SEBI Widens Probe Into Zee Entertainment: Former Directors Summoned In Alleged Fund Diversion

The Securities and Exchange Board of India (SEBI) has summoned former directors of Zee Entertainment Enterprises Ltd (ZEEL) to testify in an ongoing probe concerning the diversion of company funds through related-party transactions. The regulatory body has expanded its investigation to include a broader pool of entities associated with ZEEL, examining potential conduits for siphoning off funds, including two prominent Mumbai-based production houses.

As part of the inquiry, two former independent directors, who left the company's board in 2021, have been asked to appear before SEBI and provide testimony. The regulatory body has also extended its scrutiny to transactions between ZEE and private companies owned by promoters, raising questions about the transparency and approval processes within the company.

A spokesperson for SEBI has not responded to queries regarding the investigation, while a Zee spokesperson has vehemently denied any allegations of accounting irregularities at the entertainment company. The spokesperson stated, "Pursuant to the SAT order, which granted relief to the current key managerial personnel, the company has been in the process of providing all the comments, information, or explanation requested by SEBI and has extended complete cooperation on all aspects."

The news of SEBI's investigation has sent shockwaves through the financial markets, with Zee Entertainment's shares plummeting more than 10% on Wednesday, following a Bloomberg report indicating that SEBI had identified potential fund diversion amounting to approximately Rs 2,000 crore ($241 million) by the company's promoters.

In August, SEBI issued an interim order against promoters Subhash Chandra and his son Punit Goenka, preventing them from holding directorships in listed companies. The order alleged that the promoters had illegally withdrawn Rs 200 crore from ZEEL for personal benefit, using the funds as collateral for the debts owed by their private companies, including Essel Green Mobility and Pan India Infra Projects. The collateral was facilitated through a letter of comfort (LoC) to lenders.

While SEBI claimed that these transactions lacked approval from the Zee board, the Securities Appellate Tribunal (SAT) overturned the interim order in October. Any final order from SEBI is subject to appeal at SAT.

SEBI's current focus is on determining whether the former directors were aware of the issuance of LoCs by the promoters. A third person familiar with the situation stated, "If any of the directors knew about the LoCs, the same ought to have been shared with the board of the company. There are also questions around whether any of the board members are also complicit."

Interim orders are a standard practice for SEBI in high-priority cases, as the complete investigation can take 2-3 years. These orders serve to protect investor interests and prevent accused individuals from selling off the proceeds of their alleged misconduct. Despite the legal back-and-forth, Zee Entertainment's shares continued to face significant downturns, trading with cuts of nearly 15% at Rs 164.20 per share on the National Stock Exchange (NSE) as of 3:20 pm.

The widening probe into Zee Entertainment raises concerns about corporate governance, financial transparency, and the responsibilities of board members. As the investigation unfolds, stakeholders closely watch for further developments.