Auditor Qualification May Be A Fresh Headache For Zee Entertainment
Zee Entertainment Enterprises Ltd.’s auditors have flagged the letter of comfort that the broadcaster issued against borrowings by a related party that eventually defaulted, raising another potential concern for the company that has faced corporate governance issues in the past year and a half.
The matter is already under litigation as Yes Bank Ltd. moved the Bombay High Court to enforce the letter of credit after the default. But it's another issue that may be construed as a corporate governance matter for the company after pledged promoter shares and related-party transactions. Incidentally, the latest issue, too, involves related parties. Shares of Zee Entertainment fell 4% on Monday.
In 2015-16, ATL Media, a Mauritius-based fully owned subsidiary of Zee Entertainment, signed a put option agreement with Living Entertainment Ltd., a related party, to buy 64% stake held in Veria International Ltd., another related party, for $52.5 million. Living Entertainment borrowed money from Yes Bank against this put option.
In May 2016, Zee Entertainment issued a letter of comfort to the bank against the Living Entertainment’s loan. The put option was renewed on July 29, 2019 and is valid through Dec. 30, 2026.
In 2019-20 fiscal, Living Entertainment defaulted on loans and Yes Bank enforced the put option seeking payment from ATL Media. But ATL claimed to have learnt about misrepresentations by Living Entertainment and rescinded the agreement. It then filed a case against Living Entertainment in the Mauritius Supreme Court.
Yes Bank then asked Zee Entertainment to support ATL to honor its put option and help Living Entertainment to meet its obligations.
The broadcaster, citing legal advice, said the letter of comfort provided by it is not any guarantee or commitment to pay any obligation for Living Entertainment. Yes Bank moved the Bombay High Court. After it was denied ad interim relief, the bank challenged the order in a division bench of the same court.
In its qualification, the auditor, Deloitte Haskins & Sells LLP, said Zee Entertainment has not recognised the liability of $52.5 million as the company doesn’t consider the letter of comfort as a guarantee.
“According to us, this contract is an exceptional one,” said Punit Goenka, managing director and chief executive officer at Zee Entertainment, during an analyst call after the earnings. This agreement was done between the wholly owned subsidiary of the company (Living Entertainment) and Veria, he said, adding that the two parties have not performed their own obligations. “We do not believe there are any potential liabilities at least to the company or its subsidiary.”
Still, the belief in the market will be more problems might come up in the future, and have an impact on earnings and cash flows, a fund manager invested in Zee Entertainment told BloombergQuint on the condition of anonymity as the person isn’t authorised to discus investments publicly. It becomes difficult to estimate earnings and cash flows even if the past corporate governance issues are behind the company, he said.
For Zee Entertainment, the auditor qualification came as the broadcaster reported a surprise loss and its operating income tumbled in the quarter ended March. The earnings were delayed after the regulator granted companies more time because of the Covid-19 lockdown.
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