On the eve of Republic Day, while the nation was getting ready for a display of patriotic fervour, there was a public apology to investors from Subhash Chandra, founder and chairman of the Essel group that includes the Zee Entertainment Enterprises Ltd (ZEEL). Mr Chandra is an independent member of Parliament (MP) backed by the Bharatiya Janata Party (BJP) who has been its vociferous supporter and campaigner in the previous general elections.
The apology blamed unnamed ‘negative forces’ for the events leading to the stock collapse while admitting to follies such as wrong investments in Videocon’s DTH venture, Infrastructure Leasing and Financial Services (IL&FS), etc.
Essel/Zee group’s stocks were hammered down 30% burning up over Rs13,350 crore of shareholder value on 25th January, after The Wire
, reported that the Serious Fraud Investigation Office (SFIO) was looking into a Rs3,000-crore deposit into Nityank Infrapower (earlier called Dreamline Manpower), a company allegedly part of the Zee group, during demonetisation. Stocks crashed, despite the Essel group denying any wrongdoing.
The apology letter
, which came the next day, brought back memories of 7 January 2009 when Ramalinga Raju’s confession letter roiled the markets.
Had the hammering continued on Monday, 28th January (since lenders who advanced money against shares would have been forced to liquidate or get additional collateral), the value, especially of flagship, ZEEL would have been further decimated and even dropped to Rs200 or less. Its 52-week low was Rs288.95 recorded on 25 January 2019.
Such an erosion of value could have had a domino effect at a time when reports about mutual fund (MF) lending to promoters and promoter group companies had already made markets extremely jittery.
A booming stock market, despite high oil prices and disastrous economic experiments such as demonetisation and a badly executed Goods and Services Tax (GST), has been a matter of pride for the NDA (National Democratic Alliance) regime. To have it unravel due to friendly companies like the Zee group and DHFL (Dewan Housing Finance Companies), just months before the genral elections would have killed its narrative on good governance and corruption.
So, in the next few hours, some very powerful people were burning up the phone lines to find a highly unorthodox solution to the Zee/Essel group’s problem, while the two important regulators – SEBI (Securities and Exchange Board of India) and the RBI (Reserve Bank of India) maintained a sphinx-like silence.
MFs and finance companies that have lent money to Zee are really living on a hope and a prayer, despite the multipartite agreement they are working on to bail themselves out. There is nothing but a draft deal so far and teams of lawyers are still negotiating the contours of the agreement. A deal will, eventually, happen because everybody desperately needs to kick the problem forward by a few months.
But here are several issues that investors should keep in mind—especially those of you who have been brainwashed to believe that ‘Mutual Fund Sahi Hai’ without being told of all the risks and minefields involved in seeking a higher return.
Let me start by saying that a move, however unorthodox, that protects innocent investors’ share value and prevents widespread panic and redemption is good and must be supported. However, the problem that led to the need for such action must be addressed and wrongdoing punished. Otherwise, it will become a dangerous template for the future.
Remember Zee/Essel group is not the only one to spring nasty negative surprises in recent times. There is DHFL, Sun Pharma (whistleblowers’ allegations) and Vedanta, where promoters’ shenanigans have wiped out significant shareholder value in an instant.
What needs to be watched in the Zee/Essel case is whether institutions follow through and ensure a strategic sale quickly instead of waiting for the long rope they have given shareholders.
Essentially, a set of four MFs and three non-banking finance companies (NBFCs), calling themselves a ‘Committee of Lenders’ (CoL, a term that is falsely borrowed from the legally watertight bankruptcy process), have come together to exert pressure on the Zee group to protect their lending. Together, they own Rs15,000 crore worth of Zee’s stocks belonging to the promoters as a pledge, says sources involved in the process.
No formal agreement has been signed as yet, because lawyers are still working through the complexities of the deal. None of the lenders will waive its rights in the event of default (EoD), as per their original agreement in the pledge of shares. This is because each lender has a different class of collateral/ security—while some are still comfortably placed and could walk out with a neat profit, others are probably not.
However, all lenders in the consortium have agreed that the decisions of the CoL will be formally binding on all. The CoL will monitor that the group adheres to definitive timelines for finding a strategic buyer and to ensure that there is no further ‘leakage of value’ due to any actions or misadventures of the promoter group, like alienating valuable assets.
Further, if Zee/Essel tries to renege on its commitment, the lenders will have the right to call for an enforcement event, whereby they can jointly sell their stake of nearly 25% to any investor.
While all this sounds good on paper, we know that it is essentially a private contract with no legal sanction. If the Zee group does not cooperate in finding a strategic investor, the lenders are vulnerable. No strategic investor will acquire a 25% shareholding, if the management is likely to be hostile to the action. It can only happen if the buyer is willing to contemplate a hostile bid (including the mandatory an open offer for another 20% stake).
Indian institutions have never shown the gumption for such a move, especially with a politically powerful group like Zee/Essel. And it is anybody’s guess what would happen to the share value if the matter gets dragged into a long and expensive litigation which is also a possibility. Whatever course it takes, the problem has certainly been kicked into the term of another government at the Centre.
The Regulator’s Role
The role of SEBI is rather strange in all this. It started out on the right track
and is understood to have read the riot act to MF lenders. However, the need to protect innocent shareholders’ value, obviously, weighed with it. What does SEBI plan to do when the dust has settled? Perhaps it will levy another penalty on the AMCs (asset management companies) of the four MFs who lent large chunks of money to the promoter.
Then, there is Zee/Essel’s own history. Mr Chandra has a propensity to get deeply involved in dubious market deals. He was closely associated with Ketan Parekh, architect of the 2000-01 scam, and was deeply involved in assisting his bailout through shady transactions. All these have been extensively investigated by SEBI and documented by the Joint Parliamentary Committee.
Yet, after a meandering process, SEBI had scandalously
let off the group with a mere warning, when it had almost agreed to a ‘consent order’ that required it to pay up Rs5 crore
as penalty. SEBI allowed TC Nair
, its whole-time member, who signed the order, to complete his term without any questions.
While ordinary investors may invest without research, one expects MFs to be aware of history and be careful about their decisions, or face the consequences. It remains to be seen if there are any consequences, this time.
SEBI is likely to clamp down on MFs’ lending to promoters
, and that will be a good policy decision; but it will not obviate the necessity to send the right message through stringent punitive action. Otherwise, we will be lurching from one such episode to another.