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The first steps towards Reliance Industries Ltd (RIL)'s control over the Network 18 group were taken 18 months before an announcement in this regard on May 29. Latest filings with the regulator show a resolution paving the way for greater RIL presence at the helm of Independent Media Trust (IMT) was passed soon after the completion of the rights issues of Network 18 Media and TV 18 Broadcast in late 2012.
IMT, along with persons acting in concert - RIL and Reliance Industrial Investments and Holdings (RIIH), RIL's subsidiary - has filed draft letters of offer with the Securities and Exchange Board of India (Sebi) to acquire 21.9 per cent of Network 18 Media and Investments and 26 per cent of TV 18 Broadcast. Sebi is expected to issue its observations by the first week of July, in case it doesn't have any queries or clarifications.
Apart from these filings, Business Standard relied on several statements in press releases, rights issue documents, detailed public statements of open offers, annual reports and filings of various entities with the Ministry of Corporate Affairs through the past 30 months to piece together the story of how the country's largest listed firm acquired the media group founded by Raghav Bahl.
Mails sent to Bahl and spokespersons of Network 18 and RIL did not elicit any response.
On November 12, 2012, an IMT resolution enabled the appointment of two senior RIL officials as additional trustees. IMT was the pivot of the entire structure through which RIL had infused capital into NW18 group, and the entry of new trustees diluted whatever control Bahl had over IMT and, consequently, over the six promoter companies and, eventually, the two listed firms. These promoter companies, namely RB Media Holdings, RB Mediasoft, RRB Media Soft, Adventure Marketing, Colourful Media and Watermark Infratech, which held controlling stake (71.25 per cent) in Network 18, were funded by IMT through zero-coupon optionally convertible debentures (ZOCDs), with an option that allowed them to be converted into equity shares anytime within 10 years. Such a conversion would automatically reduce Bahl to a minority in the holding companies, which made the role of the trustee, who could take such a call, crucial. (DEAL THAT TOOK 30 MONTHS)
On October 31, 2012, days before this significant resolution, India Against Corruption chief Arvind Kejriwal had gathered a huge crowd of journalists in the capital's Constitution Club. At that point, he had made a reputation for himself, exposing serious corruption scandals against Congress chief Sonia Gandhi's son-in-law Robert Vadra. This was before Kejriwal started the Aam Aadmi Party; technically, RIL was still a passive investor in Network 18.
In that crowded press conference covered live by many TV channels, Kejriwal made some of the most uncharitable remarks and allegations ever made in a public forum against RIL and its chief Mukesh Ambani. Many channels that ran these allegations, which RIL later termed "baseless" and "defamatory", got legal notices.
CCI saw it coming
Describing IMT, the offer letters said, "Independent Media Trust was set up pursuant to a 'trust deed' dated November 22, 2011, between LV Merchant as the 'settlor' and DCPL as its first trustee." DCPL (Digital Content Private Ltd), was fully owned by Raghav Bahl and his wife Ritu Kapur. Prior to April 2012, it was known as Nilrab Media.
The letters said, "Pursuant to resolutions dated November 12, 2012, and May 20, 2014, Atul S Dayal, P M S Prasad and SCPL (Sanchar Content pvt Ltd), respectively, were inducted as additional trustees," adding, "All decisions of the board of trustees are by way of majority vote of the trustees."
Read together, these two statements meant with the entry of two trusted RIL hands Dayal and Prasad as trustees, DCPL, IMT's first and sole trustee, was reduced to a minority in what then became a board of trustees. This marginalisation of Nilrab, or DCPL, meant Bahl, the man who built the company from scratch, lost the last strand of control he had over IMT and, consequently, over his babies Network 18 and TV18.
While Dayal is a legal expert and structures complex deals for RIL, Prasad, an RIL veteran and board member, was handpicked by RIL chief Mukesh Ambani in February 2014 to pilot Reliance Jio, the group's 4G venture. A key rationale for RIL's Network 18 acquisition is the synergy between the latter's content and Jio.
When RIL and Network 18 first announced the three-way deal that brought them together in January 2012, they had talked about a trust structure wherein eminent people would be trustees. In a press release announcing the deal, RIL had said: "Raghav Bahl and his team will continue to have full operational and management control of both the firms. The investments in these media properties are being made by RIL through an independent trust that will have eminent individuals as trustees, preserving the management, operational and editorial independence of these firms."
