The proposed quick-fix marriage between Zee Entertainment Enterprises Ltd (Zee) and Sony Pictures Networks (Sony) is not turning out to be the ‘happily-ever–after’ story, as yet, even as the alliance itself seems to have drawn universal approval. Far from accepting the merger, with Punit Goenka continuing as managing director (MD), Invesco Developing Markets Fund (Invesco) has ratcheted up the fight to a new high. Invesco, which along with OFI Global China Fund, LLC, has combined equity holding of over 18%, dragged Zee to the National Company Law Tribunal (NCLT) for failing to announce the extraordinary general meeting (EGM) it had requisitioned for the removal of Mr Goenka.
NCLT, on Thursday, ordered Zee to hold the meeting as requisitioned by Invesco and observed that it was a ‘mandate of the law’ and not a ‘discretionary power’ of the board to decide whether or not to call it. The Zee board also met that day to discuss Invesco’s demands. This was not the outcome journalists and institutional analysts, who ostensibly ‘track’ media companies, were expecting. Their questions about Invesco’s move reveal how easily they are swayed by the company’s view and how Punit Goenka and the promoter group are still able to control the narrative. Some of their questions were answered during the hearing, while others needed some digging into Invesco’s history with Zee.
Why Is Invesco in Such a Hurry?
Friday (today) is the last working day before the 21-day deadline ends and Zee has made no move to call an EGM, which needs to be held within 45 days, with a 21-day notice period. In an email response to Moneylife, Invesco points out that Zee had failed to disclose (by informing stock exchanges) its letter to the board of directors, dated 23rd September, reiterating its call for an EGM and had earlier delayed disclosure of its letter dated 11th September seeking changes in the board. This, coupled with its failure to ‘take steps within its notice period to call an EGM’, prompted Invesco to go to NCLT.
The timing is important. It was a day after Zee announced the sudden plan to merge with Sony, with Punit Goenka remaining at the helm. While Invesco is not against the merger, its letter points to the ‘erratic manner’ in which it arrived at the decision. Since Invesco is firm on Mr Goenka’s exit, it needed to act within the calendar year, because voting rules currently allow a director to be voted out by a simple majority of shareholders; it would need a 75% vote after January 2022.
Furthermore, by pushing a merger with Sony keeping Punit Goenka in the saddle, Zee also hopes to dilute Invesco’s holding (as mentioned by its counsel Janak Dwarkadas at the NCLT hearing). Why would any 18% shareholder stand by and allow this to happen? As a Fund, it has a fiduciary responsibility to protect its investment (in excess of Rs5,000 crore) and the interests of its investors.
Thirdly, the board’s decision not to disclose Invesco’s second letter (of 23rd September) to the stock exchanges raises questions about its independence and supports Invesco’s demand to induct six new independent directors.
Fourthly, why did Invesco not requisition the EGM on its own, as permitted under our laws? Mr Dwarkadas pointed out that without details about the 2.5 lakh shareholders, it was not possible for an investor, even with deep pockets and an 18% shareholding, to call an EGM.
What Is Invesco’s Agenda?
Since some analysts and directors of Zee have managed to project the largest shareholder as a hostile bidder bent on destabilising management, some background is important. Invesco Developing Markets Fund is a US$53 billion fund; it is the third largest foreign institutional investor (FII) in India with significant investments in HDFC Bank, TCS, Kotak Mahindra, etc. The Zee investment is just 0.93% of its portfolio and its action requisitioning an EGM “is unique in the history of our Fund,” says its spokesperson.
Indeed, far from being a hostile bidder, it is curious that Invesco has chosen the high moral ground this time, since it made its two biggest investments when the group’s shenanigans had been badly exposed -- first in early-2000s and again in 2019. Invesco’s fund manager Justin Leveranz and the Zee group go back to 2004 when, as part of Oppenheimer (which later merged with the Invesco group) group, he picked up a 7.74% stake in Zee. Remember, this was shortly after the Ketan Parekh scam and the group was in cahoots with scam-accused broker who was declared the chief architect of that scam by a joint parliamentary committee (JPC). Zee was one of the 10 hugely ramped up stocks (K-10 stocks) of Ketan that crashed badly after he got into serious payment difficulties.
The Zee investment was immensely profitable for Invesco. The group’s involvement in the Ketan Parekh scam was strangely buried and it emerged unscathed, with just a warning from the benevolent market regulator. Zee went on to do well until the next big hiccup around 2018. It emerged that six debt mutual funds had lent money to the Zee-Essel group with large chunks of promoter’s equity as collateral and, dubiously, hid this promoter funding from investors and the regulator. The controversy burst into the public domain when the Subhash Chandra group began to default on payments. Zee again managed a special concession in the form of a ‘stand still’ arrangement where mutual funds would refrain from selling pledged equity and give the promoters time to pare their debt.
Invesco came to the rescue and acquired an 11% stake in Zee for Rs4,224 crore without seeking a board position. At that time, Justin Leverenz said, “This additional financial investment underscores our continued confidence in the management’s ability to deliver long-term growth and financial returns.” Invesco was assured that Zee would play straight. But Indian promoters apparently do not change their ways. Sources say Invesco has been open with management about its agitation over continued ‘related-party transactions’ and the fact that money payable by group entities was written off even in the March 2021 balance sheet.
Clearly, its decision to precipitate matters seems anything but ‘impulsive and premature’ as alleged by the Zee board in an official statement. On the contrary, the board seems to forget that it is collectively responsible for failing to check ‘related-party transactions’ and write-offs.
If history is any indicator, the story is far from over. The difference is that Invesco is a formidable opponent who cannot be cowed down by political pressure.
Invesco’s email says, “We continue to believe that the business is valuable, whether on its own or in alignment with a strategic partner. The deep bench of talent within Zee and in the Indian media industry has helped shape our view that any such transitions, if required, can be properly managed. As shareholders, we will continue our efforts to establish a fully staffed, independent and strengthened board at Zee.”
Invesco is demanding a price that is very big in the Indian context – a complete exit of the promoter group from the board, even if it has just 4%. And what will Invesco do if Punit Goenka manages to get enough shareholder support to stay on? Invesco’s choice would be to accept defeat and remain invested, or decide to pare its holding. The latter will be self-defeating, since everybody agrees that the Zee-Sony merger is good for the company. So a compromise is not unthinkable. Will Subhash Chandra, with his political clout and friends in stock market and meditation circles, again pull a rabbit out of the hat?
After this article was uploaded, the Zee board informed stock exchanges that it has rejected Invesco's demand to hold an extraordinary general meeting -EGM- to remove current MD and CEO, Punit Goenka and induct six nominees Invesco. This sets the stage for a possible court battle to delay a decision on Mr Goenka's ouster.