Goenka and Chandra may move SAT over Sebi ban this week

Media mogul Subhash Chandra and the chief executive officer (CEO) of his merger-bound firm Zee Entertainment Enterprises Ltd, Punit Goenka, are gearing up to challenge an interim directive of the Securities and Exchange Board of India (Sebi).

The Sebi directive restrains the duo from holding directorship positions in any publicly listed firm, over allegations of fund diversion.

A petition against Sebi’s 14 August order is expected to be filed with the Securities Appellate Tribunal (SAT) either on 17 or 18 August, according to two people, seeking anonymity.

They are seeking to get the order quashed or secure a stay, they added.

On Monday, Sebi upheld its 12 June order preventing the father-son duo from occupying any key positions or directorial roles in Zee Entertainment or any listed firm over allegations of fund diversion of ₹200 crore from Zee Entertainment (involving group firms as well as associate entities in 2019).

“If the investigation by Sebi, which pertains to a 2019 case, is not complete yet and takes eight more months, a ban on the individuals does not hold any ground,” said one of the two people cited above.

“First, the order was passed hastily without proper investigation or hearing, merely days before the tribunal’s pending approval for the merger. Two, the case does not pertain to any kind of stock price manipulation or unfair gains made from the market. So, it is unfair that they are banned from holding key management positions or directorships. It could be done only if a thorough investigation is concluded and the veteran corporate leader of a publicly held company is found guilty officially. He can be debarred if adequate evidences are found and if a court of law agrees with such findings. Otherwise, this interim ban order is like pronouncing two individuals guilty without having proof of their alleged action,” he added.

Zee Entertainment and Sony Corp.-owned Culver Max Entertainment Pvt. Ltd are in the process of a merger, which will create India’s second-largest media and entertainment firm worth at least $10 billion.

After 97% public shareholders approved the merger proposal, the National Company Law Tribunal cleared the amalgamation last week. A Zee spokesperson refused to comment on the development.

On Monday, Sebi, in its revised order following SAT’s earlier directive, said that while the entities ( Goenka and Chandra) may argue that even the limited restraint noted above will be excessive and disproportionate in the matter, it is emphasized that the imminent effect of permitting the entities to be in position of influence is that the ongoing investigation cannot be fair and complete.

“The interests of entities are factually in direct conflict with the interests of the public shareholders and the company (Zee Entertainment). As prima facie found, the entities have actively tried to conceal the very acts which have led to the loss of at least ₹143.9 crore to the public listed companies including ZEEL,” said Sebi.

In a recent submission to Sebi, Goenka has stated that he is integral to the functioning of the merged company due to his experience in the industry.

Sebi’s order, passed by its chairperson Madhabi Puri Buch herself, said Goenka’s conduct as the managing director and CEO of Zee Entertainment has been found to be prima facie in violation of norms on prevention of fraud and unfair trade practices and listing obligation rules.
“His actions were in direct conflict with the interests of 96% public shareholders of ZEEL, necessitating imposition of temporary restraint on him,” said Sebi.

In this context, Buch referred to a statement given by Subhash Chandra in an interview given to TV channel ET Now wherein he cited Goenka emphasizing that the merger was significant irrespective of his role, as “the resulting entity will be under Sony’s control…

“Thus, in my view, the restrictions imposed on him are reasonable…it would be appropriate that he is not part of the management of ZEEL or any corporate avatar of it,” said Sebi.

For keeping Chandra too debarred from any directorship, Sebi said, “One cannot lose sight of the fact that in the instant case, it is the LoC (letter of credit) issued by Chandra, which is the original/root cause of the entire scheme, which has, prima facie, been orchestrated. In the absence of the LoC, neither Yes Bank Ltd would have appropriated the fixed deposit of ZEEL towards the loans of associate entities nor any loss would have been caused to ZEEL.”

However, countering these arguments, the second person said Sebi should look at the “macro picture” and protect shareholders interest.

“Sebi cannot take months and months for an investigation (as in a case related to the Adani group and now in ZEE ). In the case of Adani, the Supreme Court had made this remark about Sebi. Despite that, Sebi has asked for more time,” said the second person.

He said in Goenka’s matter, SAT had clearly ordered Sebi to issue a final order after completing all investigations within two weeks.

Sebi has not done the same, but asked for eight months more to conduct investigation.

“The detrimental point here is that till eight months, Sebi has ordered Goenka to be out of office. He is currently responsible of ZEEL and will be responsible of Sony-ZEE (as a merged company),” said this person.

The second person said Sebi needs to be regulated and governed, and its decisions need to be monitored by another neutral agency. Sebi cannot compromise shareholder interest while investigating alleged transactions.

Following an earlier SAT directive, Chandra and Goenka had filed their written replies to Sebi through letters on 24 July 2023.

Subsequently, Sebi sought certain documents from the two on 29 July and gave Chandra and Goenka an opportunity of a personal hearing on 31 July.

Sebi said that after considering the submissions made by Chandra and Goenka, the issue that now needs examination is whether the interim measures taken against the two need to be revisited or not.

“One of the key purpose behind issuance of urgent interim directions against the entities was to ensure a fair and transparent investigation in the matter, which would not be possible while the entities are in positions of influence in ZEEL and the other listed companies,” said Sebi.

“The directions are temporary in nature,” said the Sebi note, adding that it is Sebi’s priority to insulate the assets of the public listed companies from exercise of any influence or control by the Chandra and Goenka.

“A $10 billion merger is at stake, interest of 96% shareholders is at stake, who have been patiently waiting for the merger to complete. The merger has received all regulatory approvals. Within 30 days, the merged company could have been formed. But this order may throw a spanner in this process, since the merged company will not have a leader to drive it to its desired goals,” added the second person. Live Mint