Sebi bars Eros International MD and CEO from Board positions, pending investigations into fund diversion

The order also has asked the investigators to enquire into the apparent failure of the Board and the Audit Committee.

Eros International Media’s Managing Director Sunil Arjan Lulla and CEO Pradeep Kumar Dwivedi have been restrained from holding any board positions or key managerial positions by the market regulator, through an interim ex-parte order passed on June 22.

The two senior executives, the company, Eros Worldwide FZ and Eros Digital Private Ltd have been banned from accessing the securities markets until further orders too.

The Securities and Exchange Board of India (Sebi) has appointed a forensic auditor to investigate whether funds have been siphoned off from the company, and the investigations have still not been completed.

Also read: Why this commentator says Sebi’s NSE order is a 'letdown', lost opportunity

According to the interim order, “pending completion of the detailed investigation initiated by SEBI, there is a need to pass an ad-interim ex-parte order to protect the interests of public shareholders as well as the interest of the general investors and to prevent any further deterioration of funds/assets of Eros”.

This urgency is because, though the investigation was started after doubtful financials were reported for FY20, the officials believe that the financials of the company are still being misrepresentated and that money is being forwarded to entities related to the promoters.

In an exchange filing, Eros International Media acknowledged receipt of the order. It added, "We are in the process of seeking legal advice in the matter and taking appropriate actions, as may be advised".

The background

The enquiry was started after financial statements for FY20 showed impairment from content advances and film rights, along with other advances and goodwill, amounting to Rs 1,553.52 crore. Also, in the same year, the company wrote off trade receivables to the extent of Rs 519.98 crore.

The National Stock Exchange (NSE) examined these statements and forwarded a preliminary investigation report (PER) to Sebi, and in the report, the officials had noted that the revenue from operations, trade receivables and loans given by the company were largely related-party transactions. These had increased substantially in the fiscal year that was under consideration or FY20.

The report observed that “prima-facie these transactions indicated that the Company was engaging in financial mis-reporting/siphoning/diversion of funds”.

Therefore, Sebi launched a full-scale enquiry into the company.

On passing the interim order, Sebi’s whole-time member stated, “I observe that there is sufficient material on record to arrive at a prima-facie finding that the books of accounts of the Company have been overstated and do not present a true and fair picture of the financial health of the Company. The transactions between the ‘content advance entities’ and the ‘trade receivable entities’, raises the possibility that Eros was circulating funds whereby amounts transferred as content advances were subsequently recognized as revenue by routing it through trade receivables entities. The fidelity of the financial statements of the Company have been rendered a chimera by virtue of these transactions”.

The order added, “This coupled with the fact the Company is still advancing funds to entities which have been potentially involved in siphoning off funds to entities related to the promoters, makes it imperative for SEBI as the market regulator to take action in the interest of the public shareholders of the Company. I also note that most of the TREs (trade receivable entities) and CAEs (content advances entities) and their directors failed to cooperate with the SEBI investigation. This recalcitrant and refractory action by entities suspected of siphoning off public funds needs to be dealt with firmly.”

The order also has asked the investigators to enquire into the apparent failure of the Board and the Audit Committee to take steps to protect the interests of the shareholders.