Eros International Media created an illusion of movies and distributors to siphon over Rs 1,500 crore, revealed investigators with the Securities and Exchange Board of India (SEBI), reported Money Control on Sunday. According to the report substantial money was transferred as content advances for the production of films but no film has been made.
On Thursday, SEBI passed an interim, ex-parte order that banned Eros International and two related companies from the market in addition to restricting company's MD Sunil Arjan Lulla and CEO Pradeep Kumar Dwivedi from holding board positions in companies.
SEBI in the order said, "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.”
Eros International in the regulatory filing said, "We are in the process of seeking legal advice in the matter and taking appropriate actions, as may be advised."
The order has also asked investigators to look into the failure of the board and the audit committee has been asked to take precautionary steps to protect the interest of the shareholders.
Background
The enquiry on the company started after financial statements for the financial year 2020 showed impairment from content advances and film rights in addition to other advances bringing the total to Rs 1,553.52 crore.
After the National Stock Exchange investigated further it sent a preliminary report to Sebi stating that the revenue from trade receivables, operation and loans were largely related-party transactions and indicated that the company was engaging in siphoning of funds. After this Sebi launched an inquiry into the company.
Eros International was round-tripping funds
The enquiry by Sebi found that Eros International was round-tripping its own funds to show revenues. Further the company was entering into agreements with bogus entities, but in an effort to clean up its balance sheet the company was writing off receivables in form of Covid-led market distress.
SEBI last year asked the company to submit copies of the agreements signed with the entities that were given advances for content as well as those that were to settle trade receivables. But according to the order by the regulator the company submitted incomplete information and Sebi had to extend the deadline in order to give the company more time to submit the required information.
The company only provided documents for only 50 per cent of the written off amount despite the repeated reminders by Sebi.
Additionally 10 of the 17 entities that had to settle trade receivables were actually untraceable and those that were traceable gave incomplete information on the transaction details. At a later time six of these people reached out through alternative addresses but were unable to provide complete details on the transactions.
What is interesting is that the company directors of these entities were actually dummy directors in companies controlled by others.
Even the rights that were claimed to be sold to these entities should have required close to 1,000 different approvals from the Censor Board, but during the investigation not even one approval was found which created further doubt.
Content advances for movies that were not made
Going into the details of content advances one can notice that the company in financial year 2020 reported that the content advances before impairment was at Rd 1,650 crore and from this 92 per cent which calculates to Rs 1,518.2 crore was given to 18 entities. From this close to Rs 1,172.41 or 77 per cent was actually written off.
The regulator summoned the 12 entities and its directors to explain how they had utiised the funds but from these 5 were returned undelivered with remarks like 'no such consignee'. These 5 entities accounted for 42 per cent of the content advance write offs. None of the 12 summoned entities could give Sebi the information of where the amount was used.
In an interesting event one of the directors did present himself before Sebi, but he said he had no idea he was the director of a company. He revealed that he needed some money so for Rs 500 he gave his KYC documents like his PAN, Aadhar Card and Photograph.
It was the bank statements of these entities that actually revealed that the amount had been siphoned off by Eros International. For example, the company had paid Nextgen Films Rs 6.5 crore for the production of Phobia 2 in January 2018, but after four days Nextgen transferred the amount to Rajani's personal bank account.
