Zee: DIIs and unitholders' interests

Last week, Sony Pictures Networks India (now called Culver Max Entertainment) ended its merger proposal with Zee Entertainment, signed on December 22, 2021. The market had already got the wind of it and so the stock started weakening from around Rs 278 on Monday, January 8. By January 23, when the breakup was official, the stock crashed 43.8 per cent in just 11 trading days. With the collapse of this deal, the spotlight will be back not only on Zee promoter Subhash Chandra but equally on the institutional shareholders of Zee, because of the 

following startling facts about Zee’s ownership today.

Zee is identified with Mr Chandra, the maverick entrepreneur and founder who ushered in unusual businesses into India, such as satellite television, back in 1992, laminated packaging (Essel), and amusement parks (Essel World). However, after years of missteps, Essel Packaging was sold off and the promoter group today is left with a stake of just 3.99 per cent in Zee Entertainment, the flagship company of the group. 

Despite such a thin sliver of ownership, the promoters have managed to retain management control of the company. Mr Chandra is chairman emeritus and his son Punit Goenka is managing director and chief executive officer. The real ownership of the company was with foreign institutional investors (FIIs), which have been steadily cutting their stake down to 28.19 per cent, and domestic institutional investors (DIIs), which, driven by the hope of a merger with Sony, had increased their stake to 43.42 per cent. Institutional holders now own 71.61 per cent of the company; but despite this dominant ownership, they have remained largely silent on a string of alleged governance issues that have beset Zee. Shouldn’t they have started showing activism on behalf of their investors a long time back?

Exactly five years ago, on the eve of Republic Day, Mr Chandra issued a public apology to investors. He blamed “negative forces” for the events leading to the stock’s collapse while admitting to follies such as wrong investment in Videocon’s DTH venture, Infrastructure Leasing and Financial Services, etc. 
 

Essel/Zee Group’s stocks had been hammered down 30 per cent on January 25, 2019, after The Wire reported the Serious Fraud Investigation Office (SFIO) was looking into the Rs 3,000 crore deposit in Nityank Infrapower, a company allegedly part of Zee Group, during demonetisation. At that time too Indian mutual funds were deeply involved in Zee, except that they had lent money to the group against pledged shares of promoters, which were transferred to weak infrastructure companies of the group. This was allegedly hidden from shareholders in collusion with mutual funds, which acted as lenders. Invesco Developing Markets Fund came to Zee’s rescue with an 11 per cent stake, willing to ignore the group’s dodgy business deals on the promise of good behaviour. In October 2021, Invesco tried to play matchmaker between Zee and Reliance, but sold its stake at a loss when the negotiations fell through. DIIs eagerly bought the shares it had dumped.

Institutional investors channel public money into stocks and are supposed to act with fiduciary responsibility. Why have DIIs increased their holding from a mere 12.4 per cent to as much as 43.42 per cent in a stock that has been a value destroyer? Zee has fallen from just under Rs 600 six years ago to around Rs 164 now. Strangely enough, institutional investors seem drawn to Zee like moths to a flame even as it has lurched from one controversy to another, starting from the 2001 market crash.

The Joint Parliamentary Committee has documented an investigation by the Securities and Exchange Board of India (Sebi) about Zee’s involvement in controversial market deals and the bailout of stockbroker Ketan Parekh (Zee was one of the K-10 stocks “favoured” by Mr Parekh). Just last year, Sebi brought a case against the Zee promoter group. In 2019, Zee Entertainment pledged a Rs 200 crore fixed deposit (FD) with YES Bank against loans to seven companies controlled by the promoter group. This was not cleared with the Zee Entertainment board and, when YES Bank adjusted the money against the dues of these entities, the promoters, alleged Sebi, diverted the funds and hid the trail of money, by layering it through several family-controlled entities, leading to a fictitious repayment. Sebi has detailed how such transactions were used to mislead the board of directors and also get a clean chit from the auditors. (The case is before the Securities Appellate Tribunal.)

Why are DIIs holding such a high stake in Zee, which is beset with alleged governance issues? Perhaps they think Zee is a deep-value stock. If so, that value will be unlocked only if they flex their muscles, throw out the board, change the management, and get in a new deep-pocketed buyer. If there ever was an obvious case for shareholder activism, it is Zee. Not only have the promoters a negligible stake but their control has been beset with governance problems, documented by the regulator for decades. So, what is stopping DIIs from stirring themselves to act in the interests of their unitholders?

The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers