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The response of one of Zee Entertainment Enterprises’ top investors regarding its role in a potential deal with Reliance Industries has once again turned the spotlight on corporate governance issues at the media company, legal experts said.
Invesco Developing Markets Fund, one of the largest shareholders in Zee Entertainment, said in a statement on October 13 that it only helped facilitate a potential transaction with Reliance Industries negotiated by Zee managing director Punit Goenka and members of the founder family.
A day earlier, Zee had disclosed that Invesco tried to pressure Goenka into a deal with entities of a large Indian group.
Nirav Shah, a partner at DSK Legal, a law firm, told Moneycontrol that not disclosing the potential Reliance deal highlighted the corporate governance concerns at Zee. Invesco had raised this concern last month, just before Zee announced a planned merger with Sony Pictures Networks India with Goenka at the helm.
“The senior management and the Goenkas were negotiating with Reliance – that’s what the Invesco statement suggests. If that was the case, then why was it not considered and why did Zee straightaway announce the merger with Sony?” he asked. “Have the Goenkas (Punit Goenka) put their interests and their decision-making over and above that of the shareholders?”
Reliance said in a statement on October 13 that the deal had to be abandoned after differences arose between Goenka and Invesco over the Zee founders’ demand to increase their stake by subscribing to preferential warrants.
Shah said Zee’s disclosure will have little impact on the upcoming hearing at the National Company Law Tribunal. But he said it creates “prejudice against the promoter.”
The US-based investment firm moved a petition in the NCLT on September 30 seeking convening of an extraordinary general meeting by Zee for the removal of Goenka and the appointment of six new directors on the board. Zee has until October 22 to respond to Invesco’s plea.
The faster the court verdict on whether to convene the EGM or not, the better it is for the shareholders, said Nitin Menon, cofounder of NV Capital, a credit fund for the media and entertainment sector.
“The markets don’t like uncertainty and the stock could see an unnecessary correction because of this. Already, the stock has fallen from its all-time high because of these events,” Menon said.
Zee shares had advanced after Invesco sought the EGM to approve its proposed board changes. The Zee stock climbed to Rs 270.85 on September 14, three days after Invesco called for the EGM. The shares had dropped to a 52-week low of Rs 166.80 on the BSE on August 23.
Zee shares gained 3.6 percent to Rs 317.25 at the close on the BSE on October 13. They had touched a 52-week high of Rs 362.85 on September 23.
Invesco, in an open letter dated October 11, said that on the eve of its EGM requisition on September 11, India’s stock market indices had more than doubled in the preceding five years, while Zee’s stock had more than halved in the same period.
“The 40 percent stock increase in response to the EGM requisition action indicates years of frustration among shareholders and an appetite for change,” said Invesco, which held a 7.74 percent stake in Zee in the quarter ended September.
JN Gupta, founder of Stakeholders Empowerment Services, a proxy advisory firm, had a different perspective on whether Zee should have come clean about the potential Reliance deal. His view was that any deal – whether it goes through or not – should be disclosed to the stock exchanges.
“But it is not practical because investors may not be able to comprehend the type of deal. So, given the problem of the Indian market, half-baked deals could be more dangerous for the investors,” Gupta said. “The second thing is that this might impact deal making because competitors may know what is happening and they may try to intervene or they may try to create a situation for the deal not going through.”
All eyes are now on the NCLT hearing after Zee files its reply.
While Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors, a law firm, noted that section 100 (4) empowers the requisitionist to call for the meeting (EGM) themselves in case the board fails to call the meeting within three months, Invesco's concern is that it will not be able to hold EGM on its own as it needs details of the public shareholders. Hence, the upcoming NCLT hearing will be key.
Shah said that the issue before the NCLT is the legality of any resolution that may be passed at the EGM. Should the company call the meeting that will be examined as and when the resolution is passed. The Bombay high court will also see whether the resolutions violate SEBI regulations and the Companies Act, he said.
“The issues will only become relevant once the meeting is held,” said Shah.Disclaimer: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.