order in respect of edserv softsystems limited and its directors

8/18/2019 Order in respect of Edserv Softsystems Limited and its Directors

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WTM/SR/SEBI/EFD-DRA4/25 /04/2016

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI

S. RAMAN, WHOLE TIME MEMBER

ORDER

Under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 read

with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices

relating to Securities Market) Regulations, 2003 and the SEBI (Issue of Capital and

Disclosure Requirements) Regulations, 2009 in respect of :

1. Edserv Softsystems Limited (PAN: AAACL7131L),

2.

Mr. S. Giridharan, Chairman and CEO (PAN: AAGPG2646E),

3. Ms. G. Gita, Managing Director (PAN: AAGPG2647F),

4. Mr. IIango Balakrishna, Director (PAN: AAJPI0688K),

5. Mr. T.S. Ravichandran, Director (PAN: AAJPR0108F) and

6. Mr. S. Arvind, Director (PAN: AACPA7943E).

1.

Edserv Softsystems Ltd. ("Edserv/the company") came out with an Initial Public Offer

(“IPO”) of 39.74 lakh shares of face value of Rs. 10/- at an issue price of Rs. 60/- per equity share

aggregating to Rs. 23.84 crores. The Red Herring Prospectus was dated January 19, 2009 and the

Prospectus was dated February 17, 2009. The bids opened on February 5, 2009 and closed on

February 09, 2009. Keynote Corporate Services Limited was the Book Running Lead Manager

("BRLM") for the IPO.

2. The primary objective of the issue as stated in the prospectus were as under:

i. “To finance the cost for developing the copyrighted D2J content by HEADS Learning (HEAL)

architecture;

ii. To finance the cost for establishing the HEAL Lab to develop, test install, connect and implement the

D2J content across all HEADS Offices as Back-end and EdCenter as Front end;

iii. To finance the cost for establishing the HEADS Offices to reach out regions all over India;

iv. To finance the cost for developing and implementing the copyrighted centralized LAMPS Portal Engine;


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v. To finance the promotion expenses to sign up and establish Partner-ed 200 EdCenters under BMC Model

across India and South Asia;

vi. To list the equity shares of the company on the Stock Exchanges.”

3. The ‘Requirement of Funds’ as disclosed by the company in the Prospectus were as under:

Table: 1

Sr.No.

Particulars Total FundsRequired

(Rs. in lakhs)1 Content Development 1120.002 Establishment of HEAL Laboratories 1038.003 Establishing HEADS Offices 275.054 Development and Implementation of centralized Lamps

Portal Engine110.00

5 Promotion Expenses 205.306 Issue Expenses 202.007 Contingencies 25.95

Total 2976.30

4. Edserv disclosed the following as the ’Means of Finance’ for the above expenses in the

Prospectus :

Table: 2

Particulars Amount(Rs. InCrores)

Proceeds from Issue of shares to KalpathiInvestments Pvt. Ltd.

3.85

Proceeds from Pre IPO Placement 0.64Proceeds of Public Issue 23.84Internal Accruals 1.43

Total 29.76

5. The scrip of Edserv was listed on National Stock Exchange of India Limited (‘NSE’) and BSE

Limited (‘BSE’) on March 02, 2009 at a listing price of Rs.60/-. On the date of listing, the price of

the scrip saw an upward movement and it touched an intra-day high of Rs. 147.00 (NSE) and closed

at Rs.137.70 (NSE) and a total 7.05 crores shares (approx. 17.74 times of the issue size) were traded

across both NSE and BSE . The price and the traded volume of the scrip of Edserv came down


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considerably over the next few days. The Price -Volume data of Edserv (NSE) for the period March

2 - 12, 2009 are as follows:-

Table: 3

Date

PreviousClose (Rs.)

OpenPrice (Rs.)

HighPrice (Rs.)

LowPrice (Rs.)

LastPrice(Rs.)

ClosePrice (Rs.)

AveragePrice (Rs.)

Total Traded Quantity(no. ofshares)

Turnover in Rs. Lacs

2-Mar-09 60.00 147.00 58.20 136.4 137.70 120.72 36403634 43,9473-Mar-09 137.70 138.00 147.90 110.20 110.2 110.20 125.65 5560744 6,9874-Mar-09 110.20 100.00 100.00 88.20 88.2 88.20 88.43 34219 305-Mar-09 88.20 72.10 75.60 70.60 70.6 70.60 70.96 1972314 1,4006-Mar-09 70.60 56.50 69.25 56.50 56.5 56.50 62.56 4217618 2,6399-Mar-09 56.50 51.40 52.50 45.20 45.2 45.20 48.46 1931997 936

12-Mar-09 45.20 40.70 47.80 40.70 44 43.80 43.60 2746945 1,198

6.

In view of the unusual price movements in the scrip of Edserv, Securities and Exchange Board

of India (“SEBI”) conducted investigation into the IPO of Edserv. SEBI’s investigation revealed

suppression of material facts and mis-statements in the Prospectus of Edserv; siphoning off and

diversion of IPO proceeds by Edserv. Investigation revealed that the BRLM to the IPO of Edserv

had failed to exercise due diligence regarding various aspects of the issue including the veracity and

adequacy of disclosures in the offer documents. It was also seen that the Company and its BRLM

failed to disclose certain material information such as information regarding the raising of ICDs,

which if disclosed, would have enabled the investors to take an informed investment decision.

