- 8/14/2023
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00:00 Hi there, you're with BQ Prime and this is The Fine Print.
00:03 Now, last week, the National Company Law Tribunal approved the Zee Entertainment and Sony Pictures
00:09 merger. None of the market participants or stakeholders expected the merger to not go
00:14 through. But equally, they didn't expect that the SEBI order against Zee's erstwhile CEO,
00:20 Puneet Goenka, will not matter at all. Those of you who've been following this story,
00:26 several creditors of the SL group like Access Finance, JC Flaers, IDBI and IDBI Trusteeship
00:34 were opposing this merger on some of the grounds saying that Subhash Chandra had given a personal
00:40 guarantee for some of the loans extended to certain SL group entities. Now, the way Zee
00:45 and Sony merger is structured, a non-compete fee is being paid to Mauritius entity. These creditors
00:52 said that the non-compete fee is structured to essentially defraud them. That was the first
00:58 hurdle before the NCLT that the creditors had raised. On the other hand, rather as a second
01:03 hurdle was a SEBI order against Zee's erstwhile CEO, Puneet Goenka. The case is still going on,
01:10 but the regulator had barred Goenka from holding directorial positions. Now, the creditors and the
01:15 exchanges had brought this also to the notice of the NCLT. Both these hurdles have now been cleared
01:22 given that the tribunal has now approved the merger. The tribunal essentially approved the
01:27 merger saying that the objectors didn't meet the requisite threshold under company law and that
01:33 the objectors weren't direct creditors of Zee, rather they were creditors of SL group entities
01:39 and their right to go after or recover their debt would continue against the merged entity.
01:45 On the objections that the creditors had raised, the NCLT also said that it has limited jurisdiction
01:54 once 99% of the shareholders of Zee have approved the merger. On SEBI's order against Puneet Goenka,
02:03 NCLT said that it was passed much after the scheme was filed before the NCLT or approved by Zee's
02:10 board and Sony Venture has every right to take up the issue at its own board level. Now, to understand
02:16 what this means for corporate law jurisprudence where regulatory orders are passed when NCLTs
02:24 are considering mergers and of course what options do creditors of SL group now have?
02:30 To understand this, I have with me corporate lawyer Murali Neelkanthan. Murali, welcome to
02:35 The Fine Print. Murali, your first quick thoughts on the NCLT's reasoning and then of course we'll
02:41 come to the consequences for various stakeholders. I didn't expect any better. So we expected when we
02:49 spoke last time as well that it's a fairly simple matter in that way. Shareholders and creditors,
02:55 share creditors have approved and therefore the scheme goes through. That has been the principle
03:00 for a very long time. Occasionally, the NCLT will allow other objections and the matter gets drawn
03:06 on for years sometimes. But the simple principle has been that if the creditors have approved and
03:12 the shareholders have approved, then the NCLT is not going to do very much about it. So that has
03:16 been the principle that the NCLT has followed and followed it well in this case. Whether it should
03:23 have also considered other objections is something we should discuss. Sure. So let me come to first
03:29 the bigger sort of hurdle that the merger was facing and that is of course the Zee's order
03:33 against Goenka and in which case Goenka also went to the Securities Appellate Tribunal.
03:40 Interim relief was denied to him and he was told to make submissions before SEBI.
03:45 Did you believe that this, because some of the permutation and combination that you know
03:49 corporate lawyers through when we asked this question on the fate of the merger until this
03:54 order came was that look, you know the NCLT what it can do is approve the merger and maybe say
04:00 that look you need to remove this clause or seek you know second round of approval from shareholders
04:08 on the clause given that Goenka has now been barred by SEBI at least you know on primer
04:13 facing level. The case will you know take its due appellate court course but did you also believe
04:21 that the SEBI order will not matter at all and NCLT probably if I can use the term brush it aside
04:28 in this fashion. I don't think they brushed it aside. I think it's a very clever way of dealing
04:32 with it. They have said that the scheme is approved but if any other authority comes in the way of
04:38 execution executing any part of the scheme then that order will prevail. So they're not taking
04:43 away jurisdiction of SEBI or the stock exchanges here. I think in a way they're saying we approve
04:49 this scheme but it's subject to authority of any other statutory body. But typically the statutory
04:56 approvals have to come before an NCLT merger approval is given right but in this case there
05:02 is this large sort of question mark on because this as I understand from the scheme documents
05:07 this is a material clause in this scheme of arrangement that Goenka will be MD and CEO of
05:13 the merged entity for the next five years effective the date of the merger. Now given that that sort of
05:19 is questionable maybe as a shareholder I thought that no I wanted Goenka in this position and now
05:27 there's a question mark I'm not sure if I want to continue with my approval. So that is a material
05:32 change. So did you not think that should have been taken to the shareholders of Z at
05:38 least once again? If it was an issue I would have expected as we spoke last time that shareholders
05:45 would come to court and say we are in support of this or we are against that. I can't see as I said
05:51 last time as well that I can't see Z shareholders coming to court because they're benefiting from
