SEBI Details How Zee Promoters Goenka And Chandra Diverted Funds

The Securities and Exchange Board of India, in a confirmatory order on Monday, barred Zee Entertainment's promoters Subhash Chandra and Punit Goenka from holding managerial and board positions.

The regulator has barred the father-son duo from holding key managerial or board positions in four Zee entities, namely Zee Entertainment Enterprises Ltd., Zee Media Corp., Zee Studios Ltd., and Zee Akaash News Pvt.

The bar also extends to any entity that's formed pursuant to the merger or demerger of any of these entities. This should be seen in light of the recent NCLT approval to the Zee-Sony merger. According to the scheme, Goenka is to be the managing director of the merged entity for five years.

The SEBI order from this week confirms the regulator's findings of its interim order of June 12.

To do so, SEBI has examined whether the evidence put forward by Chandra and Goenka warranted a modification of its interim findings, specifically:

1. Whether the Letter of Credit issued by Chandra was made in a personal capacity or as the Chairman of Zee.

2. Were the transactions undertaken by Zee with seven associate companies genuine, as argued by the parties? 

To recap, in its interim order, SEBI had highlighted that Chandra had issued a Letter of Comfort to Yes Bank Ltd. in September 2018 for loans availed by certain associate companies. Later, on the strength of this LoC, Yes Bank had adjusted Zee's fixed deposit of Rs 200 crore for meeting the obligations of the seven entities who had taken the loans.

This was done without the knowledge of the company's board, in violation of the Listing Regulations, the interim order had concluded.

During the personal hearings, Chandra submitted that the LoC was given in his personal capacity as it was not on the letterhead of Zee.

SEBI has dismissed this argument in its confirmatory order.

It has pointed out that the letter mentioned Zee Entertainment. Also, it said, a fixed deposit to the tune of Rs 200 crore was made by Zee the very next day after the LoC. This gives credence to the fact that the letter was issued by Chandra not in his personal capacity but as the Chairman of Essel Group and Zee, the order said.

Also, it has questioned why no effective steps were taken by Zee against Yes Bank, if in fact the company believed that the LoC was given by Chandra in his personal capacity.

The second issue before the regulator was the genuineness of the transactions undertaken between Zee and the seven associate entities. The interim order had noted that the seven associate entities that had borrowed from Yes Bank never repaid Zee. In fact, Zee's own funds were routed via several layered transactions to show that the repayment was done.

Like in its interim findings, SEBI's confirmatory order, too, relies on bank statements to prove that the transactions weren't genuine.

Chandra and Goenka, during the personal hearings, submitted that the transactions undertaken by Zee with related parties were purely commercial in nature, and to assume otherwise would be unjust. They also contested the regulator's reliance on bank statements. They argued that bank statements by themselves can never lead to a conclusion that transfer of money is pursuant to a sham transaction or on account of circuitous transactions.

In its confirmatory order, the regulator has agreed with this argument saying per se a bank statement cannot lead to conclusion of a sham transaction. But it goes on to point out that an entry in the bank statement shows that a particular transaction has taken place in the account of the holder.

After a thorough examination of the statements, SEBI has unraveled several layers of transactions through which the promoters diverted Zee's funds.

The pattern involved was almost the same for all the seven associate entities, SEBI has shown:

1. At first, Zee, its subsidiary, or any other listed company of the group transferred its funds to a related party or parties with whom it has business relationships.

2. The recipient transferred identical funds to conduit entities within a day or two. For a few days, these funds are transferred between these conduit entities before ultimately reaching Sprit Infrapower and Multiventures Pvt., a promoter entity of Zee; or Churu Enterprises, an entity owned by Punit Goenka and his mother Sushila Goenka.

3. These entities finally transferred funds identical to those they received from conduit entities to associate entities.

4. In the final leg of the transactions, an amount identical to the ones received from the promoter entities is transferred back to Zee, completing the cycle of fraudulent transactions.

All these associate entities had negligible balances prior to the receipt of funds from promoter entities. In five out of six instances, the money received from Spirit Infrapower or Churu was transferred to Zee within 7 to 27 minutes, SEBI said.

In all instances, where Spirit Infrapower transferred funds to associate entities, the money originated from Churu Enterprises on the same day. This prima facie, according to SEBI, establishes an orchestration of fund movement, as all of these can't be mere coincidences.

To illustrate, SEBI has shown the pattern by looking at the funds returned by Essel Green Mobility Ltd. The company, a related party of Zee, owed Rs 17.1 crore to Zee on account of appropriations made by Yes Bank. The money was duly returned to Zee on Sept. 27, 2019.

The fund trail demonstrates, according to the regulator's order, that Essel Green Mobility received an identical sum from Pan India Infraprojects a few minutes prior to the repayment. The trail also demonstrates that Pan India received the money from Spirit Infrapower, a promoter entity of Zee.

Spirit Infrapower, in turn, received these funds from Zee or other entities of Zee, including Zee Akaash News.

Thus, considering that these transactions could be part of a scheme to divert Zee's funds, the market regulator has prima facie found Goenka and Chandra in violation of its Listing Regulations as well as the Unfair Trade Practices regulations.

It has ordered further investigation into the matter, which has to be completed within eight months.