7. Based on the findings of the investigation, SEBI issued a common Show Cause Notice (“ SCN”)

dated January 18, 2012 to the following entities under Sections 11 and 11B of the SEBI Act, 1992

read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to

Securities Market) Regulation, 2003, calling upon them to show cause as to why appropriate action

including a direction to debar them from accessing the securities market and prohibit them from

buying, selling or dealing in securities for a particular duration, should not be issued against them:

1. Edserv Softsystems Limited (‘Noticee No.1’),

2. Mr. S. Giridharan, Chairman cum CEO (‘Noticee No. 2’),

3. Ms. G. Gita, Managing Director (‘Noticee No.3’),

4. Mr. IIango Balakrishna, Director (‘Noticee No.4’),

5.

Mr. T.S. Ravichandran, Director (‘Noticee No.5’) and


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IPO in respect to the project as disclosed in the Prospectus. The balance amount was utilized for the

required non –IPO activities.

iv.

The ICD of Rs.4 crores issued by the company in the month of January 2009 was to fund the

infrastructure development of HEAL Laboratories and HEADS offices of the Company. It is

submitted that the BRLMs were fully aware of the said ICDs and that they were well aware of the

contents of the ICD agreements before such ICDs were availed.

v. As part of the objects of the issue, there were certain expenditure to be incurred pertaining to setting up

of the infrastructure for HEAL Laboratories and HEADS offices. In this context, we had identified

Rajesh Service Centre, Krishna Enterprises, Mahadev Impex and Shiv Impex for executing the said

infrastructure works for HEAL Laboratories and HEADS offices.

vi. We had issued purchase orders to the suppliers Shiv Impex and Mahadev Impex and had made the

initial payments. But due to the failure to meet with Company’s requirements and consistent delays, we

had vide our letters dated January 2, 2010 and January 21, 2010 cancelled the purchase orders given

to Shiv Impex and Mahadev Impex respectively. In this regard, we received back the advance payment

made of Rs.50,00,000/- each from Mahadev Impex on February 26, 2010 and Shiv Impex on

March 15,2010 and March 08, 2010 alongwith nominal interest.

vii. It is submitted that only part of the payments to some of the supplier entities were met through the said

ICDs, the rest were made through either the IPO proceeds or internal accruals of our Company.

viii. The cost of establishing the HEAL laboratories were made from the IPO proceeds. The amount

utilized for establishment for HEAL Laboratories and Heads Offices were IPO proceeds.

ix.

The statement with respect to not placing orders for equipment and software for HEAL laboratories

made in the prospectus was absolutely correct. As on the date of prospectus, only the expenses pertaining

to furniture and fixtures for setting up of HEAL laboratories were paid and no expenditure was made

for the equipment and software.

x.

Bridge loan has not been defined under the ICDR Regulation. ICDs were raised for the purpose of

continuity of the project. It is to be noted that the ICDs were raised only for the purpose of continuity of

the Project.

xi. It is submitted that all the information pertaining to the said ICDs were disclosed to BRLM and so

they were fully aware of the said ICD agreements before such ICDs were availed.

xii.

It is vehemently denied that we have made contradictory/ inconsistent information during the

investigation and that we have not complied with the summons issued by SEBI or that we have failed to

furnish information/ document sought by SEBI.


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incomplete reply to the said summons. It is submitted that vide our letter dated March 18, 2011 we had

inter alia provided information/documents required by SEBI.

xxi.

It is vehemently denied that we had siphoned of Rs.4.75 Crores. It is submitted that the objects for

which the IPO was made has been completed.

11.

Subsequently, an opportunity of personal hearing was granted to the Noticees on August 29,

2012. The said hearing was adjourned at the request of Edserv. Thereafter, another opportunity of

personal hearing was granted to Edserv on September 25, 2012. Edserv vide email dated September

24, 2012 sought cross examination of two entities i.e. Rajesh Service Centre and Krishna Enterprises

(suppliers) and requested for rescheduling its personal hearing. SEBI vide email dated September 25,

2012 denied the cross examination and granted opportunities of hearings on October 18, 2012 and

November 22, 2012.

In view of the denial of cross examination by SEBI, Edserve filed an appeal before Hon'ble

Securities Appellate Tribunal (‘SAT’) and pursuant to the directions of the Hon’ble SAT, SEBI

granted an opportunity of cross examination to Edserv on December 5, 2012. The entities to be

cross examined did not appear and the same was adjourned. Another opportunity of cross

examination was granted on December 27, 2012, however Edserv vide email dated December 20,

2012 requested for an adjournment of the said hearing. Considering the request of the entity, a final

opportunity of cross examination was granted on January 31, 2013, however due to administrative

exigencies the same was rescheduled for March 26, 2013. However, the entities to be cross examined

did not appear. Since cross examination could not materialise due to non-attendance of the entities,

opportunity of personal hearing was granted to the Noticees on July 03, 2013, however, the

Noticees failed to attend the same and requested for an adjournment. Another opportunity of

hearing was granted to Edserv on July 22, 2013. However, Edserv again failed to attend the hearing

and sought extension vide email dated July 21, 2013. One more opportunity of hearing was given to

Edserv and its Directors on March 10, 2015, however the entities did not appear for hearing. As it

appeared that the hearing notices were returned undelivered, the hearing notices were also sent to

the alternate addresses of the directors for hearing scheduled on December 28, 2015. None

appeared for the hearing. However Mr. Giridharan, the Noticee No. 2 vide email dated December

31, 2015 had made the following submissions-


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a) “ Edserv has wound up by the Hon’ble Madras High Court vide order dated 19th August, 2013

and Board of directors had been removed from their post and also from all the roles and

responsibilities with the company.

b) The company is currently in the custody of the Official Liquidator (OL) and all the assets,

documents, correspondence both past and present are with the OL.

c)

After the company got wound up, Directors lost the control and Directors have no information

and details of the company. Also Directors have been only directing all queries relating to company

to OL as per their direction.

d) To further seek details of the matter relating to Edserv, it is only proper to contact the OL and get

the relevant details.”

