Sebi ban: Here’s what regulator held Subhash Chandra and Punit Goenka guilty of

The Securities and Exchange Board of India (Sebi) on Monday issued a strongly-worded order against former Zee Group chairman Subhash Chandra and Punit Goenka, the Managing Director and Chief Executive Officer of Zee Entertainment Enterprises, for allegedly abusing their positions in the company and siphoning off funds for their own benefit. 

The capital markets regulator has barred the duo from holding the position of director or key management personnel in any listed firm until further orders. That brings us to the question: What exactly was the wrongdoing that the duo was found to be involved in and what was their modus operandi? 

Simply put, the regulator found that they used fixed deposits (FDs) worth Rs 200 crore of Zee Entertainment Enterprises (ZEEL) to repay loan of certain entities—seven to be precise—that were either owned or controlled by family members of Chandra or Goenka. 

More importantly, the decision to use the FDs was taken by Chandra—who issued a Letter of Comfort (LoC)—without the knowledge of the company’s board and only a few in the management were aware of it. 

In the regulator’s words, Chandra and Goenka “abused their position as directors/KMPs of a listed company for siphoning off funds for their own benefit”. 

The matter dates back to November 2019 when Sebi initiated an investigation after two independent directors of ZEEL—Sunil Kumar and Neharika Vohra—resigned after raising several concerns, one of which related to appropriation of certain FDs of ZEEL by YES Bank for squaring off loans of related entities of Essel Group. 

“At the October 17, 2019, meeting it was brought to light via a letter received by the board from the concerned bank that guarantees have been given to a subsidiary without approval from the board. The operating team treated the issue very casually,” Vohra said in her resignation letter. 

Here’s how it was executed. 

On September 4, 2018, Chandra, the then chairman of ZEEL/Essel Group, issued a LoC towards credit facilities availed by certain group companies from YES Bank. “This is with regards to the Rs 200 crore loan outstanding in Essel Green Mobility Ltd from YES Bank Ltd. We will ensure that a fixed deposit of at least Rs 200 crore is available with YES Bank Ltd, from any one of Essel Group of companies (including Zee Entertainment Enterprises Ltd), at all times whilst the said facility remains due and outstanding and that in the event of default under the said facility, you may appropriate the fixed deposit towards repayment of the said Facility,” stated the LoC. 

Thereafter, based on the LoC, YES Bank adjusted the Rs 200-crore FD of ZEEL against payment obligations of seven entities—Pan India Infraprojects, Essel Green Mobility, Essel Corporate Resources, Essel Utilities Distribution Company, Essel Business Excellence Services, Pan India Network Infravest, and Living Entertainment Enterprises. 

As mentioned earlier, all seven entities were either owned or controlled by family members of Chandra or Goenka— ZEEL’s annual report for FY20 mentioned that the seven entities were controlled by key management personnel and their relatives and the KMPs included Chandra and Goenka. 

Interestingly, when questioned by Sebi, the company stated that Rs 200 crore—equivalent to the value of FD that was encashed by YES Bank for the dues of the seven entities—subsequently made its way back to those firms in September/October 2019. 

However, per Sebi, since the duo issued an LoC on behalf of the company without informing or consulting the ZEEL’s board, it amounted to a violation of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and adjudication proceedings were initiated. 

Further, a detailed analysis of bank statements showed that the money repaid to ZEEL actually originated from the company itself or other listed firms of Essel Group. 

“Analysis of the said bank statements showed that although ZEEL had claimed to have received Rs 200 crore from the abovementioned seven Associate Entities of the promoters, major portion of the said funds had originated from either ZEEL itself or listed companies of the Essel Group, which after passing through several layers, reached the accounts of the Associate Entities from where it ultimately landed in ZEEL’s account,” stated the Sebi order. 

“The funds had followed a circuitous route where funds originated from ZEEL/listed companies of Essel Group, passed through various entities owned or controlled by Promoter Family and ultimately ended up with ZEEL,” it added. 

“… 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 Sebi, in its 16-page order. 

According to Sebi, at least Rs 143.90 crore had been transferred from ZEEL/other listed companies of Essel Group to falsely portray repayment of due amounts to ZEEL from the seven entities. 

Meanwhile, a statement issued by ZEEL stated that the board is “currently in the process of reviewing the detailed order, and appropriate legal advice is being sought in order to take the next steps as required.” 

“With a singular focus on enhancing the shareholder value year after year, the Board of the Company has continued to guide the management towards its strategic goals and priorities for the future. All the appropriate steps will be actioned as necessary, in order to ensure that the interest of the Company and all its valuable shareholders are kept at the forefront. The Board recognizes the significant contribution made by Dr. Subhash Chandra as the founder of the Company and the growth and value generation centric leadership showcased by Mr. Punit Goenka. The Board is confident that the Company, will continue to achieve the set goals for the future and most above, create value for all stakeholders,” said the statement by R Gopalan, Chairman, Zee Entertainment Enterprises. 

Also read: ZEE reviews SEBI’s order on Chandra, Goenka; seeks legal advice for next steps

Also read: ZEE's Subhash Chandra, Punit Goenka move SAT a day after Sebi imposes ban on them