Why has SEBI barred ZEE’s Subhash Chandra and Punit Goenka from holding directorial positions?

SEBI started investigating the matter related to the appropriation of certain fixed deposits (FD) of ZEEL by Yes Bank, for squaring off loans of related entities of Essel Group. The issue came to light after the resignation of two independent directors – Sunil Kumar and Neharika Vohra – of ZEEL in November 2019.

The regulator found that Chandra, the then Chairman of ZEEL/ Essel Group, had provided a Letter of Comfort (LoC) in September 2018, towards credit facilities amounting to Rs 200 crore availed by certain group companies from Yes Bank. The LoC was issued without the knowledge of the board of ZEEL, which was a violation of SEBI’s Listing Obligations and Disclosure Requirements (LODR) norms.

LoC is a document issued by a parent company which assures a bank that they are aware of the loan availed by one of their subsidiaries. The letter shows that the parent company supports its subsidiary in the loan process and in case of any issue, it will help in meeting the obligations.

Sebi said that Yes Bank had adjusted the FD of ZEEL for meeting the obligations of seven associate 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. These entities were owned or controlled by the family members of Chandra and Goenka (promoter family).

When asked, ZEEL submitted to SEBI that Rs 200 crore, equivalent to the value of FD which was encashed by Yes Bank for the dues from associate entities owned by the promoter family, had subsequently been received back from those associate entities in September/October 2019, the interim order issued on June 12 said.

The regulator found that the funds had originated from ZEEL or other listed companies of Essel Group, which moved through multiple layers of promoter family-owned or controlled entities and were ultimately transferred to ZEEL, in order to show the fulfilment of payment obligations of the associate entities towards ZEEL.

As per SEBI, at least Rs 143.90 crore had been transferred from ZEEL or other listed companies of Essel Group, to falsely portray repayment of due amounts to ZEEL from associate entities.

“As regards the balance amount (Rs 200 crore – Rs 143.90 crore), the fund trail in respect of the same is under examination and the possibility that the same has also been siphoned off from ZEEL/other listed companies of Essel Group cannot be ruled out,” SEBI’s Whole Time Member Ashwani Bhatia wrote in the order.

What are SEBI’s observations on the matter?

The capital market regulator said that since Chandra issued the LoC without the knowledge or approval of the board of directors of ZEEL, he had a direct role in the diversion of funds of ZEEL and other listed companies of Essel Group. Goenka was involved in falsely portraying that ZEEL had received the dues from associate entities. Both were the direct beneficiaries of the fund diversion, since the associate entities which benefited from the liquidation of FD of ZEEL by Yes Bank, were owned or controlled by the promoter family, the order said.

“The siphoning of funds appears to be a well-planned scheme since, in some instances, the layering of transactions involved using as many as 13 entities as pass-through entities within a short period of two days only,” it said.

The regulator noted that during FY 2018-19 to FY 2022-23, the share price of ZEEL has come down from a high of close to Rs 600 per share to the current price of less than Rs 200 per share. This erosion of wealth despite the company being so profitable and generating profit after tax consistently would lead to a conclusion that all was not well with the company, it noted. During this period, the promoter shareholding also dropped from 41.62 per cent to the current level of 3.99 per cent.

“The Noticees (Chandra & Goenka) created a façade through sham entries to misrepresent to the investors as well as the regulator that money had been returned by associate entities, whereas in reality, it was ZEEL’s own funds which were rotated through multiple layers to finally end in ZEEL’s account,” the order said.

What is the SEBI’s interim order?

“I am of the opinion that, while the investigation is still underway, their (Chandra and Goenka) continuation as a director/key managerial personnel in any listed company or its subsidiaries is likely to be prejudicial to the interest of those companies, particularly its investors.

“Therefore, I am convinced that, pending completion of investigation by SEBI, interim directions need to be issued to safeguard the management of such companies and protect their investors and other stakeholders,” SEBI’s whole-time member Bhatia wrote in the order.

He has barred Chandra and Goenka from holding the position of director or key managerial personnel in any listed company or its subsidiaries until further orders.