12. The Noticees nos. 5 and 6 viz., Shri T.S. Ravichandran and Shri S Arvind submitted their

separate but identical replies dated December 19, 2015 pursuant to the hearing notice dated

December 14, 2015. The submissions made by Noticee No. 6 are reproduced as under-

a) “I was an independent Director of the Company appointed as per Clause 49 of the Listing

Agreement with stock exchanges and not a promoter of the company or its full time Director in

charge of and responsible to the company for the affairs of the Company. I enclose the Annual

Report of the Company for the Financial year 2010-11 which has been filed before the Registrar

of Companies, Tamil Nadu and Stock Exchanges where the company was listed which shows

that I was an independent director of the company.

b)

Only Mr. S. Giridharan and Ms. G. Gita were promoters of the Company and its full time

Directors managing the affairs of the Company.

c) As an Independent Director, I am not liable for any acts of the management which had not come

to my notice through board processes vide Section 149(12) of the Companies Act 2013 and if

there are any lapses of the management in the instant case, I am not liable for the same.”

It is also submitted by the said Noticees that Noticees no. 5 viz., Shri T.S.

Ravichandran resigned from the Directorship of the Company on December 10,

2012 and Noticees no. 6 viz., Shri S Arvind resigned from directorship of the

Company on January 28, 2013.

13. The Noticees Nos 5 and 6 viz., Shri T.S. Ravichandran and Shri S Arvind also submitted that

they have not received any notice from SEBI with regard to any proceedings against Edserv


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Softsystems before SEBI. There was no response from Edserv and Directors Ms. G. Gita and

Mr. Illango Balakrishnan. In view of the same, a final opportunity of hearing was granted to

the Company and its Directors on February 24, 2016. The hearing notice was also served on

the Official Liquidator of the company. A copy of SCN was also provided to Shri T.S.

Ravichandran and Shri S Arvind along with hearing notice dated January 29, 2016, The

hearing notice was also published in the newspapers viz., ‘Dinamani ’ on February 5, 2016 and

‘The Hindu’ on February 06, 2016 for the Company and Directors viz., Ms. G. Gita and Mr.

Illango Balakrishnan. However, the said Noticees neither appeared for the hearing nor

submitted any reply till date.

14. Shri S Arvind and Shri T.S. Ravichandran submitted their detailed replies dated February 09,

2016 and February 10, 2016 respectively pursuant to the hearing notices dated January 29,

2016. Apart from reiterating their earlier submissions, the said Noticees have inter alia made the

following identical submissions (-

a) “ No question of vicarious responsibility of an Independent Director for the acts of full time

Directors of the company or the Principal Officers of the Company arises. The ratio of judgment

in the NSIC case will also be applicable in this instant case. The liability of each Director for the

offence cited has to be separately stated and general statements that the Directors of the Company

are liable for the offences is not adequate. I would also like to draw attention to the Circular of the

Ministry of Corporate Affairs (General Circular No. 08/2011 dated March 25, 2011) which

had laid down the same guidelines for the responsibility of Non Executive Directors on the Board

of the Companies including Independent Directors appointed as per SEBI requirement on the

Boards of publicly listed companies. In this circular the Ministry of Corporate Affairs has

reiterated that “no such directors shall be held liable for any act or omission or commission by the

company or by the officers of the company which constitute a breach or violation of the Companies

Act, 1956 and which occurred without his knowledge attributable through Board process and

without his consent or connivance or where he has acted diligently in the Board process”. This

Circular also makes Independent Directors who have no knowledge of the alleged offence against

the Company immune from action.

b)

The first lapse pointed out by SEBI in its notice is the non-disclosure by the company in the

public issue prospectus of its borrowing of Rs.4 crores from 5 private entities in January and

February 2009 and its declaration in the prospectus that the company had not availed any bridge


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loan. This loan was later returned to the entities with interest. I would like to state that this

information has not been disclosed to the Board at any of the Board meetings. This fact of non

disclosure has to be explained by the Chairman and CEO of the Company Mr. S.

Giridharan and the Managing Director Mrs. G. Gita as they have not disclosed this

to the Board of Directors also at the time of getting approval for the IPO

prospectus from the Board and hence it was not possible for the Board to amend

the information provided in the IPO Prospectus to reflect the correct position on

Loans /ICD as the Independent Non – Executive Directors were not aware of the

facts. The IPO Prospectus as provided by the Chairman and CEO of the

Company to the Board has been approved by the Board. This non-disclosure of

information on Inter Corporate deposits taken by the Board has to be explained by

the Chairman and CEO and the Managing Director of the Company and not by

the Independent Directors. There is therefore no lapse on the part of the

Independent Directors in this matter of non-disclosure of relevant information in

the IPO Prospectus.

c)

The second lapse pointed out by SEBI in its notice is possible diversion of an amount of Rs.470

lakhs meant for establishment of HEAL Labs... In this connection, I would like to point out

that the progress of expenditure on the project of the Company was being reviewed by the Board at

its meeting after the IPO and the Chairman had placed the expenditure details before the Board

and the Chairman and Managing Director had certified that the amounts raised were utilized for

the purposes stated in the IPO. The Board had recorded this information and reported to the

Stock Exchanges as required at the time of reporting of quarterly results. The Auditors of the

Company had also audited the accounts of the Company including the accounts relating to

expenditure of funds raised through IPO in February 2009 during FY 2008-09 and 2009-10

and have not qualified the accounts on any count. Hence, the Board accepted these accounts as

genuine and approved them. If as SEBI has pointed out there are doubts about the genuineness of

the expenditure to an extent of Rs. 470 crores the Chairman S. Giridharan and managing

Director Ms.G. Geetha, have to clarify the same to SEBI with proper voucher and other records

which they have not done so far. As far as the Independent Directors are concerned they have to be

guided by the certificates of the management on the utilization of the IPO proceeds as also by the

audit report.