But months later, when the offer documents for the rights issue that would fund the transaction was filed with Sebi, Nilrab Media emerged as the sole trustee of IMT. While this was a departure from the earlier announcement, it had given a semblance of control to Bahl, even after the complex deal. It also helped the dealmakers convince Sebi that there was no actual transfer of control, which would have necessitated open offers at that point.
However, the Competition Commission of India (CCI) wasn't convinced. Under the structure, RIL, the beneficiary of the trust, did not have a direct say on the working of the trust. But a crucial clause in the initial agreement designated RIL's subsidiary RIIH as the protector of the trust. This entity had powers to appoint and remove trustees.
In its May 2012 order, the CCI had referred to this crucial point - the power of the protector to appoint and remove trustees - to infer RIL had indirect control over the media group. However, Sebi, which has a say over takeover regulations that control open offers, did not take any action following this order.
Following IMT's open offer, the filings said DCPL would no longer be the trustee and SCPL would take over. "DCPL, one of the trustees of IMT, is 100 per cent owned by the sellers. DCPL holds, in its capacity as a trustee of IMT, 19,383,100 equity shares, representing 1.85 per cent of the emerging voting capital and the ZOCDs issued by the holding companies. On the completion of the transactions under the SPA (share purchase agreement), DCPL shall resign as a trustee of IMT and the equity shares and ZOCDs of the holding companies, currently held by DCPL, shall be held by SCPL as a trustee of IMT," the letter of offer said. This holding, along with 4.95 per cent held by Shinano Retail, a person acting in concert with the open offer, would raise the group's total holding in Network 18 Media to more than 78 per cent.
MCA filings show SCPL was being prepared from as early January 2013, when its name was changed from Tilaka Land. Dayal holds 60 per cent in the firm and two RIL group executives, Ramesh Damani and Sundar Mathrubootheswaran, recently took over as directors.
In the other leg of the three-way deal announced in January 2012, TV18 was to acquire stakes in certain channels of Hyderabad-based ETV group, owned by RIL. Thus, the media group bought an RIL asset funded by RIL's cash, which flowed through multiple entities and fancy instruments. While the entities kept the behemoth far enough to stay out of regulations necessitating open offers, the instruments and the clauses in these kept it close enough to keep a check on the promoter and strike at will when the need arose, any time during the next 10 years.
What Reliance paid
It seems this need arose in the last week of May. In statements put out soon after the announcement, various figures have cropped up. But what exactly did the acquirer pay and what exactly is the seller taking home?
RIL seems to have paid a little more than Rs 706.96 crore that Raghav Bahl and his wife received and a lot less than Rs 4,295 crore, the enterprise value of Network 18 Media and Investments, at its open offer price of Rs 41.04 a share.
The net cash outflow for Reliance group entities in the series of multi-year transactions it executed to take control of the Network 18 group entities works out to Rs 1,341 crore. This is excluding up to Rs 2290 crore the group will spend to acquire the shares it does not already own in the two firms, through the open offers. The amount is a tad short of the consolidated debt of Rs 1,400 crore under which the NW18 group was reeling before it came under the spell of the 'KG to 4G' conglomerate in the last quarter of 2011.
According to filings, in 2012, the RIL group spent Rs 2,211.8 crore in subscribing to ZOCDs of six promoter firms. These , in turn, used this money to buy 692.11 million shares of Network 18 and 67.73 million shares of TV 18 Broadcast.
Of this sum, RIL got back Rs 1,925 crore in the form of the price paid for acquisition of the ETV channels.
In the letter of offer of rights issue in 2012, TV18 Broadcast said the ETV valuation was based on an estimate by global advisory firm EY. "In connection with the ETV acquisition, we and Network 18 have entered into an SPA with Equator and Arimas, pursuant to which Arimas shall sell and transfer Equator securities to us for an aggregate consideration of Rs 1,925 crore, as adjusted for the net debt," it stated.
Equator held 99.96 per cent in Panorama (which owns ETV news channels), 49.98 per cent in Prism (which owns ETV non-Telugu channels) and 24.5 per cent in Eenadu (which owns ETV Telugu channels). To arrive at the valuation, the little known companies were valued at Rs 467.6 crore, Rs 1,881.2 crore and Rs 2,076.8 crore, respectively.
In Network 18's annual report for the year ended March 2013, the following qualification was made under the ETV acquisition: "The company paid Rs 19,500,000,000 to Arimas Trading Private Ltd for acquisition of 100 per cent stake of Equator Trading Private Ltd (promoters of ETV). However, the shares are not yet transferred due to pending legal compliances which are under process."
