Zee may not merge with Sony because Shirpur Gold Refinery did some fraud

Or how to steal from a bank

Billionaire Subhash Chandra after being accused of fraud

If you’re a billionaire interested in multiple lines of business that have nothing to do with each other, the normal way to go about it is to make separate companies for each business. That way, your companies are insulated from each other. If one of your companies takes a lot of loans and things get out of hand, it won’t affect all your other companies that might be more responsible or even debt free.

Or if you use one of your companies to commit fraud, your other companies would remain unaffected. If you’re this billionaire, you want to ensure that your fraud is limited to your designated fraud-indulging company, without having its effects spill over into your other companies.

Subhash Chandra is a billionaire who became rich primarily in the media business with Zee TV. He now owns (or has owned) companies across media, entertainment, infrastructure, hospitality, packaging, etc. Last month, SEBI issued an enforcement order saying that one of these companies, a refinery called Shirpur Gold Refinery, was Chandra’s designated fraud-company which stole money from its lenders.

Another of Subhash Chandra’s companies, Zee Entertainment, has been in the process of merging with one of its competitors, Sony Pictures, since December 2021. Chandra would hope that the Shirpur fraud doesn’t affect this merger. Well, SEBI hopes otherwise.

To shut down a company, lend it money

Here’s a fun way to steal money from a bank:

1. Borrow money. Tell the bank that you need it for your company’s operations

2. Don’t use it for your company’s operations. Instead, lend this money to some other companies (that you secretly own)

3. Shut those companies down. The bank goes to your original company for its money but you put your hands up and point to these other companies which don’t exist anymore

4. ??? Profit

Of course, things don’t work like this exactly. For one, shutting down a company that has borrowed money isn’t straightforward. Its creditors have to be paid back!

Here’s what happened, all from SEBI’s enforcement order.

Shirpur Gold Refinery borrowed ₹404 crore ($49 million) from Punjab National Bank. It then lent this money to a number of companies, the largest chunk of which went to a company called Altrarex which borrowed ₹241 crore ($29 million). Of course, Subhash Chandra & family owned all the companies here—Shirpur, Altrarex and whoever else Shirpur lent to.¹ Straightforward stuff till here.

Once Altrarex had this money, the problem then became how does one shut this company down so that it doesn’t have to be returned to Shirpur, and well, Punjab National Bank?

The way most companies die is by taking loans which they’re unable to repay. Someone lends money to a company and expects regular payments back with interest. If the company doesn’t repay on time, the creditor gets annoyed and takes it to court. The court then sells off everything the company has and repays the creditor with whatever it can recover. Classic.

Altrarex borrowed money from Shirpur, yes, but it also borrowed money from a company called Ekmart. A relatively small amount, about ₹49 crore ($6 million). If you hadn’t guessed it, yup, Ekmart was also owned by Subhash Chandra & family. Is there a single company that this man doesn’t own?

Anyway, Altrarex borrowed money from Ekmart and didn’t pay it back. So Ekmart took Altrarex to the NCLT. In my last post about the airline Go First, I wrote:

If the bank goes to the NCLT, it’s not as straightforward as the court deciding that the company must pay back its debts. The idea goes that if this company hasn’t repaid its debt to this bank, it probably hasn’t to other banks as well. It likely doesn’t have enough money to pay back all its lenders; that is, it’s insolvent. So the court must step in and help figure a solution so that all the creditors that are owed money are happy. As happy as can be in the circumstances, of course. Essentially, it’s not about one particular bank or creditor anymore, it’s about everyone that is owed money.

Once Ekmart took Altrarex to the NCLT, this is what a normal day would look like:

1. Ekmart goes to the NCLT and tells the court that Altrarex owes it ₹49 crore but isn’t paying it back

2. There is a public announcement! All creditors of Altrarex are invited to come and ask for their money back

3. Eventually all creditors THAT SHOW UP get something

Of course Shirpur didn’t show up. Ekmart (which had lent a small amount) took Altrarex to the NCLT, but Shirpur (which had lent a large amount) didn’t claim its money back when it had the chance. So Ekmart would get its ₹49 crore back but Shirpur would get none of its ₹241 crore. That cash would remain with Altrarex’s owners (Subhash Chandra) and the company would not exist any more.

Fool me twice, shame on me

If a company wants to merge with another company, it has to go through a number of approvals. If it’s publicly listed, the stock exchanges must approve. If it’s a bank, the RBI must approve. The Competition Commission must approve, just in case the combined entity might have too much market share. Once all that’s done, the NCLT needs to approve, after keeping all the remaining stakeholders in mind.

An important stakeholder in a company is its lenders. If a bank has lent money to a company that is trying to merge itself with another, it isn’t necessarily a problem. The combined entity can just take on the original company’s debt and pay it back whenever it’s due. That’s how it usually goes.

Zee Entertainment has been trying to merge with Sony Pictures for the last year-and-half. Zee Entertainment had taken on some debt. It had borrowed from a number of banks and not always paid them back on time. For banks that have lent to Zee, this would be a great time to ask for their money back. Zee is vulnerable and it needs to be at its best behaviour, else the NCLT might not give its go ahead.

So Zee settled its ₹83 crore ($10 million) loan from IndusInd Bank, who had been chasing Zee for quite some time. Zee also settled another ₹211 crore ($25 million) that it owed IPRS, another creditor chasing it.

But a lot of others want to get paid! IDBI Bank wants ₹149 crore ($18 million). Axis Finance wants ₹146 crore. JC Flowers wants ₹377 crore. You get the gist.² Technically, these debts shouldn’t block Zee’s merger with Sony Pictures. The new, combined company can take all of these debts. That’s exactly what Zee is saying to the NCLT as well.

But SEBI just asked the NCLT to consider its order against Shirpur Gold Refinery before it gives its approval to the merger. What SEBI is saying to the NCLT is this: “Hey, the owners of this company that’s asking for a merger? They just set up an intricate system that abuses your own bankruptcy processes so that they can steal from their lenders. Are you absolutely positive they won’t steal from their creditors again?”

1. While SEBI identified that Subhash Chandra and his family ultimately owned all these companies, their ownership on paper isn’t straightforward. They have someone else own these companies on paper. SEBI identified that these people were also ultimately connected to Subhash Chandra’s companies (by holding directorship, for instance) and figured that it was a proxy ownership.

2. Zee Entertainment may not have directly borrowed from all these companies. IDBI, for instance, had lent to another company Siti Networks, but Zee had guaranteed that loan. Axis Finance and JC Flowers, on the other hand, have a more complicated ask. They lent money to other companies owned by Subhash Chandra, and he had personally guaranteed those loans (not Zee).