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d) The Noticees 4-6 including me (Noticee No. 5) were only independent non-executive directors of

the company and not involved in the day to day affairs of the Company.”

e)

The Noticees also submitted that all the facts relevant to the above proceedings

have been put up above and they do not wish to appear for the personal hearing

and the orders may be passed based on the facts stated above.

Consideration of Issues and findings:

15. I have considered the SCN issued to the Noticees alongwith the documents provided therein,

their replies to the SCN and all other relevant material available on record. In the light of the

same, I shall now proceed to deal with the charges levelled against the Noticees in the SCN.

The charges levelled against the Noticees are mentioned at paragraphs 8 and 9 above.

16. Before dealing with the charges in seriatim, the relevant legal provisions, the contravention of

which have been alleged in this case may be reproduced hereunder for reference purpose:-

(i) Section 12 A of Securities & Exchange Board of India Act, 1992 ("SEBI Act"),

which provides as follows:

“12A. No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device orcontrivance in contravention of the provisions of this Act or the rules or the regulations madethereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing insecurities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which arelisted or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(ii)

Regulations 3(a), (b), (c), (d), 4(1) and 4 (2) (f) of SEBI (Prohibition of Fraudulent

and Unfair Trade Practices relating to Securities Market), Regulations, 2003, which

provides as follows:

3. Prohibition of certain dealings in securities

No person shall directly or indirectly—

(a) buy, sell or otherwise deal in securities in a fraudulent manner;


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(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be

listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in

contravention of the provisions of the Act or the rules or the regulations made thereunder;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities

which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit

upon any person in connection with any dealing in or issue of securities which are listed or proposed

to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules

and the regulations made thereunder.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a

fraudulent or an unfair trade practice in securities.

(2)Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it

involves fraud and may include all or any of the following, namely :—

…

(f) publishing or causing to publish or reporting or causing to report by a person dealing in

securities any information which is not true or which he does not believe to be true prior to or

in the course of dealing in securities;

(iii) Clause 6.2 under Chapter VI of SEBI (DIP) Guidelines, 2000 reads as under:

6.2 The prospectus shall contain all material information which shall be true and adequate soas to enable the investors to make informed decision on the investments in the issue.

(iv) Sections 11C (2) and (6) read with Sections 11C (3) and (5) of SEBI Act, 1992,

provides as follows:

Section 11 ( C) (2) - Without prejudice to the provisions of sections 235 to 241 of theCompanies Act, 1956 (1 of 1956), it shall be the duty of every manager, managing director,officer and other employee of the company and every intermediary referred to in section 12 orevery person associated with the securities market to preserve and to produce to theInvestigating Authority or any person authorised by it in this behalf, all the books, registers,other documents and record of, or relating to, the company or, as the case may be, of orrelating to, the intermediary or such person, which are in their custody or power.

3) The Investigating Authority may require any intermediary or any person associated withsecurities market in any manner to furnish such information to, or produce such books, or


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registers, or other documents, or record before him or any person authorised by it in this behalfas it may consider necessary if the furnishing of such information or the production of suchbooks, or registers, or other documents, or record is relevant or necessary for the purposes of its

investigation.

5) Any person, directed to make an investigation under sub-section (1), may examine onoath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of hisbusiness and may administer an oath accordingly and for that purpose may require any ofthose persons to appear before it personally.

6) If any person fails without reasonable cause or refuses—

(a) to produce to the Investigating Authority or any person authorised by it in this

behalf any book, register, other document and record which is his duty under sub-section (2)or sub-section (3) to produce; or

(b) to furnish any information which is his duty under sub-section (3) to furnish; or

(c) to appear before the Investigating Authority personally when required to do so undersub-section (5) or to answer any question which is put to him by the Investigating Authorityin pursuance of that sub-section; or

(d) to sign the notes of any examination referred to in sub-section (7), he shall be punishable with imprisonment for a term which may extend to one year, or with fine, whichmay extend to one crore rupees, or with both, and also with a further fine which may extendto five Lakh rupees for every day after the first during which the failure or refusal continues.”

17. Let me now discuss the charges levelled against the Noticees and their submissions made:

A. Non-Disclosure in the Offer Documents:

1.

Non–disclosure of funds raised through ICDs prior to the IPO

As per the SCN, Edserv and its Promoter Directors were alleged to have failed in making

material disclosures regarding funds raised through ICDs, which were in the nature of a bridge

loan.

i.

During the course of investigation, it is noted from the bank account statements that Edserv

had made ‘Inter Corporate Deposit (ICD)/Loan repayments’ from the proceeds of the IPO.

The details of the same are as under:

a) On February 27, 2009, Edserv received Rs. 11,30,70,455 in its ICICI bank account

(A/c No. 602305027424) from the escrow account of the issue (ICICI bank). On the

same day, Edserv inter alia made the following payments/fund transfer from its ICICI

Bank Account:


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AccountNumber

Date Amount(Rs.)

Name of entityto whom funds paid

Reasons for payment

602305027424 27-02-09 51,16,646 Ramesh Jain Deposit / Loan Repayments

602305027424 27-02-09 1,01,98,330 PR Vyapaar Pvt.Ltd.

Inter Corporate Deposit/Loan Repayments

602305027424 27-02-09 76,18,235 Saraswati VincomLtd.


602305027424 27-02-09 5,29,18,200 EdservSoftsystems Ltd.

