Eros Intl allegedly used non-existent films to siphon funds

The producer of hits such as Bajirao Mastani and Tanu Weds Manu, Eros International Media has allegedly concocted a fiction of immense proportions. According to investigators with the Securities and Exchange Board of India (SEBI), the market regulator, the company has created an illusory world of non-existent movies and distributors, which has led to the disappearance of more than Rs 1,500 crore.

On June 22 order, the SEBI passed an interim, ex-parte order banning Eros International MD Sunil Arjan Lulla and CEO Pradeep Kumar Dwivedi from holding board positions in companies, and also banned them, Eros International, and two related companies from the securities markets until further orders.

According to the interim order, “pending completion of the detailed investigation initiated by SEBI, there is a need to pass an ad-interim ex-parte order to protect the interests of public shareholders as well as the interest of the general investors, and prevent any further deterioration of funds/assets of Eros.’’

In an exchange filing, Eros International Media acknowledged receipt of the order. It added, “We are in the process of seeking legal advice in the matter and taking appropriate actions, as may be advised.” The stock closed nearly 20 percent lower on June 23 at Rs 21.08.

What started it?
Investigations into the company’s affairs started with financials disclosed by the company for FY19-20. The statements showed that the company had suffered impairment (losses) of up to Rs 1,553.52 crore on content advances and film rights. This included the write-off of Rs 519.98 crore worth of trade receivables, including commercial rights for theatrical release and satellite-broadcast.

The National Stock Exchange of India (NSE) examined the statements and filed a report with SEBI. The report stated that prima-facie the transactions indicated that the company was mis-reporting its financials.

The market regulator then launched its inquiry. SEBI investigators found that the company was round-tripping its own funds to show revenues, and entering into agreements with bogus entities, among other things. This seems to have been going on for a decade now, but the company may have made an attempt to clean up its balance sheet by writing off receivables under the guise of Covid-led market distress.

In February 2022, SEBI asked Eros to give copies of the agreements signed with the entities who were given advances for content (such as filmmakers, actors, etc.), and those who were to settle trade receivables (distributors, broadcast rights licensees, etc). But, according to the order, the company gave incomplete information and SEBI extended the deadline for providing the required information.

Despite repeated reminders and a lot of back and forth, the company provided documents for only 50 percent of the written off amount.

Also, the company seemed to be in a hurry to write off the receivables. Per the agreements, the recipients had one more year for making the payments, but the company had written off the entire outstanding in FY19-20 itself.

Substantial money had been transferred by way of content advances for the production of films, but no movies had been made.

Roundtripped receivables
Ten of the 17 entities that had to settle trade receivables were untraceable. Those who were traceable gave sketchy, incomplete information to SEBI on the transaction details. Later, six of them, reached through alternative addresses and through the company directors, responded to SEBI’s summons, but still did not provide sufficient information on how they had commercially exploited the rights given by Eros.

The company directors of these entities were found to be dummy directors, with the companies controlled by others.

Also, the movies — whose rights were claimed to have been sold to these entities — would have required at least 977 separate approvals from the Censor Board to air. But the investigators couldn’t find even one approval, which cast doubts on whether these distributors / licensees had actually made any attempt to commercially exploit the rights they bought.

The order stated, “It prima facie appeared that most of the TREs (Trade receivable entities) were paper companies with no business operations.” The companies had reported zero revenues in some years, the nature of their business had nothing to do with media or entertainment, and some of them had their GST registrations cancelled because they had been obtained through “fraud and wilful misstatement of facts.”

Eros also seemed to have routed funds through some of these entities to pay itself. That is, Eros claimed to have earned Rs 1,623 crore between FY 12-13 and FY 18-19 from 19 distributors / licensee companies. But investigators found that 60 percent of the revenue Eros recognised from these entities were directly / indirectly funded by Eros.

“In some instances, the amounts were paid back by these entities to Eros on the very day the funds were transferred by Eros to their accounts. In other instances, it was transferred back after a gap of a few weeks / months,” the order read.

Naturally, the movies for which the money was paid never got made.

Movies never made
Content advances, before impairment, added up to Rs 1,650 for FY20. Of this, 92 percent or Rs 1,518.2 crore was given to 18 entities. Of this Rs 1,518.2 crore, over 77 percent or Rs 1,172.41 crore seems to have been written off.

This Rs 1,172.41 crore was also 88.8 percent of the total content write-off made by Eros.

SEBI summoned the 12 entities and its directors, asking them to explain how these funds were utilised.

Summons sent to five — who accounted for 42 percent of the content advance write-offs — were returned undelivered with remarks such as “no such consignee.’’

All twelve could not give details of how the funds from Eros were used. SEBI then reached out to the directors of these companies, who excused themselves claiming health issues and that they were in a different city. The market regulator gave them an opportunity to record their statement from wherever they were; they “again failed to present themselves before SEBI,” the order added.

One director did present himself before the regulator, but said that he wasn’t aware that he was the director of the company. He had simply given his KYC documents —PAN, Aadhaar card, and photograph — for Rs 500, because he needed the money.

Eleven out of the 18 entities were prima facie found to be directly / indirectly connected to Eros through common Directors. These 11 entities accounted for 65 percent of the losses / impairment by way of advances for content.

When the bank statements of the entities were examined to see the utilisation of funds given by Eros, it seemed “prima facie, Eros appeared to have siphoned off / diverted funds using these CAEs (content advance entities) since FY2012-13,” added the order.

SEBI’s investigators also found that at least Rs 56.73 crore of the funds advanced by Eros were ultimately transferred by the content associates to relatives of the promoter of Eros, Vikram Rajani. Rajani is the brother-in-law of the MD and Vice-Chairman of Eros, Sunil Arjan Lulla.

For example, on January 5, 2018, Eros had paid Nextgen Films Rs 6.5 crore for the production of Phobia 2. But, within four days, Nextgen transferred Rs 6.1 crore to Rajani’s personal bank account.

Also, the money paid to these content associates was used to pay off loans taken by them. This included Rs 26 crore that Eros had transferred to Nextgen as part-payment for four movies, including Chanda Mama Door Ke, which was supposed to have the late Sushant Singh Rajput as the lead. The late actor was reported to have gone to NASA for training for the space-mission movie.

However, on analysis of bank statements, SEBI investigators found that the money transferred for the making of these four movies was returned the very same day (January 9, 2017) by NextGen as repayment of its loan. Moneycontrol