Sebi bans Zee promoters Subhash Chandra, Punit Goenka from holding directorial, key managerial roles over fund siphoning

Market regulator Sebi has banned Subhash Chandra, chairman of Essel Group  and Punit Goenka, the Chief Executive Officer (CEO) of Zee Entertainment Enterprises (ZEEL) from holding a director or Key Managerial Personnel in any listed company or its subsidiaries until further orders. Sebi's directions come after the regulator found that Subhash Chandra and Punit Goenka siphoned off funds for their own benefits from their listed entity ZEEL.

The interim order, while likely to be challenged by the promoters, has come at a time when the company is seeking regulatory approvals for a merger with Sony Pictures Networks India, and such an order, legal experts believe, is a major blow for the company.

Sebi asked ZEEL to place this direction before its board within 7 days from the date of receipt. Also, the regulator gave both Subhash Chandra and Punit Goenka 21 days of time to file their reply or objections if any in the case.

An interim order is issued by Sebi when there is prima facie evidence of wrongdoing. The Sebi order read: “The Noticees (Chandra and Goenka) shall cease to hold the position of a director or a Key Managerial Personnel in any listed company or its subsidiaries until further orders."

Both Chandra and Goenka came under Sebi's radar after the resignation of two independent directors of ZEE — Sunil Kumar and Neharika Vohra – from the board in 2019, citing various concerns including the appropriation of fixed deposits of ZEE by Yes Bank, which prompted Sebi to initiate a probe into the matter.

A senior corporate lawyer said, “The only silver lining for ZEE is that the order is interim in nature and they have the opportunity to file their replies and be heard. Likely they will seek and get an injunction pending a final order.”

In her resignation letter, Neharika Vohra said, "At the October 17, 2019 meeting it was brought to light via a letter received by the board from the concerned bank that guarantees have been given to a subsidiary without approval from the board. The operating team treated the issue very casually.”

According to the Sebi order, Subhash Chandra had provided a letter of comfort (LOC) for a ₹200 crore loan to Essel Group Mobility. The probe revealed Subhash Chandra gave this LOC without obtaining board approval for the same.

“The above facts make out a prima facie case of Subhash Chandra and Punit Goenka having abused their position as directors/KMPs of a listed company for siphoning off funds for their own benefit,” said Ashwani Bhatia, a whole-time member of Sebi in the 16-page order.

In the LoC, it was said that "This is with regards to the ₹200 crore loan outstanding in Essel Green Mobility from Yes Bank. We will ensure that a fixed deposit of at least Rs. 200 crore is available with Yes Bank, from any one of Essel Group of companies (including Zee Entertainment), at all times whilst the said facility remains due and outstanding and that in the event of default under the said facility, you may appropriate the fixed deposit towards repayment of the said Facility.”

Sebi revealed that from Vohra's resignation letter to the chairman of the board of directors of ZEEL, it was observed that the LoC was known only to a few persons in management and even the board of ZEEL was not aware of the same.

Due to the LoC, Yes Bank had adjusted a fixed deposit of ₹200 crore of ZEEL for meeting the obligations of seven entities which are called "Associate Entities" towards the bank.

These Associate Entities are --- Pan India Infraprojects, Essel Green Mobility, Essel Corporate Resources, Essel Utilities Distribution Company, Essel Business Excellence Services, Pan India Network Infravest, and Living Entertainment Enterprises.

Sebi observed that these seven associate entities were owned by family members of Subhash Chandra and Punit Goenka (Promoter Family).

The promoter family is also the beneficial owner of promoters of ZEEL.

Also, in the annual report of ZEEL for the financial year 2019-20, these associate entities were mentioned as companies controlled by key management personnel (“KMPs”) and their relatives.

The KMPs included Subhash Chandra and Punit Goenka.

When probed by Sebi, ZEEL submitted to the market regulator that ₹200 crore, equivalent to the value of FD which was encashed by Yes Bank for the dues from Associate Entities owned by Promoter Family --- had subsequently been received back from those Associate Entities in September/October 2019.

But ZEEL confirmed that Chandra and Goenka had signed of LoC without informing, consulting, and or approval of ZEEL or its board members -- which had violated Sebi's obligations and disclosure requirements regulations.

Subsequently, Sebi initiated adjudication proceedings against ZEEL, Subhash Chandra, and Punit Geonka.

After examining the bank statements of ZEEL, Sebi found out that although ZEEL claimed to have received ₹200 crore from these associate entities of promoters --- major portion of the said funds had actually originated from either ZEEL itself or the listed companies of Essel Group.

The funds had followed a circuitous route!

This means that the funds had originated from ZEEL/other listed companies of Essel Group --- which moved through multiple layers of Promoter Family owned/controlled entities --- and were ultimately transferred to ZEEL. This was done to show the fulfillment of payment obligations of the associate entities towards ZEEL.

But clearly, it indicated that no actual net receipt of funds by ZEEL, and these were merely book entries to show receipt of funds, as per Sebi.

Data from Sebi showed that ZEEL and other listed companies of Essel Group had at least transfered ₹143.90 crore -- to falsely portray repayment of due amounts to ZEEL from these associate entities.

Accordingly, Sebi said, "It appears that funds had been siphoned off from ZEEL and other listed companies of Essel Group. The funds diverted from ZEEL/other listed companies had ultimately benefitted the Promoter Family, as the Associate Entities which were the beneficiaries of appropriation of ZEEL’s FD of Rs.200 Crore by Yes Bank for settlement of their liabilities are owned/controlled by the Promoter Family of ZEEL."

"The siphoning of funds appears to be a well-planned scheme since, in some instances, the layering of transactions involved using as many as 13 entities as pass-through entities within a short period of two days only,” the order read.

Such transactions along with poor corporate governance practices led the company's stock to fall significantly. Between FY19 and FY23, shares of ZEE lost a third of their value. Shares of Zee Entertainment closed at ₹195 apiece on Monday, up 0.5% from the previous close. At its peak, Zee shares traded at around ₹600 apiece in FY19.

The company did not respond to Mint’s request for comments at the time of publication.

SEBI JUSTIFIES DIRECTIONS AGAINST CHANDRA, GOENKA

Sebi also justified these interim directions against Subhash Chandra and Punit Goenka citing their active involvement in running the company even today.

For now, Sebi has found Subhash Chandra to have a direct role in the diversion of funds of ZEEL and other listed companies of Essel Group because he was the chairman of the Group including ZEEL at that relevant time.

It is important to note that Chandra has long resigned from the company, while Goenka continues to be the MD and CEO of ZEE.

“Although the Promoter Family is only holding 3.99% shares in ZEEL, Subhash Chandra and Punit Goenka continue to be at the helm of affairs of ZEEL. Considering the above, I am of the opinion that, while the investigation is still underway, their continuation as a director/Key Managerial Personnel in any listed company or its subsidiaries is likely to be prejudicial to the interest of those companies, particularly its investors,” the order said.

Meanwhile, the regulator stated that Punit Goenka was the MD and CEO of ZEEL at the time when the funds were moved out of ZEEL for being routed again to ZEEL through layered and circuitous transactions, for falsely portraying that ZEEL had received the dues from Associate Entities.

And hence, Sebi said, these transactions could not be possible without the active involvement of Chandra and Goenka.

Coming to the balance amount of ₹56.1 crore (Rs.200 Crore – Rs.143.90 Crore), the fund trail is also under examination and Sebi has not ruled out the possibility that the same has also been siphoned off from ZEEL/other listed companies of Essel Group.it has