A/c to A/c transfer

602305027424 27-02-09 25,00,000 Garrison PharmaLtd.


602305027424 27-02-09 1,52,59,353 Devkant

Synthetics Ltd.

Inter Corporate Deposit/

Loan Repayments

b) On February 27, 2009, Edserv received Rs. 8,03,06,160 in its Union Bank of India

account (A/c No. – 352101010800409) from the escrow account of the issue (HDFC bank).

On the same day, Edserv inter alia made the following payments/fund transfer from its

Union Bank of India account:

Account Number Date Amount

(Rs.)

Name of entity

to whom funds paid

Reasons for payment

352101010800409 27-02-09 25,00,000 Mahadev Impex Payments for softwarecontent/services

352101010800409 27-02-09 25,00,000 S. K. Alloys and Trading

Procurement ofmachineries

ii. In view of the above, SEBI sought details of the ICDs from the Company. Edserv vide

letter dated February 16, 2010, furnished the details of the ICDs/loans borrowed by them as

follows:

Sr.No.

Name of Party(From)

Date Amount(Rs.)

RepaymentSchedule

Rate of Interest

1 Ramesh Jain 20/01/2009 50,00,000 40 days 24% p.a.2 Devkant Synthetics

Pvt. Ltd.24/01/2009 75,00,000 36 days 24% p.a.28/01/2009 75,00,000 32 days 24% p.a.

3 PR Vyapaar Pvt. Ltd. 20/01/2009 50,00,000 40 days 2% per month22/01/2009 50,00,000 38 days 2% per month

4 Sarswati Vincom Ltd. 29/01/2009 75,00,000 31 days 24% p.a.5 Garrison Pharma Ltd. 05/02/2009 25,00,000 24 days 24% p.a.

Total 4,00,00,000


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iii. The abovementioned tables shows that just before IPO, Edserv had taken ICDs/loans

amounting to Rs. 4 crores from 5 entities during the period from January 20, 2009 to

February 05, 2009. Further, immediately on receipt of the proceeds of the IPO, the said

ICDs/ Loans were re-paid along with interest of Rs.6.92 lakhs from the proceeds of the IPO

on February 27, 2009. No disclosures regarding the ICDs were made in the prospectus.

It is noted that Edserv made the following disclosures in the Prospectus dated

February 17, 2009:

a) at page 24 under the head Object of the Issue mentions inter alia :-

“To finance the cost for establishing the HEAL Lab to develop, test, install, connect, and

implement the D2J content across all HEADS Offices as Back-end and EdCenter as Frontend.”

iv. Edserv has contended that ICDs were borrowed to meet the cost of establishing the HEAL

laboratories which was one of the main Objects of the IPO. However, the same were not

disclosed as means of finance in the prospectus. Hence, the only logical conclusion to be

drawn in the circumstances is that such a contention has been taken as an after- thought to

provide justification for raising of ICD's and not making proper disclosures about it in the

prospectus.

v. It is observed that at Page 30 of the Prospectus dated February 17, 2009 under the heading

Bridge Loan it was stated -‘We have not entered into any bridge loan facility that will be repaid from the

Net Proceeds’. However, it is noted that Edserv did indeed raise funds through ICDs

borrowed from 5 entities as mentioned in paragraph 17 A 1 (ii) above.

vi. Edserv has submitted that the term “bridge loan ” has not been defined under the ICDR

Regulation. ICDs were raised for the purpose of continuity of the project. All theinformation pertaining to the said ICD details were disclosed to BRLM and so they were

fully aware of the said ICDs. Being a registered intermediary BRLMs ought to have known

that the said information was required to be disclosed in the prospectus.

In this regard, I note:

Edserv had borrowed loan/ICDs during Jan 20-Feb 11, 2009 and the same was

repaid along with interest from the proceeds of the IPO. Hence Edserv was well aware that


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the ICDs were to be repaid from the proceeds of the IPO. Therefore, the said ICDs were

indeed in the nature of bridge loans.

vii. The Noticee’s contention that it is the duty of the BRLM to ensure disclosures, and the

company had provided all the information to the BRLMs cannot be accepted. I find that it

is the duty of the issuer company and its directors to make prompt, true and fair disclosure

of all material developments in the offer documents. Further, the Prospectus was signed by

all the directors of Edserv declaring that all the statements in the offer documents are true

and correct. Hence the failure to mention availing of the ICDs and their proposed

repayment from the proceeds of the IPO was a deliberate attempt on the part of Edserv and

its directors. Effectively, the Noticees failed to disclose vital information of raising funds

through ICDs prior to IPO and its repayment out of issue proceeds in the Offer Document.

Therefore, it is established that Noticees have failed to disclose such vital information/

material fact in the Offer Document and deprived the public/investors in taking an

informed decision while investing in the IPO of Edserv.

2. Non-Disclosure of placing of Orders with Suppliers for the establishment of HEAL

Laboratories.

i. Edserv in the prospectus had disclosed that they are yet to place orders for equipments and

software amounting to Rs. 338.00 lacs for establishment of HEAL laboratories. However,

Edserv had already placed purchase orders dated January 12, 2009 and January 23, 2009 for

Rs. 2.94 crores and 2.07 crores for establishment of HEAL labs/office. In view of the same,

it was alleged that Edserv failed to make proper disclosure of the orders placed by it.

ii. In this regard, information was sought from Edserv and vide its letters dated May 26, 2010

and July 28, 2010, the Company informed SEBI that amounts received from the loans/ICDs

were paid to suppliers viz., Krishna Enterprises, Rajesh Service Centre and Shiv Impex for

establishment of HEAL laboratories/Head Office/computers and accessories. The details

are as follows:


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Entity providingloan/ICD

to Edserv

Amount(Rs.)

