Sebi’s prolonged Zee probe keeps ‘promoter overhang’ alive, leaves investors in limbo

Zee Entertainment

• Sebi sends second show-cause notice to Zee promoters for fund diversion
• Prolonged probe adds uncertainty, eroding Zee's market value
• Zee's shares down 35% post Sony merger collapse

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The Securities and Exchange Board of India’s (Sebi) decision on February 12 to issue a second show-cause notice to Zee promoters and 84 other entities over alleged fund diversion has revived questions among market participants over why the regulator’s investigation has stretched for more than three years.

The fresh notice comes despite Sebi apparently having gathered substantial evidence earlier when it issued its interim order against Zee promoters in June 2023. The continuing probe has kept what market participants refer to as a  “promoter overhang” on the company, leaving investors without clarity on how the matter will eventually conclude.

The investigation into the alleged wrongdoing dates to the tenure of former Sebi chairperson Madhabi Puri Buch, during which the regulator first began examining the fund diversion allegations and subsequently issued its interim directions.

Sebi had issued its initial interim order against Subhash Chandra and Punit Goenka, promoters of Zee, on June 12, 2023. In that order, the regulator alleged diversion of funds by the promoters to private entities linked to the promoter group and barred both Chandra and Goenka from holding any key managerial positions (KMPs) in listed companies. This was followed by a confirmatory order on August 14, 2023, which reinforced the restrictions after a period of review. Since those initial orders, however, there has been little visible progress in the case.

Zee had challenged Sebi’s interim order before the SAT, and on October 30, 2023, the tribunal overturned the regulator’s interim directions.

Sebi is currently in the process of concluding its final investigation.

Prolonged Investigation

The prolonged investigation assumes significance because the allegations involve serious charges of fund diversion that could potentially lead to disqualification from capital markets. Legal experts say it could take several more years before investors get clarity on the final outcome, particularly as companies typically challenge Sebi orders before the Securities Appellate Tribunal (SAT).

High-profile cases often move further to the Supreme Court, where adjudication itself can take one to two years.

Minority investors form a large portion of Zee’s shareholder base, with about 6.5 lakh public and small investors holding roughly 96 percent of the company’s capital, while the promoter group holds just 4 percent.

The uncertainty has also coincided with a sharp erosion in Zee’s market value. The company’s shares now trade around ₹90 levels, with a market capitalisation of roughly ₹8,600–8,700 crore. This stands in stark contrast to the period when the proposed merger with Sony was announced. The combined entity at that time was expected to be valued at over $10 billion, positioning it among India’s largest media conglomerates. Zee itself had a market capitalisation of roughly ₹28,000–30,000 crore around the time the merger was announced, underscoring how sharply the company’s valuation has compressed since then.

Zee’s shares have fallen sharply since the merger collapse and regulatory overhang, with the stock still significantly below levels seen when Sony was pursuing the deal. Market watchers note that Zee’s shares remain down roughly 35 percent since the merger’s termination, highlighting how uncertainty has weighed on investor sentiment.

“SEBI’s prolonged investigation into alleged fund diversion at Zee Entertainment Enterprises Ltd, with show-cause notices issued to Subhash Chandra and Punit Goenka, illustrates how regulatory delay itself operates as a material risk to shareholders. Proceedings under the PFUTP Regulations read with Sections 11, 11B and 15HA of the SEBI Act carry exposure to penalties up to ₹25 crore or three times the alleged gains, along with disgorgement, market debarment and directorship prohibitions,” said Alay Razvi, managing partner at Accord Juris.

An email sent to Sebi seeking comment remained unanswered.

‘Loss to shareholders’: Zee

“SEBI investigation has derailed several strategic steps planned by the Company, including the proposed merger, causing immense loss to the Company’s shareholders. The Company has firmly refuted all the allegations and remains confident that SEBI will conduct a fair analysis of the Company’s responses, to bring a closure to this prolonged issue. The Company continues to uphold the highest standards of governance and will take all the required legal steps to protect the interest of its shareholders,” a Zee spokesperson said in response to Moneycontrol queries.

In its June 2023 interim order, Sebi alleged that Zee promoters had orchestrated a scheme to siphon off Rs 200 crore from listed entities. According to the regulator, Chandra had issued a letter of comfort to Yes Bank, allowing it to use Zee’s fixed deposits to settle loans of seven associate entities owned by the promoter family.

While interim orders are based on prima facie findings, final orders follow a detailed investigation process that often takes over a year. Even so, legal experts say the government and regulators should consider reforms to shorten the time taken for investigations, as prolonged regulatory proceedings themselves create uncertainty for listed firms and investors.

To be sure, Sebi has significantly improved the pace of investigations in recent years, aided by increasing use of technology-driven surveillance and analytical tools.

“The Zee impasse illustrates how protracted investigations can operate as indirect penalties, as evidenced by the collapsed Zee-Sony merger and a persistent promoter overhang. The Securities Market Code Bill addresses this tension by mandating time-bound adjudications and a strict separation of powers. Such reforms are vital to ensure regulatory oversight effectively safeguards corporate democracy without leaving listed entities in a state of value-eroding suspicion,” said B Shravanth Shanker, managing partner at B. Shanker Advocates.