05:56 this whole exercise. The only objection I expected was from Sony shareholders and obviously that's
06:03 not going to happen because it's not a listed company. So that to me would have been the
06:08 way of exploring this question and since there was nobody actually agitating this issue very strongly
06:16 we had a very, very it seems from the order I don't know what happened in court but it seems
06:21 in the order that it was just one in a little bit of submission to say there is an order like this
06:25 that said he has passed which is what SAT has done and quickly dismissed as not relevant to
06:33 this whole exercise by the order. Well the arguments were made at length the order doesn't
06:38 deal with them in the same fashion. I would have expected though that the ROC would have made a
06:46 case out for it. So there is a whole list of fairly standard objections that the ROC comes up with
06:53 and there is a one-line reply to each one of those things. I would have expected the ROC to actually
06:59 make these two points that there is investigation pending by SEBI. Now that also means that ROC
07:07 should be investigating because now it has enough material right based on the SEBI order ROC has
07:12 material to investigate. Instead it has said that there are no investigations pending,
07:16 there are no inquiries pending. So if the ROC had actually wanted to make this point and say that
07:23 here are the two issues on which we can't actually give you a clean check and therefore
07:29 this merger cannot go through then I suspect that the NCLT would have taken it more seriously. Now
07:34 we don't know if they said it but from the order it doesn't seem like they have. So ROC didn't and
07:39 to your mind both SEBI and the exchanges weren't the right entities to agitate this point? No they
07:46 were but it seems like the NCLT brushed them aside and said this matter can be taken up it can still
07:53 be investigated by SEBI and if SEBI passes an order then the scheme will stand amended to that
07:59 extent which means that if SEBI passes an order saying that the going class can't be directors
08:04 then they will not be directors and it doesn't affect the scheme in any material way. That seems
08:08 to be the view that the NCLT has taken that the shareholders don't really care about this they
08:14 approved it and if it is subject to the orders of any regulator so be it. We don't know what will
08:20 happen maybe regulator will not pass an adverse order maybe it will but there's no reason for that
08:25 proceeding to hold up the approval of the scheme. Sure so then as far as the implementation of the
08:31 scheme is concerned that can go ahead both the parties now I mean Zee and Sony they don't now
08:37 have to go before SEBI in any fashion right? No and I would have expected that they've been already
08:45 set for this so everything that it need to be done and filed they would have filed it on Friday or
08:50 Saturday whenever the order came out. I suspect that they would have gone off and said we've
08:54 already implemented so in the time it would take to go in appeal they would respond by saying that
09:00 we already implemented the order we cannot undo all of this so we've issued the shares we've done
09:05 the allocations all the shareholders have got their shares registry has been updated all of this has
09:09 already been done and it cannot be therefore undone. I would have expected if they are sharp
09:14 they would have done that I would have done that in the case. Okay so then now okay now what happens
09:18 the Goenka is supposed to make submissions before SEBI and let's assume that
09:26 for argument's sake that there is an adverse order which goes to SAT and then let's say whichever
09:32 party loses goes to the supreme court by which time considerable time has passed and the scheme
09:38 has become effective. Yes absolutely. I would think that on the next very next day can Goenka
09:46 then become you know the MDCO given that this these proceedings are pending or Sony will have
09:53 to sort of actually come up with somebody another personnel in this position given that
10:00 the appellate process is going on parallelly. So I suspect that as I said if I was in their place I
10:07 would have implemented the scheme today. Yeah.
10:10 You have natural justice and due process now that could take months then you have
10:32 the possibility of several appeals and that could take months it could take years who knows.
10:38 So if they're quick. At which at what point do we see the gravity of SEBI's case reflect
10:46 in this merger scheme whether we have now the merged entity at play here. It's very difficult
10:54 to say because you have parallel tracks and we don't know what the speed of each of them is
10:58 and whether they will ever intersect. So it could happen that SEBI
11:04 gives them a fair hearing and then finds at the end of that process that in fact there have been
11:11 financial irregularities and they should be prevented from being on the board of companies.
11:16 Now that will go into another appeal process and for that period of time he may not be able to hold
11:22 office. So there will be a temporary vacuum there let's say and if that order is then upheld
11:32 in appeal then the vacuum will get longer. If it is overturned in appeal then he'll be back so it'll
11:38 only be temporary. So it's a possibility that you could have situations where you have these temporary
11:44 vacuum where because of an order in appeal in this matter or in appeal in the other matter
11:50 you could have phases where he could be out and that could be five years who knows.
11:58 We've known NCLT matters to go on all the way to the supreme court for more than five years.
12:02 In the interim do you believe any developments on the Sony board front because that's what
12:11 the NCLT has said that you know Sony can very well take this up at its own board level.
