SEBI’s Order Could Spell Bad News For Sony-Zee Merger

Zee Entertainment Enterprises Limited has landed in controversy yet again after the Securities and Exchange Board of India came out with a report that accused Zee’s promoters of engaging in fraudulent practices. 

SEBI’s order couldn’t have come at a worse time for the media conglomerate, which is in the last stages of its merger with Sony. The deal could create India’s second-largest media company, but the recent SEBI order could jeopardise the merger.

What Does the SEBI Report Say?

The Essel Group has interests across various sectors, including media, infrastructure, packaging, metal refining, amusement parks etc. However, its infrastructure business had been a cause of trouble for the groups. 

In order to finance its foray into infrastructure, the group took on debt secured by pledging shares of Zee Entertainment Enterprises Limited. Further, the promoters even provided a letter of comfort and assured Yes Bank that funds worth Rs 200 crores would be kept in a fixed deposit with the bank to secure the loans given to the sister infrastructure companies. But the decision to provide a fixed deposit of Rs 200 crores was made without consulting the directors of Zee, which is a public company. 

In 2019, two of its independent directors resigned from the board, citing the above issue. 

Related party transactions by themselves are not illegal or unethical, but public companies need to inform boards before committing such large sums to guarantee loans. 

Essel Group’s infrastructure companies could not pay back the loans, and the bank forfeited the money to recover its dues. Effectively, shareholder money was lost. Nevertheless, Zee claimed that it had received the money back from its related parties, a claim that SEBI decided to investigate further.

Surprisingly, SEBI’s report alleges that another Rs 200 crores were sourced from Zee, routed through different related companies, and then paid back by the infrastructure companies. 

For instance, Essel Green Mobility, one of the infrastructure companies, returned Rs 17 crore to Zee. According to SEBI, this Rs 17 crore was sourced from Zee, transferred between five companies and then returned to Zee. 

SEBI has alleged that there were several such transactions of a similar nature and that the initial Rs 200 crores never made it back to the company.

Another recent order by SEBI indicates that Zee’s promoters might have indulged in similar actions in the past as well. 

Shirpur Gold Refinery, another listed entity of the Essel Group, had taken loans from banks, but the money was not used to fund operations or expansions. However, the company was unable to return money to its lenders. 

A major reason for the defaults was the non-payment of dues by three companies which owed Rs 404 crores to Shirpur. Further, during one of the three debtors’ insolvency proceedings, Shirpur didn’t even make a claim for its money. All three of these companies were related to Shirpur’s promoters (Essel’s promoters). The loans were written off as doubtful debts, and the money was not returned to the actual public shareholders.

How Could the Order Affect the Merger?

SEBI has submitted these orders to the National Company Law Tribunal (NCLT), which is currently deciding on the Zee-Sony merger. 

The merged entity would be run by Punit Goenka, and the promoter family would also increase their stake in the combined entity. Punit Goenka has been named in both the SEBI orders and has been barred from holding managerial or directorial roles in any company along with his father, Subhash Chandra. 

Even if the merger goes through, the combined entity might have a different Chief Executive Officer. 

The merger would be an important step in strengthening both Zee’s and Sony’s presence in the Indian market since it would have created an entity with $ 1.5 billion in cash, giving it the firepower required to compete with larger players like Reliance, Disney, Amazon and Netflix which have deep pockets and are expanding their content budgets at a rapid pace. 

Reliance’s media arm Viacom18 alone, has access to around $ 2 billion of cash and has been working hard to acquire content from the likes of HBO. Both Sony and Zee have a large content library. With an increasing preference for digital content consumption, having a large content library would allow the combined entity to have a strong value proposition for users. 

For the Goenkas, the deal would have helped them continue at the helm of Zee despite their low shareholding. In the past, Invesco, one of Zee’s shareholders, had pushed for the removal of Punit Goenka from the Managing Director’s position. However, the matter was put to rest, Invesco exited the company completely, and the Goenkas continued to lead Zee. But given the seriousness of SEBI’s allegations and the Goenkas’ small stake in the company, it could even result in calls for a management change.