SAT allows Zee Entertainment to proceed with ₹3,143 crore fundraise

The Securities Appellate Tribunal (SAT) on Friday granted partial relief to Zee Entertainment Enterprises Ltd (ZEEL), allowing the company to proceed with its proposed ₹3,143-crore capital raising through the issue of fully convertible warrants to a promoter-group entity, even as it declined to stay the broader securities-market ban imposed on the company by the Securities and Exchange Board of India (SEBI).

A three-member bench comprising Presiding Officer P.S. Dinesh Kumar and Technical Members Meera Swarup and Dheeraj Bhatnagar permitted ZEEL and its chief executive officer Punit Goenka to proceed with the proposed preferential issue, subject to the condition that both deposit the full penalty imposed by SEBI within one week.

The tribunal also extended by one week the deadline for the proposed warrant issue, which was otherwise due to expire on Friday.

The order provides a narrow but significant window for Zee to pursue its capital-raising plan while leaving the substantive SEBI order largely intact. The market-access restrictions imposed by the regulator will continue to operate, except to the extent specifically carved out by SAT for the proposed fundraising.

The tribunal's order is particularly significant for ZEEL because the company had been working against a tight timeline to complete the proposed preferential issue. Any delay in executing the transaction could have affected the issue price and the valuation at which the company raises the funds.

SAT does not stay SEBI's market ban

SEBI, in its July 31 order, had barred ZEEL from accessing the securities market for two months and Goenka for 12 months in connection with alleged disclosure and governance lapses involving a land parcel in Hyderabad.

The regulator's order followed findings that the land was used in 2018 to secure loans for promoter-linked entities without the requisite board approval and proper disclosure.

ZEEL and Goenka subsequently challenged the order before SAT, seeking an urgent stay on the regulator's directions pending final adjudication of their appeals.

While SAT has now permitted the specific capital-raising transaction to proceed, it has not otherwise interfered with SEBI's order. This means the two-month securities-market restriction on ZEEL and the longer restriction imposed on Goenka remain in force.

The relief, therefore, does not amount to a wholesale stay of the SEBI order. Instead, the tribunal has created a limited exception to enable ZEEL to complete the ₹3,143-crore transaction.

₹3,143 crore fundraising at centre of dispute

The proposed fundraise involves the issue of fully convertible warrants to a promoter-group entity on a preferential basis. ZEEL's shareholders had approved the proposed ₹3,143-crore capital raising on July 31, the same day SEBI passed its order.

The timing became a key point of contention before SAT.

During the August 12 hearing, senior advocate Ravi Kadam, appearing for ZEEL, argued that the regulator's order had come at a critical juncture for the company. According to the submissions, although SEBI passed the order on July 31, it was served on the company on August 1, jeopardising the timeline for completing the warrant issue.

Kadam told the tribunal that the proposed issue had to be completed within a strict 15-day period. Any interruption could expose the company to financial consequences arising from changes in the market price of ZEEL shares and could potentially make the transaction commercially less attractive.

The company also sought clarity on whether the securities-market restrictions would prevent it from using its investments in mutual funds for routine operational requirements.

Zee says delay could hurt valuation

The urgency around the fundraising was also underlined by senior advocate Pesi Modi, who appeared for Goenka.

Modi told SAT that approximately 96% of public shareholders had voted in favour of the proposed ₹3,143-crore capital raising, arguing that the transaction was therefore supported overwhelmingly by the company's public investors.

He also argued that the timing of SEBI's order had caused a sharp decline in ZEEL's share price and that forcing the fundraising to wait until the end of the two-month market-access restriction could have serious consequences for the company's valuation.

A delay, he submitted, would require the company to reassess the issue price at a lower valuation, potentially resulting in a significant financial impact.

The arguments placed the proposed fundraising at the heart of the interim-relief proceedings. ZEEL sought to distinguish between the regulator's punishment for the alleged past violations and the company's ability to undertake a transaction that had already received shareholder approval.

SAT questions SEBI on blocking fundraise

During the August 12 hearing, SAT had questioned SEBI on the rationale for preventing ZEEL from undertaking the capital raising during the two-month market-access restriction.

The tribunal sought to understand what specific harm would arise if the ₹3,143-crore fundraise were permitted immediately, particularly when the company would otherwise be able to undertake the transaction after the expiry of the two-month restriction.

The bench also questioned the basis for imposing the securities-market restriction on ZEEL in circumstances where the allegations did not involve fraudulent market activity.

SEBI, however, defended its order.

Senior advocate Chetan Kapadia, appearing for the regulator, argued that debarment orders serve multiple purposes, including deterrence, prevention and punishment. According to SEBI's submissions, restricting access to the securities market during the period of debarment is an inherent consequence of such an order.

SEBI also maintained that ZEEL could undertake its proposed fundraising once the two-month restriction expired and that the regulator's order should not be diluted merely because the company had a capital-raising plan underway.

Following the hearing, SAT had reserved its order on the interim relief sought by ZEEL and Goenka.

Mutual fund investments can be used for operations

Apart from the fundraising, the tribunal also addressed ZEEL's request concerning its investments in mutual funds.

SAT permitted the company to deploy its mutual fund investments for day-to-day operational business requirements. However, the tribunal clarified that these funds cannot be used for other purposes, including the proposed dividend.

The clarification provides ZEEL with access to liquidity for its regular business operations while maintaining restrictions on the use of those funds for other corporate purposes.

The issue had assumed importance because ZEEL had argued that the securities-market restrictions should not effectively prevent the company from accessing funds required to meet its ordinary operating expenses.

Background to SEBI's action

SEBI's July 31 order stems from transactions relating to a land parcel in Hyderabad and the manner in which it was allegedly used in connection with financing arrangements involving promoter-linked entities.

According to the regulator's findings, ZEEL's land was used to secure loans for entities linked to the promoters without appropriate board approval and without the disclosures required under securities laws.

SEBI consequently imposed a two-month securities-market ban on ZEEL and a 12-month ban on Goenka.

The regulator's action came amid a broader dispute over corporate governance and transactions involving the company's former and current leadership. ZEEL and Goenka have challenged the findings and penalties before SAT.

The appellate tribunal has not, at this stage, finally adjudicated the merits of the appeals. Friday's order is confined to the interim relief sought by the appellants.

Relief comes with conditions

The most immediate consequence of Friday's order is that ZEEL can now move ahead with the proposed warrant issue, provided the conditions laid down by SAT are met.

Both ZEEL and Goenka have been directed to deposit the full penalty mandated by SEBI within one week. SAT has also extended the deadline for the warrant issue by one week, giving the company additional time to complete the transaction.

The order thus balances two competing considerations: preserving the effect of SEBI's regulatory action while preventing the proposed capital raising from being derailed by the timing of the market-access restriction.

For ZEEL, the ruling could provide crucial breathing room to complete a fundraise that the company has argued is important for its financial position and future plans. At the same time, the company and Goenka continue to face the securities-market restrictions imposed by SEBI, subject to the final outcome of their appeals before SAT.

The tribunal's final determination on the merits of SEBI's findings will determine whether the regulator's penalties and market-access restrictions ultimately stand, are modified or are set aside.