12:16 Exactly but considering that they're already hurt by the financials if this fraud is proved
12:24 and they have done nothing about it I would have suspected that somebody on the Sony side would
12:28 have said we reserve the right to perhaps rework the shares on a future date or we'll get some
12:36 form of support from the SL group that if this money has disappeared and it has to be returned
12:42 then we will get some comfort around that. None of that seems to be there in the order. So maybe
12:49 Sony believes that money is gone or even if it is gone it still the valuation holds up
12:55 or it's believed that the money is not really gone it's got better information than
13:00 SEBI or the stock exchanges and is confident that the money is really there in which case
13:05 there's nothing to be done. So I'm not really sure what the Sony thinking on this is but these seem
13:09 to be the two possible strategies. Okay and what sort of would become of this promise of making
13:18 Goenka MD CEO? Would you think that Sony would want to remedy that in some way in the scheme today
13:24 or they'll play it by the year and see where the SEBI investigation goes? It depends on how
13:30 desperately they need him as CEO, isn't it? So if you do want him as CEO then you can say it's all
13:36 subject to future orders. If you don't want him as CEO you could say this puts the whole
13:42 commitment that we made to you under a lot of stress, it's not good for the company and
13:47 therefore we'll remove you. So I'm not really sure what they want out of this but they can play it
13:54 both ways. Okay, all right now let me come to some of the creditors who are SL group creditors.
14:01 It seems reasonable to say that look your remedy against the merged entity will continue to be or
14:09 will continue to hold and so that's not the reason to hold up this merger that argument seems
14:14 reasonable to me. It does and in fact almost all of the objections seem to be hinged on this issue
14:22 and in the order it seems to address it time and again by saying the merged entity is actually
14:28 stronger financially and therefore there is a better chance of you recovering against the
14:32 merged entity with a higher net worth than against Z and therefore you really can't have any claim.
14:38 The other objection of course is that you have no locus because you don't have a claim against Z
14:44 and all of the proceedings where these claims have been agitated. So they've been agitating the DRT,
14:54 they've been agitated in the commercial court. None of those courts or tribunals has actually
15:01 helped the creditors by saying we will injunct you or grant you some relief. So they could have
15:07 granted an order saying if any money is received it shall be kept aside to settle this claim or
15:13 we will garnish it or somebody needs to give us a bank guarantee for it. Any of those reliefs
15:19 would have been granted. The fact that they were not granted seems to have given the NCLT
15:26 a bit of strength to say that listen you don't really have a claim against Z, nobody's granted
15:32 you any relief. These are at best disputed and they can't come in the way of a merger which I
15:39 think is a very practical and pragmatic way of dealing with this and it'll help many other
15:42 cases I'm sure before the NCLT. Yeah and the fact that the NCLT didn't even go down the road of
15:53 figuring out why the non-compete is getting paid to Mauritian entity also gives structuring leeway
16:00 to similar transactions, right? Yeah so one of the contentions or objections there is that
16:07 this is money that's really owed to Subhash Chandra which is then being paid to Mauritius
16:12 and therefore it's money due to one of the creators of Subhash Chandra under the guarantee
16:18 to which response is quite simple which is that you can't have it both ways, you can't say
16:25 it's illegal and I want to have a bite of it. The other thing that's said in the order is that
16:32 you really still continue to have a claim against Subhash Chandra, go get it.
16:36 They haven't really dealt with this issue of is it really a diversion of money from Subhash
16:42 Chandra to Mauritius because they're saying the only people who can object to that are the
16:46 shareholders and they voted for it and those shareholders include institutions. The promoters
16:51 don't really have control because they only own about six percent or three percent of the company
16:56 and therefore you can't have any claim because nobody's objected. So it's like saying that
17:00 even if it is all completely wrong, why has nobody else objected and because nobody's objected
17:05 it should be fine. So there's a presumption that everybody's approved it and therefore they've all
17:10 done due diligence and nobody has problems with it and therefore the NCLT will not look any further.
17:14 So is it, I mean last question only then, is it safe to assume that future mergers and schemes of
17:21 this nature, shareholder approval will be primary and even if there are allegations of financial
17:29 irregularities, of funds getting diverted, of maybe some financial institutions getting short
17:35 change in the process, it's not going to be the NCLT which will stop the merger on these grounds.
17:41 If this order continues to be good law, I wish it is, it should make easier for a lot of companies
17:49 to get their mergers done more quickly. It's not been the case in the past because you have had
17:55 too many people intervening and objecting and that process goes on forever. So the little silver
18:01 lining on this is that if creditors and shareholders approve, the ROC gives you a clean chit,
18:08 then frankly nobody should be objecting to a merger and should go through fairly quickly.
18:13 All right, do you see one, from his last question, do you see any of this getting appealed
18:20 in any way before NCLAT? I think it will be appealed, it doesn't matter how good or bad the
18:26 order is, India it seems to be that there will be an appeal. The cost of an appeal compared to the
18:32 cost of a win is worth the gamble. So I suspect that there will be the regular two appeals,
18:38 one to the NCLT and one to the Supreme Court and who knows what will come out of the
18:45 SEBI investigation. If something comes out of that, then it will help the appeal process.
18:50 All right, Murali, we'll stay on top of this gamble if it plays out. Thank you very much
18:56 for joining us with your thoughts on the fine print and thank you so much for watching. Thank you.
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