 7. Along with the aforesaid submissions Mr. Vasanthakumar A. P also forwarded a scanned copy of the letter dated November 16, 2016 from UTI Venture Funds Management Company Pvt. Limited which reiterated the above submissions and requested for removal of his name from the SCN. 8. Considering the facts and circumstances of the case and the replies submitted by some of the noticees, an opportunity of hearing was granted to all the directors on March 10, 2017. The personal hearing was rescheduled on March 30, 2017 due to official exigencies. Mr. Vasanthakumar A P vide email dated March 03, 2017 confirmed his appearance for personal hearing on March 10, 2017, but vide email dated March 30, 2017, he informed his inability to attend the hearing on March 30, 2017 and requested to consider his abovementioned submissions.

9. The Authorised Representative/s (AR/s) of Mr. Parthasarathy Srikanth, Mr. Ravichandra Hegde, Advocate vide email dated March 29, 2017 requested for an adjournment of hearing on March 30, 2017 on the ground of a part heard matter before Hon’ble Securities Appellate Tribunal (SAT). The remaining noticees against whom the proceedings were pending failed to appear for the hearing on March 30, 2017 without giving any reason. Considering the request of AR/s of Mr. Parthasarathy Srikanth, another opportunity of personal hearing was granted on April 10, 2017. On April 10, 2017 the ARs of Mr. Parthasarathy Srikanth, Mr. Ravichandra Hegde, along with Mr. Paras Parekh Advocate from M/s J. Sagar & Associates, Advocates & Solicitors submitted an application on the following preliminary issues and requested for an order in the matter:- a) Denial of critical records in the matter. b) The Show Cause Notice does not specify the particular violation of the SEBI Act -The Show Cause notice states that the applicant failed to comply with the provisions of Section 205(1A) and Section 207 of the Companies Act, 1956. Section 24 of the Companies Act, 2013 states that matters related to dividend by listed companies are to be administered by SEBI by making regulations in this behalf.

The explanation to section 24 further states that in matters related to dividend, SEBI shall exercise the powers conferred upon it under Sections 11(1), (2A), (3) and (4), Section 11A, Section 11B and Section 11D of the SEBI Act, 1992. Section 24(1) makes it clear that SEBI while being delegated with the powers under Section 24 is required to frame appropriate regulations in relation to the matters contained in Section 24(1). c) Further, Section 11 B and Section 11(4) provides various powers and functions to be discharged by SEBI for the protection of investors. However, the show cause notice has not pointed out any particular action being proposed by the SEBI in the present matter. Once the said course of action is made known, only then the Applicant would be better placed to deal with the Show Cause Notice and in particular show cause as to why the proposed action be not taken against the applicant. d) Even in the present scenario when the administrator is appointed in the matter of Zylog, SEBI could have directed the complainants to approach the High Court or the administrator and the issue would have been looked into by the administrator.

10. The objections on the preliminary grounds raised by the ARs was overruled observing that the preliminary issues have been taken on record and no prejudice would be caused to the Noticee, if no seperate order is passed on the preliminary issues / application. The ARs were requested to argue on the merits of the charges levelled in the SCN. The ARs requested for an adjournment for the same. Considering the request, a last opportunity of personal hearing was granted on April 25, 2017.

11. Subsequently, vide letter dated April 14, 2017, ARs of Mr. Parthasarathy Srikanth made the following submission to the SCN:- a) SEBI does not have jurisdiction to administer the provisions of section 205(1A) of the 1956 Act and as stated during the course of the hearing held on April 10, 2017, the provisions of the Companies Act 1956 are applicable and not the Companies Act, 2013. b) The provisions of Section 207 of the 1956 Act requires him to knowingly be a party to the alleged violation by Zylog. The Show Cause Notice is issued on an incorrect understanding that his knowledge of such violation makes him liable for penalty. c) The Show Cause Notice is deficient as it does not set out the exact action that is proposed against him. d) He was appointed as a Director on board of Zylog on June 30, 2006 as a professional Director. He resigned from Zylog on June 24, 2013. At the time of his resignation Zylog issued a letter dated August 23, 2013 (“Zylog Letter”) stating inter alia that he had always acted in the best interest of Zylog. The Zylog letter specified that Zylog had accepted his resignation on account of the fact that it could no longer afford to pay his professional fees. e) The Zylog letter in fact indemnified him for all actions that he may need to face on account of his Directorship at Zylog. f) Many shareholders of Zylog addressed letters in November 2015 to Hon’ble Justice Sri S. Rajeshwaran who is presently the administrator for Zylog (“Administrator”) naming him as one of the candidates for being appointed as one of the independent directors of Zylog.

