Zee-Sony Merger Can't Go Through In Its Present Form, Say Experts

The merger between media behemoths Zee Entertainment Enterprises Ltd. and Culver Max Entertainment Pvt. (Sony Pictures) is unlikely to go through in its present form and may have to be modified, according to experts.

On Monday, SEBI barred Essel Group's Subhash Chandra and Zee's Punit Goenka from holding directorial positions.

In an interim order, the Securities and Exchange Board of India said that Chandra and Goenka had misused their positions to divert funds from Zee for the benefit of other Essel Group companies. The regulator highlighted that Chandra gave a letter of comfort to Yes Bank Ltd. against the obligations of associate entities controlled by promoters. This was done without seeking any approval from Zee's board, in violation of the listing regulations, the order said.

Subsequently, the loan obligations of associate entities were met by appropriating Zee's fixed deposits worth Rs 200 crore. And repayment was done by them via Zee's own funds in a circuitous way through bogus book entries.

Goenka has appealed the regulator's order before the Securities Appellate Tribunal, arguing a violation of principles of natural justice. The matter will be taken up on June 15.

The order from this week, SEBI has said, should be read together with the one on April 25 against Shirpur Gold Refinery Ltd. To recap, Shirpur is a listed company promoted by Jayneer Infrapower and Multiventures Pvt., a company owned by the family members of Subhash Chandra, the promoter of Essel Group companies. According to SEBI's April order, Shirpur diverted its assets worth over Rs 400 crore between 2019 and 2021 for the benefit of its connected entities.

The combined effect of these two orders doesn't bode well for Zee's proposed merger with Sony, experts said.

It would be hard for the National Company Law Tribunal to ignore all these regulatory orders and approve the merger merely on the basis that the majority shareholders and creditors of Zee have given their consent, Murali Neelakantan, an independent corporate counsel, told BQ Prime.

In the last merger hearing, the stock exchanges NSE and BSE placed on record SEBI's order in Shirpur's case. The tribunal had directed the exchanges to reconsider their approvals. But the direction was overturned by the appellate tribunal on grounds of natural justice.

The situation is quite unprecedented, Neelakantan said. This is a case where the majority of shareholders and creditors have agreed to the scheme, and minority creditors—interestingly, institutions—are alleging fraud, he said.

Fraud vitiates everything, including the consent given by shareholders and creditors for the merger, he said.

It is too early to comment on the impact of the interim order on the overall merger, Hemang Parekh, partner at DSK Legal, said. "This, however, doesn't mean that there wouldn't be contractual implications for parties to the deal."

The other big question is whether Sony will be a patient partner as the various legal hurdles push the deal timelines.

The dispute is now at three different places—SEBI, SAT, and NCLT—and as each of those gets unstuck, they will go through the appeal process, Neelakantan said.

As time passes, the deal can get muddier, and they might be less interested in closing the deal in its present form, he said. Irrespective of the outcome, the challenge is going to be the timing. There would be pressure on Sony to close the deal in an altered form that accounts for the statutory orders, Neelakantan said.

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