SEBI finds another plot-hole in the Zee script

**Akshara** (0:04)
In today's episode, we will break down two important stories. First, we will talk about SEBI finding another plot hole in the Zee script. And then we will talk about whether India can dig up hydrogen instead of making it.
Welcome back to The Daily Brief by Zerodha where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara and today is Tuesday, 4th August. Coming to the first story.
So last Friday, July 31st, was a particularly headline-grabbing day for Zee Entertainment. That day, its shareholders gathered for an extraordinary general meeting. Now, the agenda was to approve a Rs 3,143 crore fundraise by issuing convertible wardens to a Mauritius-based entity linked to the Goenkaas, the promoter family that founded Zee and its parent, Essel Group.
This was exactly the kind of lifeline the family had been trying to secure for months. The resolution passed. But later, in the same day, SEBI published a 150-page order that found the company and its two most prominent figures, founder-chairman Subhash Chandra and his son, former MD and CEO Puneet Goenka, guilty of fraud as per the PFTOP regulations. Zee itself is also part of the list of notices. Now, the penalties aren't enormous, but the findings are scathing. And SEBI's order is a meticulous dismantling of how two promoters used a listed company's assets to bail out their own family entities and then buried the evidence in an annual report. We covered the broader Zee saga a year ago. Now, the Yessel Group has been struggling with over-leverage. Until then, the Goenka family had been continuously selling its stake in Yessel to clear their debt burden. In a 2023 interim order, SEBI had also found that the promoter family may have illicitly diverted resources from Zee to other Yessel Group entities. Now, SEBI has released the final version of the 2023 order, filling in important gaps in the saga. And it goes back to a deal from nearly 10 years ago. So, in December 2016, four Yessel Group entities, GeneX Projects, Vivek Infracon, GeneX Infrabild, and Renu Realtek borrowed Rs. 726 crore from India Bulls Housing Finance.
Now, these weren't Zee companies per se, but privately held entities buried several layers deep in the Yessel Group's corporate structure, which was ultimately controlled by the Goenka family. The four borrowers were wholly owned by Yessel Home, which in turn was wholly owned by Yessel Realty. So, whoever controlled Yessel Realty, controlled the whole chain.
So, Yessel Realty had six shareholders and two were directly traceable to the Goenka family. Subhash Chandra held the beneficial interest in one of them, while his wife Shashila Goenka and son Puneet Goenka held the other.
The other four shareholders collectively held 64%.
But their own shareholders turned out to be Yessel Realty, Yessel International, Yessel Media Ventures, and each other. The ownership was circular, and the votes that represented the 64% block just looped back to the same family. So a 36% direct holding was, in effect, total control. Now, by late 2018, these borrowers were in trouble. In November, India Bulls issued notices demanding additional security, as the existing collateral wasn't enough to cover the loans anymore. The borrowers promised to pre-pay Rs. 100 crore by the end of December, but they failed to. So instead, on December 5th, 2018, Subhash Chandra himself signed a personal guarantee for the loans. But then, on December 27th, he did something far more consequential. He executed a Declaration and Acknowledgement or DNA, which is a formal document in which he, signing as an authorized signatory of Zee Entertainment, deposited the original title deeds of a 17,600 square meter plot of company-owned land in Hyderabad with India Bulls.
The document ensured that in the event of a default, India Bulls would have the first claim over this land. But remember, this was Zee's land, not Subhash Chandra's. It belonged to a listed company with hundreds of thousands of public shareholders, and it was being offered as collateral for loans that had nothing to do with Zee's business. Most importantly, the board of Zee had not even approved of this. In fact, this was never even tabled for discussion. The juiciest layer of this shaky cake was how the DNA transaction was covered up. So in May 2019, Deloitte, which is Zee's statutory auditor, noted something odd in the annual report for FY 2018-19.
The original title deeds of the Hyderabad land were not available with the company. That's all the auditors could say. And what could they say? They didn't know why the documents were missing because no one told them.
On the very same day in 2019, Puneet Goenka signed a management representation letter addressed to the auditors. And in it, he stated that Zee had satisfactory title to all its assets and that there were no liens or encumbrances on any of them. He acknowledged that title deeds were not available on demand, but he did not mention the DNA his father had executed. SEBI's order is precise about what this concealment achieved. An investor reading the annual report would have understood at most that some property documents had been misplaced, perhaps just an administrative hiccup. But they would not have known that a company asset that, at the time, was worth Rs 57.3 crore had been effectively pledged away. So this, SEBI concluded, was the nexus to the securities market. The fraud wasn't contained to the private dealings between the Goenka and India bulls. It reached investors through the humble annual report that every publicly listed company in India has to publish every year. Now, Subhash Chandra and Puneet Goenka's defense rested on a seemingly clever argument. The mortgage was never legally valid and Zee wasn't a party to the loan agreements. Therefore, they argued no enforceable mortgage ever came into existence. And if there was no mortgage, there could be no fraud. SEBI rejected this comprehensively. The adjudicating officer N Murugan drew a distinction that runs through the entire order. So there is, in his view, a difference between the enforceability of a transaction and the character of the conduct. So what does that mean? A document could be legally defective, yes. But there was a conscious intention or purpose behind its execution. The fact that the mortgage wouldn't have held up in a civil court doesn't erase the acts that were undertaken to create it, from signing over the title deeds to the representation to auditors. So, as per Murugan, if the legal failure of the pledge could absorb the people who had emptied it, then the penalty would depend not on whether the conduct itself was illegal or not, but on how well or not well the scheme was executed. Meaning, the worse someone is at their job, the safer they are. And that, the order concludes, cannot be the law.