Pursuant thereto, he was appointed by the Administrator as an independent director to carry out the functioning of Zylog. He submitted that this also demonstrates the fact that shareholders of Zylog continue to repose faith in him and consider him fit to become a director to Zylog’s Board. g) Curiously, there is no proceeding initiated against Zylog itself for the alleged violation. It is submitted that in the absence of any proceedings against the company, the initiation of proceedings against the Director thereof is entirely incorrect. h) Zylog also has indemnified him for actions on account of his Directorship at Zylog which indicates that he had no role to play in any of the non-compliance alleged against Zylog. i) Even according to the Administrator and the auditor of Zylog, he had no role or involvement in relation to the decision making at Zylog and his participation was merely to offer his views to the Board of Zylog. j) Even presently, he is considered fit by many shareholders of Zylog’s Board to help revive Zylog.

e) Further in the relieving letter dated August 23, 2013 ZSL has inter alia stated about Mr. Srikant Parthasarathy that :- “You have devoted your valuable time, energy and professional expertise in the best interest of our organization despite the fact that the company was not in a position to pay your monthly salary of Rs. 5 lakhs (gross) since November 2012 till date of relieving. At present the financial position of the Company is not good to retain you and also being a professional director we do not hold you in the company and entangle yourself with litigations and legal hurdles and also on statutory non-compliance which arose due to financial contingencies.” 12. The ARs appeared on April 25, 2017 and made the following submissions:- a) That Mr. Parthasarathy Srikanth was designated as executive director but he was not managing or controlling the company and he was only a professional director. b) That after resigning from the company on August 23, 2013 Mr. Parthasarathy Srikanth was not connected with company in any way. c) That Mr. Parthasarathy Srikanth’s wife had a dues of Rs. 1.96 crore from the company as dividend. d) That Mr. Parthasarathy Srikanth is a Chartered Accountant by qualification and he was appointed on board on June 30, 2006. e) That though Mr. Parthasarathy Srikanth has raised objection for non-payment of dividend in the board meetings, he has no documents to show or prove the same. f) That Mr. Parthasarathy Srikanth is now a shareholder director in the company and any direction of restraint against him in the present proceedings shall not be in the interest of the company or the shareholders. g) That none of the complainants have approached the Administrator for the dividends due to them. (i) The ARs placed reliance on (i) Relieving letter from the company dated August 23, 2013, (ii) One of the shareholder’s letter sent to administrator of the company proposing appointment of the noticee as independent director and (iii) Statements of the statutory auditor before the administrator of the company in the meeting held on March 31, 2016, to substantiate his contentions.

13. After the SEBI order dated June 20, 2017, in respect of Mr. S Rajagopal and Mr. V. K Ramani, Mr. Parthasarathy Srikanth vide letter dated July 17, 2017 made further submission showing the similarity between his matter and the matter of Mr. S Rajagopal and Mr. V. K Ramani and made the following submissions:- a) He was part of the Audit Committee and attended the meeting which is taken on record and which forms the basis of proceedings being disposed of against the two mentioned directors and after the said two directors resigned, he was actively involved in coordinating and deliberating with the management to make the payment of dividend; b) It was his efforts and his requests which resulted in payment of dividend to the tune of around Rs 2.13 crores out of the declared Rs. 16.44 crores; c) Despite non-payment of his dues including the salary which was assured to be cleared by December 2012, he continued to remain as a professional director without any remuneration and without any power to decide any issue; d) There was a subsequent meeting of the Audit Committee in February 2013 which too was attended by him and where he specifically made recommendation to the board with other members to make the payment towards dividend; e) It was only after the management expressed their inability to pay any further dividend and also his salary, he was left with no choice but to resign and the acceptance letter received from the company is self-explanatory; f) In the present scenario, when the administrator has appointed him as an Independent Director while exercising his powers under law, he in his professional capacity is assisting the administrator, in his efforts to revive the Company, as per the request and decision of the shareholders who filed representation to be Administrator to appoint him on board; g) SEBI’s primary duty is to ensure protection of investors-shareholders and shareholder-investor grievance redressal in the market, and he have been epitome of investor confidence during his tenure with Zylog, which is a fact well-known, admitted and acknowledged by all stakeholders in the market.

It would suffice to state that he was re-inducted into the board at the insistence of the investors. h) When the management communicated that they cannot afford to make any further payment of dividend to the shareholders beyond what was paid at his insistence and coupled with the fact of non-payment of his dues, he tendered his resignation after a period of five months from the date of resignation of Mr. Ramani.

14. I have considered the charges alleged in the SCN, replies filed by the noticees and documents on record and the submissions of the Authorized Representatives. At the outset, before getting into the merits of the charges in the SCN and the replies, I note that the SCN has proposed to invoke the power under section 11B of the SEBI Act against the noticees directly for the non-payment of dividend by ZSL relying on a provision contained in the new Companies Act, which corresponds to the section 205(1A) of the Companies Act 1956. I note that the violation occurred in September 2012 and the SCN was issued in October 2016. In the meanwhile, the company went into liquidation vide the order of High Court of Madras, dated July 3, 2014 and in August 2013 the new Companies Act was brought into force. The SCN has possibly referred to section 127 of the Companies Act, 2013 which corresponds to section 207 of the 1956 Companies Act to show that even as on the date of issuance of the SCN, the violation continued despite the promulgation of the 2013 Act.

