The Securities and Exchange Board of India’s (Sebi’s) interim order against Essel Group’s Subhash Chandra and Punit Goenka has brought back alleged lapses in corporate governance into the limelight.
It all started with a Letter of Comfort (LoC) given by Chandra to Yes Bank for appropriation of a fixed deposit held by Zee (ZEEL) against a loan of Rs 200 crore given to associated entities in 2019.
However, the issuance of the letter led to resignations by independent directors Sunil Kumar and Neharika Vohra. In her resignation letter, Vohra wrote at the October 17, 2019 meeting that it was brought to light via a letter received by the board from the concerned bank that guarantees were given to a subsidiary without approval from the board. “The operating team treated the issue very casually,” wrote Vohra.
The company, on its part, claims the LoC was given by Chandra in his individual capacity, which would, as a result, have no financial implication on the group.
But the problem wasn’t just the LoC, but the way the money made its way to the books of Zee’s listed entities. While Sebi’s investigations have been done for about 70% of the money or Rs 143 crore, it believes that the rest of the money would have been siphoned off in a similar manner.
While Zee group claimed that the associated entities repaid the money, the market watchdog’s investigations found that the money originated from listed entities’ own books, went on a long trip across various associated entities’ accounts, and finally made its way back to the listed entities’ accounts.
For example, ZEEL claimed to have received Rs 22.30 crore from Essel Corporate Resources (ECRPL) on September 30, 2019. But the money had come from Dish Infra Services (DISPL), a wholly-owned subsidiary of Dish TV India, a listed company under the Essel group.
As Sebi’s flowchart showed, the money went from Dish TV to five other subsidiaries – all owned by Chandra and Goenka – before it went to ECRPL, and it, in turn, paid ZEEL. “The above flow of funds clearly indicates that there was no actual net receipt of funds by ZEEL, and these were merely book entries to show receipt of funds,” stated the Sebi order.
Similarly, ZEEL claimed to have received Rs 17.40 crore from Living Entertainment Enterprises (LEEPL) and Rs 49.30 crore from Pan India Network Infravest (PINIL) on October 1, 2019. However, the repayments originated from Zee Studios, a wholly-owned subsidiary of ZEEL, on September 30, 2019.
Sebi’s order gives several other examples of siphoning off funds from the listed companies to the unlisted subsidiaries that eventually went back to the books of the listed companies.
In some instances, the layering of transactions involved using as many as 13 entities as pass-through entities within two days. It was also observed that one promoter of ZEEL, Sprit Infrapower & Multiventures, acted as a conduit entity and aided & abetted the siphoning off funds.
While the company has moved the Securities Appellate Tribunal and will be heard on Thursday – just a day before the crucial National Company Law Tribunal (NCLT) hearing on the Zee-Sony merger – this is not the first time that the group has come under the regulators’ lens in recent times.
On May 26, the National Company Law Appellate Tribunal (NCLAT) came to its rescue after the NCLT directed the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) to review their approval given to the Zee-Sony merger. The NCLT had passed its order on May 11 after Sebi had given an adverse ruling against an Essel group firm, Shirpur Gold Refinery, in April.
The interim order-cum-showcause notice by Sebi had alleged that Shirpur Gold Refinery had created a scheme to divert funds from debtors to entities of promoter groups. The two-member NCLAT bench said that Zee should have been heard in the matter and has remitted the case back to NCLT.
Earlier in April, Goenka settled investigations against him by the market regulator for alleged failure to put in place adequate internal controls within the company to identify unpublished price-sensitive information (UPSI). He paid `51 lakh as a settlement fee.
Incidentally, both Chandra and Goenka had filed for a settlement application in this case as well, but it was rejected by the capital market watchdog.
At a time when the company is awaiting regulatory approval for the impending merger with Sony Pictures Networks India, a spate of negative regulatory orders does not augur well for any group.
But both Chandra and Goenka have shown immense ability to beat all the odds over the years. Will this be just another one in that long list?