Date Entity to whomEdservtransferred/paid

money

Date of payment byEdserv

Amount(Rs.)

Purpose of payment, asclaimed by Edserv

Ramesh Jain 50 lakhs Jan 20, 2009 KrishnaEnterprises

Jan 21, 2009 50 lakhs Establishment ofHEAL Labs.

DevkantSyntheticsPvt. Ltd.

75 lakhs Jan 24, 2009 Shiv Impex 50 lakhs

Advance amountpaid for computersand accessories.

Jan 24, 2009 Rajesh ServiceCentre


75 lakhs Jan 28, 2009 Rajesh ServiceCentre


PR Vyapaar

Pvt. Ltd. 1 crore

Jan 20, 2009 KrishnaEnterprises


Jan 22, 2009 KrishnaEnterprises

Jan 23, 2009 50 lakhs Establishment ofHEAD office.

Sarswati Vincom Ltd.

75 lakhs Jan 28, 2009

Rajesh ServiceCentre


Jan 29, 2009 Rajesh ServiceCentre

Jan 29, 2009 25 lakhs Establishment ofHEAD office.

GarrisonPharma Ltd.

25 lakhs Feb 06, 10and 11,2009

Shiv Impex Feb 06 and10, 2009

20 lakhs Advance paymentfor computers andaccessories.

iii. Edserv vide letter dated July 28, 2010 stated that Krishna Enterprises, Rajesh Service Centre,

Shiv Impex and Mahadev Impex were engaged in the establishment of Heal

Offices/Laboratories, Infrastructure Development and for purchase of computer accessories

and services. Further, these organizations were engaged even prior to the IPO and as a part

of advance and material purchase as sought by them, internal resources as well as borrowed

funds were utilized and paid to commence the work. Furthermore, these utilizations of

funds were one and the same as given and disclosed under prospectus. Edserv further

informed that the ICD borrowings have been repaid out of the public issue proceeds and

hence these expenses to Rajesh Service Centre, Shiv Impex and Krishna Enterprises may be

treated as if the payments have been made through IPO proceeds.

iv. Edserv submitted that the statement in respect to not placing orders for equipments and

software for Heal laboratories made in the prospectus was absolutely correct. As on the date

of prospectus, only the expense pertaining to furniture and fixtures for setting up of HEAL

laboratories were paid for and no expenditure was made for the equipment and software.


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v. In the prospectus issued by Edserv under the heading risk factors, at Page (x) it is

mentioned that:-

“We are yet to place orders for equipments and software amounting to Rs. 338.00 lacs for

establishment of HEAL laboratories as mentioned in the objects of the issue.”

It is also noted that under the Objects section- 'Establishment of Heal Lab', it is disclosed

that they propose to spend Rs. 338.00 lacs on furniture and fixtures (including Computer

and Software systems) for the proposed laboratory. As per its own submission that furniture

and fixtures include Computer and Software systems, I find that the contention of the

Noticees that no expenditure was made for the equipment and software cannot be accepted.In the light of the aforesaid discussions, it is clearly established that the Noticees not

only failed to disclose the purchase orders placed with suppliers viz., Krishna Enterprises,

Rajesh Service Centre, Shiv Impex and Mahadev Impex and the payment of substantial

amount in advance in the Offer Document but also made wrong disclosures as mentioned

above.

3. Siphoning of funds and Diverted IPO proceeds:

The SCN alleges that the Noticees siphoned off the funds received in the IPO (i) through purchase

orders placed with entities/suppliers viz., Krishna Enterprises, Rajesh Service Centre, Shiv Impex

and Mahadev Impex and (ii) through repayment of ICDs raised from certain entities. The

movement of funds amounting to Rs. 4.75 from EDSERV to Krishna Enterprises and Rajesh

Service Centre entities is pictorially depicted as under:

1.5 crores

2.25 crores

1 crore

1.5 crores

50 lakhs

50 lakhs

50 lakhs

Ramco International25 lakhs

50 lakhs S. K. Alloys & Trading

M/s Edserv (4.75 cr.)

Krishna Enterprises

Rajesh Service Centre

Shiv Impex (2 crores)

Mahadev Impex (2 crores)


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The above chart shows that Edserv had ultimately transferred/ paid a total of Rs. 2

crores each to Shiv Impex and Mahadev Impex through Krishna enterprises and RajeshService Centre.

i. In view of the above, SEBI vide letters dated August 27, 2010 sought information from the

abovementioned suppliers. The letters issued to Shiv Impex and Mahadev Impex were

returned undelivered. From the replies dated September 21, 2010 and October 30, 2010 and

documents submitted by Krishna Enterprises and Rajesh Service Centre and their bank

account statements, the following are noted in the Investigation Report:

a.

The bank account statement of Krishna Enterprises shows that it received Rs. 1crore from Edserv on Jan 20, 2009 out of which Rs. 50 lakhs was paid to Shiv Impex

and Rs. 50 lakhs to ‘S. K. Trading & Alloys’ on the same day through Pay Orders.

Krishna Enterprises had received another Rs. 50 lakhs from Edserv on January 22,

2009 and it had paid/transferred Rs. 50 lakhs to Shiv Impex through cheque on

January 23, 2009.

b. The bank account statement of Rajesh Service Centre shows that it had received Rs.

