SAT Ruling in the Zee Entertainment Case

In a ruling late last month, the Securities Appellate Tribunal (SAT) reversed an order of the chairperson of the Securities and Exchange Board of India (SEBI) dated August 14, 2023 in the case involving Zee Entertainment Enterprises Limited (ZEEL). The SEBI order had barred Mr. Punit Goenka from holding the position of director or key managerial personnel in ZEEL or other related companies.

The matter relates to corporate governance (related party transactions, in particular) and disclosure in the context of Mr. Goenka’s role as the managing director and chief executive officer of ZEEL. SEBI’s investigation unearthed the fact that ZEEL (through Mr. Subhash Chandra) had issued a letter of comfort to Yes Bank Limited in relation to credit facilities availed by certain other entities. Under the terms of the letter of comfort, ZEEL was to ensure that a fixed deposit of at least INR 200 crores would be available to Yes Bank at all times when the loan remained outstanding. It turns out that Yes Bank adjusted the fixed deposit against credit facility given to seven different entities, which in turn paid back INR 200 to ZEEL along with interest.

The nub of the issue is whether there was round tripping, i.e., whether ZEEL transferred funds to the other entities that in turn used those funds to pay the amount of INR 200 to ZEEL. More specifically, the question is whether the other entities used their own funds to pay ZEEL or whether they used funds that were made available to them by ZEEL itself. The SEBI chairperson had found that “ZEEL’s own funds and funds from other listed companies of Essel Group were used to give an impression that the associate entities had indeed returned the money they owed to ZEEL”. This finding resulted in the order passed against Mr. Goenka, who challenged the same on appeal before the SAT.

In this background, SAT was concerned with the question of the genuineness (or otherwise) of the transactions between ZEEL and its group entities, which would determine the finding of round tripping. In engaging with this question, SAT embarked on a detailed analysis of the various transactions. Much rested on the burden of proof of the legitimacy or, alternatively, the deceptive nature of the transactions by ZEEL that were alleged to amount to round tripping. Here, SAT’s primary point of difference with SEBI lay on its conclusion that SEBI’s findings of fact on the round tripping issue was based on presumption rather than proof (on preponderance of probabilities). SAT noted that SEBI did not establish foundational facts before it could arrive at a presumption. SAT found, instead, that transactions between ZEEL and the other companies by which ZEEL paid funds were based on necessary legal documentation, which SEBI had not disputed.

SAT also disagreed with SEBI’s finding on at least three other issues in order to buttress its position as to the absence of round tripping. First, it found that SEBI was unable to establish any undue nature of the relationship between ZEEL and the other entities. In particular, relying upon the Supreme Court’s decision in ArcelorMittal India Private Limited v. Satish Kumar Gupta, SAT found that Mr. Goenka did not exercise control over the other entities by playing an active role in them. Second, on the argument that there was proximity in time between the disbursements made by ZEEL to the other entities and their payment back to ZEEL, SAT noted: “Proximity of time can raise an eyebrow that may point to a needle of suspicion but beyond that it does not prove that the transaction was fictitious nor can it prove round tripping of funds.” Third, the SAT reasoned that to restrain Mr. Goenka from acting in a managerial capacity in any listed company was “harsh and inappropriate” and disproportionate to the nature of the allegations made against him.

In all, the legal battle of contention boils down to “presumption-versus-proof”. SAT’s conclusion is premised on the ground that SEBI’s findings were largely constructed on presumptions and that there was inadequate proof to question the genuineness of the transactions that were alleged by SEBI to amount to round-tripping. This conundrum is symptomatic of several enforcement actions under securities regulation. Although SAT did engage with some questions or law, essentially those that relate to the burden of proof, its approach was fact-centric rather than one based on an interpretation of the SEBI’s regulations, primarily the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 whose violation was principally alleged.

While the SAT ruling grants at least a temporary reprieve to Mr. Goenka, SEBI will likely contemplate an appeal to the Supreme Court. In the meanwhile, as Menaka Doshi has analysed, the SEBI enforcement measures have already had some amount of impact on ZEEL’s impending merger with Sony India.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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