NCLT Reserves Order In Zee-Sony Merger Matter

The National Company Law Tribunal reserved its order, on Monday, in the matter concerning the merger of Zee Entertainment Enterprises Ltd. with Culver Max Entertainment Pvt.—also known as Sony Pictures. The court has heard objections from several Essel Group creditors.

Zee and Sony had agreed to merge their businesses in December 2021. They had also obtained the requisite permissions from the NSE, BSE, and other sectoral regulators—such as the Competition Commission of India and the Securities and Exchange Board of India—before approaching the tribunal for sanctioning the merger. It had come to a halt at NCLT following objections raised by several creditors of Essel Group against the non-compete clause added into the scheme.

According to the scheme, Essel Mauritius—an Essel Group entity—will receive a non-compete fee of Rs 1,100 crore from Sony Group entity SPE Mauritius in consideration for Subhash Chandra's right to compete against the merged entity. According to the creditors, this clause is a scheme to defraud the creditors and round-trip the amount that should have ideally accumulated to Chandra.

As Chandra has given personal guarantees to several of these creditors, any amount accrued to him could have been useful in paying off the debts. By diverting it to a third party, the scheme is essentially depriving Chandra's creditors of any claim to such an amount.

Axis Finance Ltd., JC Flower Asset Reconstruction Co., IDBI Bank Ltd., Imax Corp., and IDBI Trusteeship Ltd. are entities that have objected to the scheme.

The NSE and BSE have placed on record before the court two orders in the matter of the Essel Group entities, where the promoters diverted funds from the listed entity for the benefit of their associate entities. This included an order against Punit Goenka barring him from holding a directorial position in any listed company. The order was upheld by the appellate tribunal earlier on Monday.

According to the objectors, the order has a direct bearing on the merger, as one of the integral parts of the scheme of merger is the appointment of Goenka as the Managing Director of the merged entity. As there is a regulatory bar on Goenka holding such positions, the merger shouldn't go through, they submitted.

They also said that it's meaningless to say that SEBI has already approved the scheme, as it can neither approve nor reject a scheme. It can only grant a no-objection certificate for the same.

Arguments were also made against the purpose of including a non-compete clause as part of the scheme, as the agreement basically entails an arrangement between entities that are not parties to the scheme.

According to company law, a merger is an arrangement between a company and its shareholders. As neither Essel Mauritius nor SPE Mauritius fall under either of the categories, shareholders of Zee are not eligible to approve the scheme as submitted.

Countering the argument, Zee's counsel, Senior Advocate Janak Dwarkadas, submitted that these provisions in the scheme were never meant to overwrite any statutory disqualifications. If he is disqualified, the shareholders are free to choose another Managing Director. Their power doesn't go away. The scheme shouldn't fail because of his disqualification, it was further argued.