The Securities Appellate Tribunal today (August 14) questioned the logic behind Securities and Exchange Board of India’s decision to block Zee Entertainment Enterprises Ltd. from proceeding with its proposed Rs. 3,143 crore promoter-linked fund raise, pointing out that the market regulator itself accepted that the investment could be made after the company’s two-month debarment period. SAT said, SEBI’s position defeats logic since no other legal bar to the transaction had been pointed out.
The Tribunal noted that the proposed investment had already been approved by 76.64% of the public shareholders and that about 96% of Zee’s shareholders were public shareholders.
SEBI’s July 31 order barred Zee from accessing the securities market for two months. At the same time, Zee had a shareholder-approved warrant issue that had to be completed by August 14. Zee argued that the debarment to operate would effectively kill or disrupt the transaction despite shareholder approval. SAT told SEBI, if the transaction was legally permissible after two months, on SEBI’s own admission, what was the basis for preventing it now, particularly when the only identified impediment was the very restriction imposed by SEBI?
When asked by SAT, SEBI admitted that no charge of violation of the Prohibition of Fraudulent and Unfair Trade Practices regulations had been made against Zee in the impugned order in relation to dealing in securities.
SAT placed a lot of emphasis on the fact that the proposed fund raise had received approval from a substantial majority of public shareholders.
In effect, although SAT allowed the fund raise, it did not lift the SEBI ban. In other words, it stayed the relevant direction only to the extent necessary for Zee and Punit Goenka to complete the issue of fully convertible warrants to the promoter group entity on a preferential basis. The wider securities-market debarment continues. The Tribunal has also extended by a week the deadline for issuing the warrants, which was due to expire today (August 14).
Pertinent to note that the SEBI action arose from allegations that a Hyderabad property owned by Zee had been allegedly mortgaged in 2016 by promoters to secure borrowings of four group entities. SEBI argued that the property had been mortgaged without the necessary board or shareholder approval. SAT did not pass orders on these allegations.
Effectively, the SAT order makes it clear that SEBI can continue to restrict Zee’s market access, but it cannot use that restriction to prevent the specific shareholder-approved warrant transaction from being completed during the interim period.