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BOTTOMLINE: Zee’s real unanswered questions

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The most important question today is not whether Invesco (Oppenheimer) has the right to call an EGM and recast the board, which the courts will decide. The most important question is: Has Punit Goenka lost the right to continue?

BOTTOMLINE: Zee’s real unanswered questions
What matters is not whether Invesco can call an extraordinary general meeting (EGM) or recast the board, the questions on Zee are more fundamental
Even as the tussle over who will sit on Zee’s board and manage its affairs enters the legal arena, we look beyond the hullabaloo to focus on the more basic and fundamental questions around the media firm. The answers to these hold the key to the company’s future.
Why did two directors bail out?
For those following the Zee Entertainment events unfold, it seems strangely coincidental that two directors, Ashok Kurien and Manish Chokhani, chose to voluntarily resign for personal reasons with immediate effect just a day after Invesco’s communication seeking their removal, along with Punit Goenka’s, from the board of the company. Being individuals of some standing in the business world, were they just being cautious to avoid getting caught up in what they might have perceived could be an unpleasant tussle? Or, did they know in their hearts that the days of the current management were numbered and they wanted to distance themselves from what might follow? We may never know.
Why won’t Punit Goenka let go?
From the events of the past few days, it has become evident even to the less initiated that Goenka is pulling out all stops and deploying all devices to hang on to his position. Why this desperation to hold on by stooping to leverage regulatory inconsistencies and legalities? Is it just because it is hard to let go of your baby that you’ve given birth to and looked after for years? Or, is there something more to it? Could it be that there is more to Zee than meets the eyes, and there is a fear of revelation?
Can a leopard change its spots?
Despite several announced steps and communications to assure stakeholders that Zee is reinventing itself and focused strongly on improving governance, not all buy this line. There have been several not so investor-friendly moves by the management in the past, that fail to inspire confidence. The most recent was highlighted by proxy advisory firm IIAS when it asked investors to vote against the appointment of Kurien as an independent director, who they believed was actually not independent. They also held Kurien and Chokhani responsible as members of a board committee for approving a hefty pay hike for Goenka, in a year when no employee had got a raise.
Some time ago, SEBI had in an unflattering communication pulled up the present management for gross violations. The extract below spells out the serious nature of the misdemeanours.
Extract from SEBI communication shared with stock exchanges
3. From various replies of the Company, findings of Grant Thornton in its Audit, letter dated October 15, 2019 by Unify Capital Pvt Ltd, minutes of board meeting of the Company dated October 17, 2019, Letters of comfort issued by Mr Subhash Chandra and Mr Punit Goenka to Yes Bank and RBL Bank, it was inter-alla observed that
3.1. Large outstanding dues from the related parties were continuing without any definitive recovery plan,
3.2. Systems and processes with regard to documentation of advances required corrective action, 3.3. Letters of comfort were issued by directors of the Company without informing the board, and 3.4. Inter corporate deposits provided to Oscar Investments Ltd were assigned to related parties for recovery.
4. It has been observed that the above actions of the Company are not in the best interest of the shareholders and are in violation of various principles mentioned in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
5. In view of the above, you are hereby being cautioned to be careful in future and ensure strict compliance with the provisions of SEBI LODR Regulations.
Why no-compete & 20% stake clauses in Sony deal?
What’s strange about the terms of the non-binding term sheet with Sony is the non-compete clause and the one about raising stake to 20 percent at a later date. It doesn’t seem rational to think that the current promoters with their vastly depleted resources can in any way pose a threat to a Sony-Zee combine at any time in the foreseeable future. Is the non-compete then, just a means to let the promoters retain a 4 percent stake post dilution? And why the 20 percent stake cap? Does Sony want to ensure the stake of promoters doesn’t cross 20 percent under any circumstances or is there a deal being worked out by promoters with investors assuring buyout at a later date?
Is Sony in it for real?
The other big question is whether Sony is in the deal for real. If it is, it wouldn’t be amiss to assume that it could have started back-channel conversations with other stakeholders to know their minds. And if it really is serious, one doubts if Goenka’s exit will be a deal-breaker. Sony may want him in there for a while to help them sort some internal issues out, but if the push came to shove unlikely they will let a deal go just for him. In fact, one won’t even be too surprised if a new deal is struck with a new board that betters the terms for both sides—no non-compete, no 5-year term commitment for Sony and a better valuation for shareholders.
What’s Oppenheimer’s end game?
Is Oppenheimer only looking to exercise a right and restore good governance at Zee, to ensure it protects the value of its investments or is it negotiating a better deal with a strategic investor that the current dispensation is opposed to? It is unlikely that any investor like Oppenheimer would wish to get involved in managing businesses. It would therefore be logical to think, that whether it is Sony or another suitor, Oppenheimer’s interest would be driven by how much value it gains from its investment in the company. And given that Zee is majority-owned by foreign portfolio investors, a new promoter clearly seems the logical outcome of the current battle.
Will the Ministry of I&B muddy the waters?
The present management has from the start been using the “MIB” word. Is this just a red herring? One thinks it might be very difficult for the Ministry to side with a management that has only fractional shareholding and been chided earlier by regulators on governance, in a company that is majority-owned by foreign portfolio investors. So, the MIB card seems more like a ploy and distraction rather than a real hurdle for any new credible suitor to overcome.
Can this be Punit Goenka’s last hurrah?
Interestingly, even as the battle shifts from NCLT to the Bombay High Court, Goenka earlier on Saturday tweeted on the occasion of Zee completing 29 years: “It is the love you have showered upon us, that has enabled us to achieve these milestones! This journey has taught me that being challenged in life is inevitable, but being defeated is optional. Here's to many more successful years ahead.” Is this bravado or does Goenka know something we don’t?
The only question that truly matters
The most important question today is not whether Invesco (Oppenheimer) has the right to call an EGM and recast the board, which the courts will decide. The most important question is: Has Punit Goenka lost the right to continue? The verdict for that will be delivered not in the court but at the shareholders’ meeting or by what big stakeholders do with their stakes. And that’s what I’ll be watching out for.
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