Rejecting a prayer to modify an interim order issued against five, market regulator Securities and Exchange Board of India (SEBI) decided to continue restrictions imposed on Eros International Media Ltd, Eros Worldwide FZ LLC (now known as Eros Worldwide FZE), Eros Digital Pvt Ltd, Sunil Arjan Lulla, executive vice-chairman and managing director (MD) of Eros International and Pradeep Dwivedi, the company's chief executive officer (CEO). The case is related with the impairment of 'content advances' and 'film rights' provided for other advances and goodwill worth Rs1,553.52 crore by Eros International in its results for FY19-20. The company also wrote off trade receivables (TRs) of Rs519.98 crore in the same year.
In an order, Ashwani Bhatia, whole-time member (WTM) of SEBI says, "The substantive objections raised by the five noticees to the findings in the interim order (of SEBI) can at best be termed as an exercise to distract from the substantive issue. There is not even a whisper in the replies about the two central preliminary findings in the interim order – the usage funds by content advances entities (CAEs) which were subsequently written off and evidence of trade receivable entities (TREs) monetising the rights obtained from Eros. The noticees have attempted to brush off these issues by contending, in the case of TREs, that they cannot be held responsible for providing information regarding how third parties were utilising rights obtained from them and in respect of CAEs, by persistently claiming that content had been delivered in the past by these entities or by offering vague replies on the lines that such practices are a norm in the entertainment industry."
"No documentary evidence has been provided by Eros International to substantiate payment of advances. These replies cannot be accepted considering the quantum of money involved, the centrality of these revenues to the balance sheet of Eros International, the duration of time such practices were continuing and the prima facie findings evidencing round tripping of funds. It is also to be noted that TREs and CAEs, who Eros International has been dealing with for years, have also failed to provide information to SEBI. Given these circumstances, SEBI as the securities market regulator, cannot turn Nelson's eye when such serious concerns are raised regarding the integrity of the financials of a publicly listed company. It is, therefore my considered view that directions in the interim order are liable to be confirmed pending the completion of the investigation initiated by SEBI," the WTM says.
After Eros International disclosed impairment in its financial results, National Stock Exchange (NSE) examined the financial statements of the company and forwarded a preliminary examination report (PER) to SEBI. The PER observed that prima facie these transactions indicated that Eros International was engaged in financial mis-reporting and siphoning or diversion of funds. It was followed by a detailed investigation by SEBI.
The investigation revealed that Eros International impaired content advances including interest or adjustments of Rs1,320.40 crore with 87 entities and written off trade receivables of Rs519.98 crore with 17 entities.
Eros International had entered into certain contracts with 19 TREs wherein the company granted them the rights to re-release movies in multiple regional languages for a fixed tenure.
Between FY11-12 and FY19-20, Eros International had booked total revenues of Rs1,623.81 crore from these 19 entities, out of which Rs1,099.59 crore was received by Eros International and the remaining Rs519.98 crore was written off as bad debts. However, SEBI says, on analysis of bank account statements of 19 entities above, it was noted that out of Rs1,099.59 crore received by Eros International, prima facie 60% of the amount, i.e., Rs664.05 crore was funded by Eros International only. Eros International indulged in round-tripping of funds. Eros, through multiple entities, funded these 19 entities. Those entities, in turn, paid back the amount to Eros International. In some instances, the amount was paid back to Eros International on the same day and, in some cases, it was given to Eros with a gap of a few weeks or months.
In FY18-19, more than 65% of the total revenue of Eros International came from these 19 entities, SEBI says.
The SEBI investigation also revealed that, out of the 18 CAEs, 11 entities are directly or indirectly connected to Eros International and almost 65% or Rs868.23 crore of the total impairment provision or write-off pertained to these 11 connected entities.
While SEBI was investigating the matter, it was noted that even after the impairment of Rs1,290.15 crore of content advances in FY19-20, Eros International made content advances to the same CAEs in FY20-21, FY21-22 and FY22-23.
A surprise visit by a BSE team to the registered office of a CAE, to whom payment was made subsequent to FY19-20, in April–May 2023, revealed that their registered offices were closed. Further, with respect to two of the other content advance entities, the goods and services tax (GST) registration of these entities has been cancelled by the GST department suo moto. Even after the cancellation of GST certificates, Eros International made payments to these two entities.
During the hearing, the SEBI WTM observed that these five noticees had not submitted any information about end–to–end utilisation of content advances paid by it to 18 CAEs. "This is indeed surprising considering the exhaustiveness of the process for development and production of an entertainment project...Even otherwise, it is hard to accept that the utilisation post payment of advance funds, where it was not in accordance with the terms of the agreements, could have been done so without intimation to Eros International, who in many cases is the sole producer of such projects. Again, this calls into question the prudence and diligence of making such large advances to CAEs without adequate due process. Accordingly, I find that this argument advanced by the noticees cannot be accepted..."
Last year, after SEBI decided to investigate the matter, Moneylife sent an email to Eros International, copied to Mr Dwivedi and Rajesh Chalke, chief finance officer (CFO) of the company, regarding the SEBI investigation.
In response, the company spokesperson stated, "The impact of COVID-19 on media and entertainment industry is an established fact, and that has a bearing on advances made in the past in our business for content acquisition, for which only provisions have been taken as per the Indian accounting standards (Ind AS), and write-offs are limited to doubtful receivables as per norms. Hence, the accounting of assets and impairments in the respective period of our financials necessarily follows prescribed Ind AS standards depicting the fair enterprise value."
In the latest order, SEBI says its restriction on Eros International, Eros Worldwide, Eros Digital, Mr Lulla and Mr Dwivedi would continue. Mr Lulla and Mr Dwivedi would remain barred from holding a position of director or key managerial person (KMP) of any listed company other than Eros.
Mr Bhatia, the WTM, also directed SEBI to complete its investigation within six months.