These compliance issues could also have been a reason for the delay in RIL's final move.
In January 2014, TV 18 announced it had completed the acquisition, after obtaining all regulatory approvals. Arimas is an indirect RIL subsidiary, with Shinano Retail and Ojasvi Trading, also a RIL group entity, sharing office with Shinano, splitting ownership. It has Reliance Retail executive Ashwin Khasgiwala and Damani, who recently joined SCPL, as directors.
What Bahl got
The overall consideration for the deal to acquire Network 18, according to a detailed public statement issued by the company after the May 29 announcement, is Rs 3,266.78 crore. This includes Rs 2,211.8 crore of subscription to the zero-coupon debentures made by IMT in 2012, Rs 348.02 crore of convertible loans given to promoter entities and the cash component of Rs 706.96 crore paid to Raghav Bahl and Ritu Kapur for the holding companies.
Of the Rs 348.02 crore of convertible loans, a majority (Rs 304.94 crore) is to RB Holdings , one of the main promoter group entities before 2012 . The remaining convertible loans are extended to the six promoter entities.
RB Holdings balance sheets for the past three years show it invested all the borrowed money in the shares and debentures of Network 18 Media and Investments. As of December 2011, RB Holdings was the largest promoter shareholder of Network 18 Media. At that point, it held 46.25 million shares, or 32.37 per cent of the company. Nearly half these shares were pledged with lenders. One issue was that Network 18 Media shares in the books of RB Holdings were valued at boom-level prices. According to its 2012 balance sheet, RB Holdings held 17.18 million shares of Network 18 Media, worth Rs 308.98 crore, valuing each share at Rs 180. Against these assets, it had long-term borrowings of Rs 288 crore and trade payables of Rs 152 crore. In the following year, FY13, the company took a huge write-off, as the shares, which had plummeted to Rs 35 levels by January 2012, were moved to the new promoter entities; the long-term borrowings stood at Rs 193 crore and trade payables at Rs 139.4 crore. Today, its shareholding is nil and is being bought over as part of the deal for Rs 1 crore.
Another erstwhile promoter entity about which recent statements are silent was Network 18 Group Senior Professionals Welfare Trust (NGSPWT). This company had raised loans to invest in shares of Network 18 Media. The only twist was that the loans were raised from Network 18 Media itself. This was a promoter group entity that had a significant stake of 11.14 per cent as of December 2011. According to its annual report for the year ended March 2013, this entity owed Rs 555.73 crore to Network 18 Media and Investments.
In a complicated series of transactions, the company was using shares of the subsidiaries of Network 18 such as TV18 Broadcast to raise money to buy shares of Network 18. Deepak Shenoy of capitalmind.in, a financial analysis portal, who had highlighted this issue as early as in 2011, said this liability remained in all likelihood. The annual report for FY14 might give a clearer picture.
NGSPWT's assets are the 15.92 million Network 18 Media shares (post the rights issue dilution, this is just 1.52 per cent stake) it owned, according to the March 2014 filing. If these shares are tendered at the open offer price of Rs 41.04, it would fetch about Rs 65 crore. If sold at the current market price of about Rs 60, these might fetch about Rs 95 crore. Thus, a liability of Rs 460-490 crore remains for Bahl, provided these have not been paid in FY14. A handful of other entities owe about Rs 16 crore, according to the FY13 annual report. The company is yet to file its annual report for FY14.
Shenoy also pointed out this huge price difference meant the acquirers didn't expect the offer to be subscribed at all. "They may offload the excess three per cent they have through a public offer, at a later date," he said. Assuming Bahl and Kapur use a part of the Rs 707 crore they received from the transaction to repay this liability, they will be left with a little more than Rs 200 crore.
KEY CHANGES IN TRUST STRUCTURE
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January 2012: Announced that the independent trust will have eminent people as trustees
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February 2012: Nilrab Media, owned by Raghav Bahl and Ritu Kapur appointed trustee of IMT
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April 2012: Nilrab's name changed to Digital Content private limited
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May 2012: CCI order points out RIIH power to appoint/ remove trustees giving RIL indirect control
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November 2012: Atul Dayal, PMS Prasad appointed as additional trustees, DCPL becomes minority
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Jan 2013: Atul Dayal acquires 60 per cent shares in Tilaka land; name changed to Sanchar Content
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May 2014: Sanchar content private Ltd also appointed as trustee
- Post open offer: Digital Content will resign as trustee, Sanchar content will take over
