Zee Ent slumps after SEBI cracks down on Chandra, Goenka; Sony merger under a cloud

The Zee-Sony merger, expected to be completed by the first half of the current fiscal year, has run into several roadblocks in the recent past

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Zee Entertainment shares opened 4 percent lower on June 13, a day after the market regulator Securities and Exchange Board of India (SEBI) barred chairman Subhash Chandra and CEO Punit Goenka from holding any key managerial positions.

The order came after a SEBI investigation found that the father-son duo abused their positions as directors/KMPS of a listed company for siphoning off funds.

At 9:30 am, Zee Entertainment was quoting at Rs 186.35 on the NSE, down 4.36 percent from the previous close. The company has already informed exchanges that the board is in the process of reviewing the SEBI order and legal advice being sought to take the next steps.

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“The Noticees alienated the assets of ZEEL and other listed companies of Essel Group for the benefit of associate entities, which are owned and controlled by them. 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,” the SEBI order said. The associate entity it referred to is Shirpur Gold Refinery.

SEBI added that there were no processes and structures inside ZEEL to stop poor governance practices and that the flagship company “used like a piggybank by the Noticees (Chandra and Goenka)”.

The investigators pointed to the share price of ZEEL falling from Rs 600 to Rs 200 over FY19 to FY23, despite the company being so profitable, and said it showed that “all was not well with the company”.  It added, that during the period, the promoter shareholding dropped from 41.62 percent to the current level of 3.99 percent.

What happens to Zee-Sony merger?

On May 11, the National Company Law Tribunal (NCLT) had asked BSE and NSE to reconsider Zee’s proposed merger with Sony Pictures Networks India in the light of the Shirpur Gold Refinery fund diversion case. However, National Company Law Appellate Tribunal (NCLAT) set aside the NCLT order.

The next hearing in NCLT is scheduled for June 16.

As of now, Goenka is slated to be the MD and CEO of the merged company, as per the scheme of arrangement. With SEBI’s order, this becomes a key roadblock for the merger.

“There are two possible outcomes to the SEBI order – one, that it delays the merger process as Goenka and Chandra appeal against the SEBI order. On the other hand, it remains to be seen how Sony will react to this news and whether the positive business implications of the merger outweigh the governance concerns getting raised against ZEEL’s promoters,” said Hetal Dalal of Institutional Investor Advisory Services (IIAS).

The Zee-Sony merger, expected to be completed by the first half of the current fiscal year ending March 31, 2024, has run into several roadblocks. Earlier, ZEEL was dragged by its operational and financial creditors over a delay in payment of dues. Now, the merger stares at a new obstruction.

“We will have to wait and watch,” said Dalal.

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