SAT questions SEBI over two-month market ban on Zee Entertainment, reserves order

The Securities Appellate Tribunal (SAT) on Wednesday reserved its order on the interim relief sought by Zee Entertainment Enterprises Ltd (ZEEL) and its former managing director and chief executive officer Punit Goenka against market access restrictions imposed by the Securities and Exchange Board of India (SEBI).

SEBI, in its July 31 order, barred ZEEL from accessing the securities market for two months and Goenka for one year in a matter involving the alleged unauthorised pledging of the company's Hyderabad property to secure loans taken by promoter-linked entities.

The securities regulator had also imposed monetary penalties of ₹30 lakh on ZEEL, ₹58 lakh on Goenka and ₹60 lakh on former chairman Subhash Chandra for violations of securities regulations.

The SAT bench comprising Presiding Officer Justice P.S. Dinesh Kumar and technical members Meera Swarup and Dr Dheeraj Bhatnagar heard arguments from both sides before reserving its order on the interim relief sought by ZEEL and Goenka.

SAT questions rationale for two-month restriction

During the hearing, the tribunal questioned SEBI on the basis for imposing a two-month market access restriction on ZEEL.

The bench sought to understand why the regulator had chosen a specific two-month period for the company's debarment and whether there was a rationale behind the duration.

Responding to the bench, SEBI's counsel said the restriction was imposed for a period of two months and that ZEEL could approach the regulator after the expiry of the period by following the prescribed process.

The exchange assumes significance because the restriction on ZEEL's access to the securities market comes while the company is pursuing a substantial fundraise.

ZEEL flags impact on ₹3,000 crore-plus fundraise

Before the tribunal, ZEEL argued that the market access restriction could directly interfere with its ability to complete a proposed fundraise of more than ₹3,000 crore.

The company told SAT that its board had approved the proposed issuance of warrants in July. The fundraise was subsequently approved by shareholders and received approval from the stock exchanges.

According to ZEEL's submissions, the stock exchange approval was granted on July 31, the same day SEBI passed its order. The company said the fundraise was required to be completed within 15 days of the approval, effectively putting the deadline at August 14.

ZEEL argued that the two-month debarment could prevent it from completing the transaction within the stipulated timeframe.

The company also questioned the rationale for imposing a market access restriction on ZEEL itself for alleged violations relating to the conduct of its former promoter leadership.

ZEEL's argument before the tribunal was that the restriction could have consequences beyond the regulatory penalty, particularly because it could interfere with an ongoing capital-raising exercise and affect the company's standing with investors and other participants in the securities market.

The fundraise is particularly significant for ZEEL as the company continues to focus on strengthening its balance sheet and securing fresh capital at a time when the media and entertainment industry is undergoing considerable structural and competitive changes.

Dispute centres on Hyderabad property pledge

SEBI's action stems from the pledging of ZEEL's Hyderabad property as security for loans obtained by entities linked to the promoter group.

According to SEBI's July 31 order, former Essel Group chairman Subhash Chandra executed a Declaration and Acknowledgement in December 2018 and deposited the original title deeds of the property with Indiabulls Housing Finance Ltd.

The transaction resulted in the creation of a first-ranking mortgage over the property to secure loans amounting to around ₹726 crore obtained by four Essel Group entities.

The regulator found that the arrangement had been entered into without the requisite approvals from ZEEL's Audit Committee, Board of Directors or shareholders.

SEBI also held that the transaction should have been disclosed as a related-party transaction but was not appropriately disclosed.

The regulator further found lapses relating to the disclosure of the contingent liability associated with the arrangement and proceedings before the Delhi High Court concerning the property.

On the basis of these findings, SEBI imposed market access restrictions on the company and individuals as well as monetary penalties.

SAT order awaited

The tribunal has now reserved its order on the interim relief sought by ZEEL and Goenka.

The immediate issue before SAT is whether the market access restrictions should be stayed or otherwise modified while the broader challenge to SEBI's order proceeds.

The tribunal's observations during Wednesday's hearing, particularly its questioning of SEBI on the rationale for the two-month restriction imposed on ZEEL, could be significant when it delivers its interim order.

For ZEEL, the outcome is also time-sensitive because the company has said that the August 14 deadline for completing its proposed fundraise could be affected by the regulatory restriction.

The SAT's decision will therefore determine whether ZEEL receives interim relief at a crucial stage of its capital-raising exercise, even as the underlying dispute over the unauthorised pledge of its Hyderabad property continues before the appellate forum.