MUMBAI: This is one takeover that appears to have gone horribly wrong for Subhash Chandra's Zee Telefilms Ltd (ZTL). Zee's plans to use Hyderabad-based Padmalaya Telefilms Ltd (PTL) for carving out a movie production and animation empire may turn sour with the company deciding to take legal action against its chairman and managing director GA Seshagiri Rao and promoter shareholders.

ZTL's interest in PTL through a 64 per cent stake buy in holding company Padmalaya Enterprises Private Ltd. (PEPL) stands at the crossroads with allegations of misappropriation made against Rao and the promoter shareholders. The misappropriation of 6.265 million shares of PTL held by PEPL has brought down Zee's indirect interest in PTL from about 33 per cent to around 13 per cent.

PEPL's holding in PTL has fallen from 50.3 per cent to about 20 per cent. The promoter shareholders had pledged the PTL shares held by PEPL against raising loans without informing the board of PEPL and ZTL. "Keeping the Board of PEPL and ZTL in the dark, the promoter shareholders fraudulently with dishonest intentions, misappropriated 6,264,631 equity shares of PTL held by PEPL to provide security for raising loans in the name of Rao, brother GSR Krishna Murthy and their related entities/companies, primarily Padmalaya Studios Private Limited and Padmalaya Vision Ltd," Zee informs in a release.

The ZTL board, which met today, has directed the company management to take suitable criminal and civil action against Rao and his relatives and to make efforts to recover the losses suffered by the shareholders because of the fraudulent acts.

ZTL has also accused the promoters of cooking up the accounts of PTL in 2002-03 and 2003-04. "Substantial amounts of fictitious transactions were put through resulting in overstating of turnover and profits and consequent inflation in current assets," the release says. "Huge amounts of cash were withdrawn from PTL and funds were diverted to related to the promoter shareholder."

As a result of ZTL's inquiry into the books of PTL for the year 2003-04, its audited accounts were recast. As per the earlier audited accounts dated 26 July 2004, PTL's total revenue was stated at Rs 1.06 billion with a net profit of Rs 180 million. As per the re-cast accounts approved by the board in its meeting held on 6 December 2004, total revenue was restated to Rs 940 million with a net loss of Rs 320 million.

Zee's accusations are based on an investigation it initiated after alleged irregularities in the functioning of PEPL and PTL were brought to its notice. The company appointed M/s Guru and Ram, Chartered Accountants, Chennai, to look into the matter. A final investigation report was submitted on 9 December, 2004.

When ZTL had acquired stake in PEPL and thereby in Padmalaya Telefilms (promoter shareholders), it nominated Rao as managing director of both the companies. According to the shareholders agreement, PEPL can't deal in the shares of PTL unless agreed to by the company and promoter shareholders and approved by the board of PEPL. No person, including the board of PEPL, had authority to deal with its investments in PTL.

"The loans raised on the misappropriated shares were not reflected in the books of accounts of PEPL and no explanation has been furnished as to the end use of the funds so raised," the release says.

At the time of filing this report, attempts by indiantelevision.com to elicit a response from Rao on the charges Zee had thrown his way were to no avail.