Mumbai: A recent order by the markets regulator barring Zee Entertainment Enterprises Ltd (ZEEL), founder and chairman emeritus Subhash Chandra, and chief executive Punit Goenka from accessing the securities market will likely delay the company’s fundraising plans, unless stayed by the appellate authorities, legal experts said.
The Securities and Exchange Board of India (Sebi) on Friday restrained them from accessing the securities market, and prohibited them from buying, selling or otherwise dealing in securities for a specific period.
While ZEEL has been barred for two months, Chandra and Goenka have been barred for 12 months in a case involving unauthorised pledge of the company’s land in Hyderabad for loans by Essel Group entities. The order said that ZEEL was required to disclose the “fraudulent and unauthorised pledging” of the Hyderabad land to the stock exchange and on its website. “ZEEL failed to make the said disclosure.”
On Friday, the company’s shareholders approved a ₹3,143.5-crore fundraising plan that would lead to the promoter raising its stake to 23.79%, from around 4% currently.
“Considering the directions issued by Sebi, if the same are not stayed by the Securities Appellate Tribunal (SAT), the company's proposed fundraise through convertible warrants is likely to be delayed by approximately two months, as the company has been debarred from accessing the securities market for that period,” said Akshaya Bhansali, managing partner at Mindspright Legal.
Bhansali said that the immediate remedy available to all three is to challenge the order before the SAT, seeking to quash it along with a prayer for interim relief staying the operation of the directions pending final adjudication of the appeal.
A spokesperson for ZEEL said that with regards to the allegations levied against the company and its promoters, the required measures in accordance with the law will be taken, to protect the interest of all stakeholders. The spokesperson said that the company “firmly believes that the order from Sebi has no direct bearing on the fund-raising exercise.”
Legal experts said that the impact of this order goes far beyond delaying the near-term fundraise.
“While fundraising may resume thereafter, future equity or securities issuances will face heightened due diligence, disclosure and regulatory scrutiny under the Sebi ICDR (Issue of Capital and Disclosure Requirements) and LODR (Listing Obligations and Disclosure Requirements) Regulations and the Companies Act, 2013,” said Rohit Jain, managing partner, Singhania & Co.
Jain said that incoming investors may demand enhanced governance protections, warranties, indemnities or valuation discounts. The findings, said Jain, could therefore increase execution risk and cost of capital, constrain the available investor pool and materially affect confidence in management, financial reporting and use of corporate assets.
Others said that Sebi’s order underscores the non-negotiable principle that the assets of a listed company constitute corporate property held for the benefit of the company and all its shareholders, not its promoters.
“While the enforcement outcome reinforces fiduciary accountability and the primacy of corporate governance, regulatory legitimacy equally depends upon consistency, procedural fairness and timely intervention. Enforcement delayed by several years, however legally sustainable, inevitably raises questions on regulatory efficacy and market certainty,” said Kunal Sharma, managing partner, TARAksh Lawyers and Consultants.
A mature securities market, said Sharma, demands that regulatory action be principled, predictable and uniformly applied, so that both governance standards and investor confidence are strengthened in equal measure.
In a note on Sunday, proxy advisory firm InGovern said that in the extraordinary general meeting on 31 July, shareholders of ZEEL approved the issue of ₹3,143.5 crore worth of fully convertible warrants to promoter group entity Sunbright Mauritius Investments Ltd on a preferential basis.
“It turned out to be a pyrrhic victory for the promoters who sought to increase their shareholding without setting right the governance lapses of the company,” it said.
The note said that as per the current state of affairs, the company cannot proceed with the warrant issue, even though the shareholders have approved it, and the promoters cannot participate during their restraint period.