Subhash Chandra and Punit Goenka were the direct beneficiaries of the aforesaid fund diversion,says the Sebi order.
The Securities and Exchange Board of India (SEBI) has barred Subhash Chandra and Punit Goenka from holding directorial and key managerial positions in any listed company or its subsidiaries till further orders. The order was passed on June 12, 2023.
Factual Matrix of the case
In the wake of the resignation of two independent directors (viz. Mr. Sunil Kumar and Ms Neharika Vohra) of Zee Entertainment Enterprises Ltd. (“ZEEL”/“the Company”) in November 2019 after raising concerns over several issues, including the appropriation of certain Fixed Deposit (“FD”) of ZEEL by Yes Bank Ltd. (“Yes Bank”) for squaring off loans of related entities of Essel Group, SEBI conducted an examination in the matter. Ms. Niharika Vohra in her resignation letter dated November 22, 2019, had inter alia alleged - “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.”
The abovementioned examination by SEBI revealed that Mr Subhash Chandra the then Chairman of ZEEL/ Essel Group, had provided a ‘Letter of Comfort’ (“LoC”) dated September 04, 2018 towards credit facilities availed by certain group companies from Yes Bank, wherein it was stated that “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.” From the resignation letter dated November 22, 2019, submitted by Ms. Neharika Vohra to Chairman of Board of Directors of ZEEL, it was observed that the abovementioned LoC was known only to a few persons in management and even the Board of ZEEL was not aware of the same. It was observed that on the strength of the said LoC, Yes Bank had adjusted Fixed Deposit of Rs. 200 Crore of ZEEL for meeting the obligations of the following seven entities (“Associate Entities”) towards Yes Bank.
In this regard, it was observed that the abovementioned Associate Entities are owned/controlled by family members of Mr. Subhash Chandra & Mr. Punit Goenka (“Promoter Family”). The Promoter Family is also the beneficial owner of promoters of ZEEL.
Violation of LODR regulations
It was observed that in the Annual Report of ZEEL for the Financial Year 2019- 20, the above seven entities were described as companies controlled by key management personnel (“KMPs”) and its relatives. The KMPs included Mr. Subhash Chandra and Mr. Punit Goenka.
When probed by SEBI with regard to the above, 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 Promoter Family, had subsequently been received back from those Associate Entities in September/October 2019.
Though ZEEL had confirmed the receipt of Rs.200 Crore from the Associate Entities, SEBI found inter alia that Mr. Subhash Chandra and Mr. Punit Goenka, by signing comfort letters on behalf of ZEEL without informing, consulting, and/or approval of ZEEL or its board, had violated Regulation 4(2)(f)(i)(1)&(2), 4(2)(f)(ii)(6) and 4(2)(f)(iii)(3)&(6) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations, 2015.
Further, since it was found inter alia that Letters of Comfort were issued by Mr. Subhash Chandra and Mr. Punit Goenka to Yes Bank and RBL Bank without informing the Board of ZEEL, SEBI also issued Advisory Letter dated June 17, 2021 to the Company.
Accordingly, SEBI initiated adjudication proceedings against ZEEL, Mr. Subhash Chandra and Mr. Punit Goenka for the aforesaid violations. Thereafter, ZEEL and Mr. Punit Goenka had filed a settlement application under the provisions of the SEBI (Settlement Proceedings) Regulations, 2018 in respect of the aforesaid proceedings. The said application was rejected by SEBI. Further, SEBI decided to examine the matter further, with regard to ZEEL’s claim of receipt of funds from Associate Entities.
Subsequently, SEBI sought the details of payments received by ZEEL from the Associate Entities whose obligations to Yes Bank were met by appropriation of ZEEL’s FD of Rs. 200 Crore by Yes Bank.
Direct role in diversion of funds
It is observed that Mr. Subhash Chandra was the Chairman of Essel Group, including ZEEL at the relevant time when the concerned LoC was issued by him to Yes Bank. Since he had issued the concerned 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, as mentioned above. Mr. Punit Goenka was the MD and CEO of ZEEL at the time when the funds were moved out of ZEEL for being routed again to ZEEL through layered and circuitous transactions, for falsely portraying that ZEEL had received the dues from Associate Entities. Pushing these transactions would not have been possible without the active involvement of Mr. Subhash Chandra, as Chairman, and Mr. Punit Goenka, as MD and CEO of ZEEL.
Further, the order noted that Mr. Subhash Chandra and Mr. Punit Goenka ( (“the Noticees”) were the direct beneficiaries of the aforesaid fund diversion, since the Associate Entities which benefitted from liquidation of FD of ZEEL by Yes Bank were owned or controlled by the Promoter Family, which included Mr. Subhash Chandra and Mr. Punit Goenka.
The abovementioned diversion of funds from ZEEL and other listed companies and the misrepresentation in the Annual Report of ZEEL and false submission to SEBI that it had received the funds from Associate Entities prima facie amount to fraudulent and unfair trade practices. In view of the above, it is prima facie found that Mr. Subhash Chandra and Mr. Punit Goenka have violated the provisions of 4(1) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Further, in view of the misrepresentation in the Annual Report and false submissions to SEBI and also their failure to discharge their duties as directors of ZEEL for their personal benefit, Mr. Subhash Chandra and Mr. Punit Goenka have also prima facie violated provisions of Regulations 4(2)(f) of LODR Regulations, 2015.