75 lakhs from Edserv on Jan 22, 2009 which was paid / transferred to MahadevImpex on Jan 24, 2009. It had received another Rs. 75 lakhs and Rs. 50 lakhs from

Edserv on Jan 28, 2009, out of which, Rs. 75 lakhs was paid/transferred to Mahadev

Impex and Rs. 50 lakhs to Shiv Impex respectively on Jan 28, 2009. It has further

received Rs. 25 lakhs from Edserv on Jan 29, 2009 which was paid/ transferred to

M/s Ramco International on the same date i.e. Jan 29, 2009.

c. Thus, Krishna Enterprises and Rajesh Service Centre have transferred the entire

amount received from Edserv as above to other entities on either the same day or

next day.

ii. It is also noted that Edserv vide reply dated May 26, 2010 and July 28, 2010 stated that the

amounts received from the loans/ICDs were paid to Krishna Enterprises, Rajesh Service

Centre and Shiv Impex. Edserv claimed that the said payment was made for establishment

of HEAL laboratories/Head Office/computers and accessories.


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iii. Edserv denied that Krishna Enterprises and Rajesh Service Centre were acting as layers for

the alleged transactions. Edserv stated that Krishna Enterprises and Rajesh Service Centre

were associated with ESL for the past 10 years and were carrying out the infrastructure

assignments given by Edserv. It is also contended by Edserv that it was not aware of the

inter-se fund transfers between the supplier entities. Edserv had paid Shiv Impex and

Mahadev Impex Rs.50 Lakhs each for the purpose of furniture and fixture works for HEAL

Laboratories and HEAD Offices. Due to failure to meet with company’s requirements and

consistent delays, Edserv cancelled the purchase orders given to them and received back the

advance amount of Rs.50 Lakhs each paid to them. Edserv denied that it had siphoned of

Rs.4.75 crores. Edserv submitted that the objects for which the IPO was made has been

completed.

iv. Edserv vide letter dated July 28, 2010 to SEBI had mentioned that assignments in respect of

supplier entities (including Shiv Impex and Mahadev Impex) are still continuing. However,

vide its own reply to the SCN, Edserv stated that the purchase orders given to Shiv Impex

and Mahadev Impex were cancelled vide letters dated Jan 2, 2010 and Jan 21, 2010,

Therefore, the submission of Edserv are contradictory.

Further, Edserv submitted that vide its earlier letter dated March 18, 2011, they had

furnished invoices raised by Krishna Enterprises and Rajesh Service Centre. However,

certain discrepancies were noted in the invoices. For instance, the amount mentioned in

words and figures do not match in Invoice No. RSC 13 dated 19/10/2010 raised by Rajesh

Service Centre. Similar mismatch is noted in respect of invoice no. 048 dated 17.11.2001

(even the dates are mentioned wrongly) raised by Krishna Enterprises. Considering the

above discrepancies, the invoices submitted by Edserv cannot be accepted especially in view

of the fact that entities failed to appear for cross examination though sufficient opportunities

were granted to them.

v. Considering the fund flow depicted in the above tables, I find that funds amounting to Rs. 4

crores extended to Edserv by way of ICDs were transferred entirely to other entities

including Shiv Impex and Mahadev Impex either on the same day or the next day. It is noted

that Krishna Enterprises and Rajesh Service Centre acted only as layers for the transactions

made by Edserv to other entities. Further, Edserv had made a direct payment of Rs.50 lakhs


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Conclusion:

18.

The facts of the case detailed in the preceding paragraphs of this order make it abundantly

clear that non-disclosures of material information in the Prospectus were deliberate acts

done to conceal the deeper underlying fraudulent activity of Edserv and its Promoter

Directors. This is clearly evident from the following:

i.

Funds raised by Edserv through ICDs prior to the IPO were routed through various

suppliers and the liability for repayment of such ICDs were attached to the proceeds of

IPO. As a result, the Noticees were able to siphon off and divert IPO proceeds to the

tune of Rs. 4 crores.

Thus, the Noticees indulged in fraudulent activities and thus violated provisions of

Sections 12 A (a), (b) & (c) of the SEBI Act read with regulations 3 (a), (b), (c) & (d),

regulations 4 (1) and 4 (2) (f) of PFUTP Regulations.

ii. In addition, I find that the Noticees have violated Clause 6.2 under Chapter VI of SEBI

(DIP) Guidelines, 2000 read with Regulation 111 of SEBI (ICDR) Regulations, 2009 by

failing to disclose/making wrong disclosure of material information in the offer

document, viz., :

Non-disclosure of the raising of funds to the tune of Rs.4 crores through ICDs

which were in the nature of a bridge loan;

Non-disclosure of purchase orders placed with Krishna Enterprises, Rajesh

Service Centre and Shiv Impex and providing substantial amount as advance to

them.

iii. Further, I find that the Noticees have violated Sections 11C (2) and (6) read with

Sections 11C (3) and (5) of SEBI Act, 1992. By failing to comply with the summons

issued by SEBI.

19. It is noted from the records that Mr. S. Giridharan was promoter as well as Chairman cum

CEO of Edserv. Ms. G. Gita was a promoter and Managing Director and Mr. Ilango

Balakrishna, Mr. T.S. Ravichandran and Mr. S. Arvind were the directors of Edserv at the

relevant time i.e. January 2009 till March 2009. I addition, they were signatories to the offer

documents filed with respect to the IPO of Edserv. Edserv though a legal entity, cannot act

by itself. It can act only through its Board/Management/Key Managerial Personnel etc. In


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respect of allegation of siphoning off funds, the persons in charge of day to day affairs of

the Company viz. Directors/Management/Key Managerial Personnel (as Noticees No. 2-6)

are indeed responsible for the fraudulent activities.

20. As regards the role of Noticees nos. 2 to 6, I have perused their respective replies and it is

noted that Mr. S. Giridharan, the Noticee No. 2 vide email dated December 31, 2015

submitted that Edserv got wound up by the Order of Hon’ble High Court of Madras and

Official Liquidator (OL) has been appointed; hence they are not liable for the affairs of the

Company. In this regard, I note that the 11B proceedings against Edserv and its promoter

directors were initiated before the initiation of winding up of the company. The OL was

not appointed when SCN was issued and reply submitted and opportunities of hearings

granted. The Hon’ble Calcutta High Court in the matter of Official Liquidator, High Court,

Calcutta Vs. Commissioner of Income Tax, West Bengal (AIR 1970 Cal 349) held “ if the

proceedings against a company in liquidation be such as not to affect by itself the assets and properties of the

company in liquidation, then such proceedings cannot be construed as ‘other proceedings ’ referred in Section

446(1) of the Companies Act, 1956, hence leave of the Court is not necessary .” Similar view had been

taken by other High Courts too. In view of the same, I note that the directions

contemplated under this order shall not affect by itself the assets and properties of Edserv

and SEBI has exclusive jurisdiction to pass such direction under SEBI Act. Furthermore, an

opportunity of hearing before me was also afforded to the OL of Edserv on February 24,

2016. However, they neither availed the said opportunity nor filed any reply. I am,

therefore, of the view that the present proceedings against Edserv can be continued without

the leave of the Court and concluded in accordance with law.

21.

It is further noted that the Noticees Nos. 3 and 4 viz., Ms. G.Gita and Mr. Ilanngo

Balakrishana failed to appear before me and also did not file any separate reply till date.

However, it is noted that Edserv, vide its letter dated July 25, 2012 submitted that the reply

filed by Edserv dated May 09, 2012 shall be treated as reply filed on behalf of all the

Directors. Edserv also annexed the extracts of Board Resolution passed by the Board of

Directors in this regard. The said extracts were signed by all the Noticees. Further, the said

Board Resolution also negates the contention of the Noticees Nos. 5 and 6 that they were


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not aware of the present proceedings till the receipt of hearing notices dated December 28,

2015.

22. It is noted from the replies submitted by the Noticees Nos. 5 and 6 viz., Shri T.S.

Ravichandran and Shri S Arvind that they were only independent non-executive directors of

the company and not involved with the day to day affairs of the Company. They further,

submitted that Mr. S. Giridharan and Ms. G. Gita had not disclosed the loans/ICDs availed

by the Company to the Board of Directors at the time of getting approval for the IPO

Prospectus to reflect the correct position on loans/ICD. In this regard, from the information/

documents available in MCA website, BSE/ NSE websites, Annual reports and Prospectus of

Edserv it is noted that the Noticees were members of Audit Committee and had attended all

the Board Meetings during the relevant period i.e. FY 2008-09 and FY 2009-10. It is also

noted that they were signatories to the Offer Documents. In view of this, I find that the

Noticees are indeed liable for the abovementioned violations.

23.

While dealing with a matter of this nature, it would be worthwhile to refer to the following

observations made by the Hon'ble Supreme Court in its judgment dated April 26, 2013, in N.

Narayanan v. Adjudicating Officer SEBI (Civil Appeal Nos.4112-4113 of 2013) held that "SEBI, the

market regulator, has to deal sternly with companies and their Directors indulging in manipulative and

deceptive devices, insider trading etc. or else they will be failing in their duty to promote orderly and healthy

growth of the Securities market. Economic offence, people of this country should know, is a serious crime which,

if not properly dealt with, as it should be, will affect not only country’s economic growth, but also slow the inflow

of foreign investment by genuine investors and also casts a slur on India’s securities market. Message should go

that our country will not tolerate “market abuse” and that we are governed by the “Rule of Law”. Fraud,

deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and ‘market

security’ is our motto."

24. In the present case, the Noticees had acted in a manner highly detrimental to the interests of

the securities market and the investors therein. The rulings of the Hon'ble Supreme Court

discussed in the preceding paragraph apply directly and fully to the facts of the instant case.

The fraudulent activities such as what have been observed in the instant case pose a real threat

to the integrity of our securities market. The violations of law observed with respect to the


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Noticees, if not dealt with sternly, could give rise to a situation where raising of capital would

become extremely difficult even for honest companies.

25. In view of the aforesaid observations/conclusions, it is established that all Noticees have

violated the provisions of Section 12A(a), (b) and (c) of SEBI Act, 1992 read with Regulations

3(a), (b), (c), (d), 4(1), 4(2)(a), (d), (e), (f) and (k) of the FUTP Regulations, Clause 6.2 under

Chapter VI of SEBI (DIP) Guidelines, 2000 read with Regulation 111 of SEBI (ICDR)

Regulations, 2009 and Sections 11C (2) and (6) read with Sections 11C (3) and (5) of SEBI

Act, 1992.

Order –

26. In view of the foregoing, I, therefore, in exercise of the powers conferred upon me by virtue

of Section19 read with Sections 11(1), 11(4), 11(A) and 11B of the SEBI Act read with

Regulation 11(1) of the PFUTP Regulations and the ICDR Regulations, 2009, hereby direct as

follows –

i. Edserv Softsystems Limited and its Promoter Directors, viz. . Mr. S. Giridharan , Ms. G.

Gita, Mr. IIango Balakrishna Mr. T.S. Ravichandran and Mr. S. Arvind are prohibited

from raising any further capital from the securities market, in any manner whatsoever,

for a period of three (3) years.

ii. Edserv Softsystems Limited and its Promoter Directors, viz. . Mr. S. Giridharan , Ms. G.

Gita, Mr. IIango Balakrishna Mr. T.S. Ravichandran and Mr. S. Arvind are prohibited

from buying, selling or dealing in the securities market, in any manner whatsoever, for a

period of three (3) years.

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

Place: Mumbai S. RAMANDate: April 11, 2016 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA