Zenith's FCCB default: Is it a case of can't pay or won't pay?

What is happening at Zenith Infotech? The company, a business continuity and cloud computing services provider, has lost 80 percent of its market capitalisation in the past six months. That’s mainly because it has failed to pay Rs 450 crore due to its creditors on maturing foreign currency convertible bonds (FCCBs).

But this is no ordinary company default. Judging by the company’s own data, questions are being raised on whether Zenith is withholding payments to bondholders.

Firstpost has sent an email to the company asking for their side of the story, but is yet to receive a reply.

[caption id=“attachment_229442” align=“alignleft” width=“380” caption=“Market insiders are asking if Zenith failed to disclose price-sensitive information in a transparent manner . Shareholders and bondholders are suffering as a result. Reuters”]  [/caption]

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The company first defaulted on repaying FCCBs worth $33 million (Rs 165 crore) in September last year, but only admitted to the same in October in a press release to the Bombay Stock Exchange. It then proceeded to default on another set of FCCBs worth $50 million (Rs 250 crore).

A year ago, on 27 December 2010, the company had said that it would consider various fund-raising options to repay FCCBs due in 2011 and 2012.

It’s hard to understand why the company has defaulted on its debt because in its results for the three months to September, the company declared that its cash and bank balances totalled Rs 187 crore. More strangely, this figure jumped to Rs 262 crore for the period ending 30 September when it published its annual report in December.

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Something else has also irked bondholders: in September 2011, Zenith announced that it had spun off its managed services division (its only other division is the cloud computing business). Then it was sold to Summit Partners, a $14 billion private equity player. No financial details, however, were provided.

When bondholders approached the Bombay High Court, the court directed Zenith to disclose the details. It was revealed that Summit Partners had bought the business for $54 million (Rs 250 crore). However, it turns out that Zenith in India had only received half that amount, while a Middle East subsidiary, Zenith UAE, received the balance $27 million (Rs 135 crore).

Zenith UAE booked revenues of Rs 50 lakh for the financial year ending March 2011. There is no explanation why it received 50 percent of Summit’s payment.

In any case, Zenith India’s cash balance should have increased to Rs 400 crore at the end of September with the sale to Summit, considering its initial balance of Rs 150 crore. But, as mentioned before, the annual report said the company only has Rs 262 crore.

And bondholders have still not got any money.

In a court hearing after October, the company said it transferred almost $15 million (Rs 75 crore) to Vu Technologies, which is run by Devita Saraf, the sister of Zenith’s Managing Director Ashok Saraf). Vu Technologies, which is mentioned as a related party in the annual report, later became a subsidiary of Zenith to justify the transaction.

A bigger shock for bondholders came on 22 December, when the company announced that it was considering paying dividends to shareholders.

That infuriated bondholders were aghast at the company’s attempt to funnel out more cash from the company (65 percent of Zenith is held by the promoters). They filed a lawsuit to block any dividend payments.

After the Mumbai High Court issued an order directing Zenith not to pay any dividends, the company cancelled its plans in this regard.

The Court on 14 February also blocked any transfer or sale of its cloud computing business arm. Via a trustee, the bondholders (mainly represented by QVT Advisors) have filed a petition to wind up the company, which will be heard on 7 March.

Market insiders are asking if Zenith failed to disclose price-sensitive information in a transparent manner - like failing to repay its foreign bonds and selling its business division. Shareholders and bondholders are suffering as a result.