Zee-Sony Merger: Is Punit Goenka’s leadership giving Sony cold feet?

December 21 marks the initial deadline for the highly anticipated $10 billion Zee-Sony merger. While Sony has agreed to discuss a deadline extension, sources suggest it has reservations around the proposal to have Punit Goenka, CEO and MD of Zee Entertainment Enterprises Ltd (ZEEL), lead the new entity. A SEBI investigation into Goenka is adding to Sony's anxiety, and weighing on the merger.   “The appointment of Goenka as MD & CEO in the merged company does not bode well on the goodwill of Sony, as the flag on the ship is as important as the ship itself,” said Rajiv Sharma, corporate law (litigation) expert and partner at Singhania & Co.   Sony Group wants NP Singh, its India MD and CEO, to take over as the CEO of the newly formed Zee-Sony entity. According to the Japanese company, this change aligns with stringent corporate governance norms in Japan and the US.

Sharma also said that there will be challenges to win the approval of the public shareholders of ZEEL and Sony, as well as secured and unsecured creditors, which is required to give effect to the approved merger scheme.    The merger is also dependent on the orders of the court and NCLAT (National Company Law Appellate Tribunal).

“NCLAT’s decision on 15th December to deny a grant of stay on the merger, as requested by Axis Finance and IDBI Bank, is on the ground that the same must be heard on merits before any decision regarding a stay is made. The case, which is listed for January 8th, 2024, is very crucial for the fate of the merger,” Sharma added.

Another expert, Mayank Biyani, associate  at PSL Advocates and Solicitors, said Sony's hesitation stems from a confluence of legal and non-legal factors. While legal challenges like Goenka's leadership and financial irregularities pose immediate hurdles, there are other concerns as well.   “Concerns about integration, market dynamics, and strategic value add complexity and raise questions about the merger's long-term benefits. Ultimately, whether these concerns can be addressed satisfactorily will determine the fate of the Zee-Sony deal,” he said.   Why all the apprehension around Goenka leading the new entity?

It all started earlier this year when SEBI (Securities and Exchange Board of India) passed an interim order, wherein Goenka was directed to not hold the position of a director or be part of key managerial personnel in any listed company or subsidiaries or any resultant company that is formed pursuant to the merger.    The interim order was passed by SEBI subsequent to an investigation conducted into the appropriation of a fixed deposit of Rs 200 Crore of ZEE by Yes Bank to square off loans of related parties of the Essel Group. Goenka’s father, Subhash Chandra, is the chairman of the Essel Group, and face the same proscription on holding office.    “It was revealed through investigation conducted by SEBI that a letter of comfort was issued by ZEE in favour of Yes Bank to ensure that a fixed deposit of Rs 200 Crore would be available to the bank in the event of default by the related parties. Allegedly, the Letter of Comfort was only known to a few persons in the management and was not disclosed to the Board of Directors,” explained Siddharth Joshi, senior associate at SKV Law Offices.   While the interim order passed by SEBI has been quashed by way of an order dated 30.10.2023 passed by the SAT (Securities of Appellate Tribunal) and restrictions imposed upon Goenka set aside, the wider investigation being conducted by SEBI is still in progress.   “The pendency of the wide investigation being conducted by SEBI to consider the various Letter of Comfort being issued by ZEEL and its promoter companies may make Sony hesitate in going forward with the merger and appointing Goenka as the chief executive officer of the merged entity,” said Joshi.