15. One of the noticees, has questioned the jurisdiction of SEBI to invoke section 11B powers in the absence of any SEBI Regulations dealing with non-payment of dividend, as laid down in the provision of the new Companies Act, 2013. In this connection, I am of the opinion that the non-redressal of investor grievance which is actually the crux of the matter is the thrust of action initiated by SEBI and this falls well within the scope of section 11B of SEBI Act. Thus the company and the persons who are responsible for the affairs of the company during the relevant time could be proceeded against for non-redressal of investor grievance under the SEBI Act. While, I note that the SCN focusses on non-payment of dividend, the aspect of non-redressal of investor grievance (arising out of non-payment of dividend) is the real cause for the action initiated in the SCN. The defense set up with respect to SEBI’s jurisdiction appears to be hyper technical and not sustainable in the light of the scope of powers of SEBI under section 11B which is very wide in its import and intended to secure and protect the interests of the investors. Thus it may not be correct to contend that by quoting the applicable provisions in respect of non-payment of dividend in the SCN, SEBI lacks the jurisdiction to invoke section 11B against the company and its directors. In other words, it would mean that if SEBI had alleged non settlement of investor grievance, it would have been tenable but not so when the underlying violation of non-payment of dividend is alleged. This defies logic. Since the company has gone into liquidation, SEBI has not brought in the company in the picture.

16. I have noted the fact that Mr. Parthasarathy Srikanth was part of both the audit committee, the one that brought the fact that statutory dues and dividends remained unpaid before the board on November 14, 2012 and the second audit committee which urged the management to clear the statutory dues and dividends. He was in the board of ZSL from June 30, 2006 to August 2013 as an executive director. The position of an “executive director” in a listed company comes along with responsibilities and compliances under law associated with such position. Therefore, his plea that he was just a professional director without having decision making authority in ZSL is without any merit. I have also considered the fact that wife of Mr. Parthasarathy Srikanth, Ms. Sripriya Srikanth was holding more than 10% shares of ZSL and she had a claim of Rs. 1.96 crores on the company due to the aforesaid dividend declaration. I have also taken note of the fact that ZSL vide letter dated August 23, 2013 had undertaken to indemnify Mr. Parthasarathy Srikanth from and against all costs, charges, claims etc. including any amount paid to settle an action or satisfy a judgment or court order, reasonably incurred by him, in respect of any civil, criminal or administrative action or proceedings to which he is made a party by reason of his directorship in the company till date of his resignation. From the aforesaid letter, it is also noted that Mr. Parthasarathy Srikanth was not given any remuneration from November 2012 onwards.

17. It is also noted from the annual report 2011-12 & 2012-13 of ZSL, available on BSE website that Mr. Sudarshan Venkatraman was the Chairman and Chief Executive Officer of ZSL, Mr. Ramanaujam Sesharathnam was the Managing Director and Chief Operating Officer and Mr. Parthasarathy Srikanth the was Executive Director of the company. During the same period, Mr. Gajanathan, was an independent director. From the minutes of the board meeting of ZSL held on November 14, 2012, it is noted that the issue of non-payment of dividend was taken up in the board meeting. Mr. Gajanathan, was present in the aforesaid board meeting. Just after the board meeting, the Audit Committee of ZSL was reconstituted due to the resignation of Mr. S. Rajagopal, Independent director and chairman of the audit committee. It is further noted from the minutes of the audit committee meeting held on February 12, 2013 that Mr. M. Gajanathan, who became the member of the new audit committee brought up the issue of non-payment of statutory dues and dividend before the management again along with chairman of the new audit committee and P. Srikanth. Inspite of the requests and insistence from the side of the audit committee, the dividend was not paid.

18. During the period 2011-12 & 2012-13, Mr. Vasanthakumar Ayyavu Palanichamy received no remuneration as he was a nominee director of UTI Ventures Funds Management Company Private Limited. From the minutes of the board meeting of ZSL held on November 14, 2012, it is noted that the issue of non-payment of dividend was taken up in the board meeting. Mr. Vasanthakumar Ayyavu Palanichamy was present in the aforesaid board meeting and immediately after the board meeting, on November 20, 2012, he resigned from the board. As a principal shareholder in the Company, his nominators had also not received the dividend and were one of the many shareholders to complain on the non-receipt of the dividend (SEBI Complaint no: SEBIE/TN13/0000131/1).

19. Considering all the above facts and circumstances of the case and the fact that the prescribed action in terms of Section 207 of Companies Act has been simultaneously initiated by SEBI as ascertained from the records, I do not deem it fit to pass any directions under sections 11 and 11B of the SEBI Act, 1992 against the noticees herein, as contemplated in the SCN dated October 20, 2016.

20. A copy of the order may be forwarded to the liquidator of the High Court of Madras along with copies of complaints received by SEBI for information and such action, as deemed appropriate in the matter.

Date: October 16, 2017 G. MAHALINGAM Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA