Zee-Sony Deal Under Scrutiny After Crackdown On Subhash Chandra, Son

Zee Entertainment Enterprises Ltd.'s planned merger with a subsidiary of Sony Group Corp. may face further delay, industry analysts said, after the Securities and Exchange Board Of India (SEBI) said the Mumbai-based media house faked the recovery of loans to cover for private financing deals by its founder Subhash Chandra.

SEBI alleged late Monday that the firm funneled money through several entities to make it seem like it had recovered money owed by Chandra's private entities. The founder and his son, Punit Goenka - Zee's chief executive - "abused their position" and siphoned off funds "for their own benefit," SEBI said in an interim order that bars them from holding any executive or director positions in listed companies.

Zee Entertainment's board is currently reviewing the order and seeking appropriate legal advice, the company said in a statement Tuesday. Goenka filed an appeal that will be heard Thursday by the Securities Appellate Tribunal, his lawyer Janak Dwarkadas told Bloomberg News. Dwarkadas argued that SEBI didn't issue a so-called show cause notice to Goenka before passing an adverse order. Sony didn't immediately respond to a request for comment on Tuesday.

SEBI's intervention comes at a sensitive time as Zee attempts to close its merger with a wholly-owned subsidiary of Sony, aimed at creating a $10 billion media giant with the financial muscle to challenge online streaming platforms such as Netflix Inc., Amazon.com Inc. and Walt Disney Co. in India.

"There is some certainty that this will cause a delay in the merger approval process," said Karan Taurani, a Mumbai-based analyst at Elara Securities. Clarity is needed as one of the requirements was that Goenka remained managing director and chief executive officer of the merged entity, Citigroup Inc. analyst Vismaya Agarwal wrote in a note. Zee's shares fell as much as 6.6% on Tuesday, before paring that decline to 0.5% at the close of Mumbai trading.

The merger, approved by Zee's shareholders and India's antitrust regulator last year, was initially hobbled by a courtroom feud between Zee's founders and its largest shareholder, then subsequently by an insolvency case filed against Zee that was halted in February.

SEBI's order alleges methods used by Chandra's listed companies to support private investments without board or shareholder approval. In a 2018 transaction, Mumbai-based Yes Bank Ltd. adjusted a 2 billion rupee ($24.3 million) deposit by Zee against loans the bank had made to privately-owned entities of Chandra's Essel Group. Zee falsely claimed the money was recovered the next year, according to the regulator.

For instance, SEBI alleges that a Zee subsidiary transferred 710 million rupees over two days to a dozen private group entities, who then paid it to Zee as settlement of dues. The regulator said that similar trails were found involving funds from two of Chandra's other listed companies - Zee Media Corporation Ltd. and Dish TV India Ltd.

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