Exclusive: Govt likely to focus on strengthening related party clause in company law

ZEEL allegedly diverted funds through related-party transactions.

In the backdrop of big corporates like Zee Entertainment Enterprises Ltd (ZEEL) coming under scrutiny for alleged governance lapses, the Centre is likely to review the related party clause of the Companies Act 2013 and may look at further strengthening it, a senior government official said.

“The government will focus attention on the related party clause. It will see if there is a need to strengthen it. How do we strengthen the related party clause? This will engage the government's attention. All the big investigations have found the issue of related party transactions. Currently, the regime is lenient and disclosure-based,” the official told Moneycontrol.

The official said that the recent investigations of ZEEL are likely to allegedly expose the issue of related party transactions.

Markets regulator Securities and Exchange Board of India (SEBI) has summoned several former directors of ZEEL as part of its investigation into the entertainment company over the diversion of company funds, allegedly through related-party transactions.

SEBI alleged that the promoters illegally withdrew Rs 200 crore from the company for their benefit. The money was used to provide collateral for the debt owed by private companies of promoters, including Essel Green Mobility and Pan India Infra Projects, among others. The collateral was through a letter of comfort (LoC) to the lenders.

It also held that these transactions were not done after obtaining approval from the Zee board. SEBI is trying to ascertain if the directors knew about the LoCs being issued by promoters.

The regulator has also widened the scope of the investigation and is now looking into a wider pool of entities that have done business with ZEEL in recent years. It is also probing a wide array of transactions between Zee and private companies owned by promoters.

SEBI issues interim orders in high-priority cases since the complete investigation can take 2-3 years. In the meantime, the regulator issues interim orders barring the accused from capital markets to protect investor interests and to refrain the accused from selling off proceeds of crime.

SEBI is examining recent statements by Zee group founder Subhash Chandra about the Zee promoter family’s purported plans to hike its stake in ZEEL. It is examining whether his statements constitute a potential breach of disclosure norms.