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Will Chandra’s mea culpa put Zee’s future at stake?

Controversies and allegations are not new for Zee promoter Subhash Chandra. But every time, Chandra has managed to forge ahead. Will he succeed this time too?

January 26, 2019 / 07:47 PM IST

Sounak Mitra

Just a day after Subhash Chandra returned from London claiming to have had a series of positive meetings with potential suitors to sell 50 percent of the promoter Essel Group’s 42 percent equity in Zee Entertainment Enterprises, the company’s stock crashed by 30.9 percent on January 25.

The stake sale is crucial for Zee Entertainment and the Essel Group for two reasons. First, it will help service mounting debt. Second, Zee needs to find a strategic partner to fulfil its dream of becoming a global player, especially in the area of emerging over-the-top entertainment segment which is now dominated by Netflix.

The loss in investor confidence resulting in a sudden fall in the share price could impact the company’s stake sale. In the end, Chandra may need to sell more that he actually intended to for raising enough money to service debt and support expansions. A lot depends on potential investors agreeing to invest after recent events.

SFIO probe or market operators?


The reason for the crash of the stock is supposedly a story published by The Wire that alleged Chandra’s Essel Group had links to a firm that made deposits of Rs 3,177.96 crore during demonetisation which is now being probed by the Serious Fraud Investigation Office (SFIO). The Essel Group management denied the allegations.

There are two things to note. Firstly, this is till now just an allegation, and nothing has been proved. Secondly, this is not entirely new information. The Economic Times had in December reported that the Videocon Group, which sold D2H to Zee Group’s Dish TV, had alleged Essel Group’s link to money laundering during demonetisation in a legal dispute. This was first flagged off by The Times of India in July 2018. Then why did the market suddenly react like this?

In any case, this may not be the only reason for the stock crash. A Bloomberg Quint report in December pointed out that Zee Entertainment and a maze of its associated companies have taken total debt of around Rs 17,000 crore. The Times of India cited fund managers as saying that Zee’s promoters have a debt of Rs 11,000 crore, lower than the value of their holding in group companies at Rs 18,000 crore.

In an open letter, Chandra said there are negative forces might have worked to sabotage Zee Entertainment’s strategic stake sale. And that, according to Chandra, is the reason for the stock crash. No matter what the reason may be, it will now be tougher for Chandra to convince potential investors, and also sooth creditors until he manages to arrange funds to repay debt.

No stranger to controversy

This is not the first time Chandra has been accused of wrongdoing. The Indian Express in November 2017 had reported that the promoter firms of Zee Entertainment had pledged shares to raise funds through the offshore route back in 2013. The story, part of Indian Express’s Paradise Paper leaks, said that a $62-million loan was taken from Credit Suisse “to finance existing offshore promoter debt in 2013.”

A company, SMTP Ltd (Mauritius), provided a loan to Essel Holdings Ltd (Mauritius) which is wholly owned by Subhash Chandra.

In a response to Indian Express, Chandra’s office said: “We would like to mention that Dr Chandra is not an executive director nor holds any post in ZEE except for being a non-executive Chairman. We would confirm that the companies (Delgrada and EHL) are Essel Group companies. We also confirm that all activities in these companies satisfy/comply with all regulatory aspects in their respective jurisdictions including India.”

In June 2017, The Wire cited a report by the Comptroller and Auditor General (CAG) of India that alleged involvement of Chandra’s firms in a Rs 11,808-crore lottery scam in Mizoram in the North East. Zee officials, however, did not respond to The Wire queries on the CAG allegations.

In 2012, Congress MP Naveen Jindal accused the Zee Group of extortion. Following this, a Zee Group editor filed a defamation case against Naveen Jindal in December 2012. In July 2018, Naveen Jindal settled the extortion case against Zee.

Earlier, Subhash Chandra was also allegedly involved in the high profile stock-market manipulation scam by Ketan Parekh in 2001. In 2008, the Securities and Exchange Board of India (Sebi) finally let off Zee’s promoters.

Nine lives

Chandra has managed to overcome these controversies every single time. Some attribute it to business acumen and others to the right connections. In October 2012, Moneylife opined in a piece that Chandra and his Zee Group always got away lightly from all kind of troubles “possible due to the right connections in the government”.

In any case, the Zee group continued to grow. Chandra has not just expanded business in media and entertainment, but also diversified into technology, education, infrastructure, wellness, packaging, financial services, oil and gas, among others. According to Forbes, Chandra’s net worth at present stands at $3.3 billion or more than Rs 23,000 crore. Chandra has gone from strength to strength. In 2016, he became a Rajya Sabha MP on a nomination by ruling Bharatiya Janata Party.

Since the turn of the century, Zee Entertainment Enterprises has grown revenues from Rs 476 crore in FY2000 to Rs 5,795.60 crore in FY2018, and net profit from Rs 267.24 crore in FY2000 to Rs 1,911.90 crore in FY2018. Just in the quarter ended December 2018, Zee Entertainment reported profit growth at 50.5 percent from a year ago as EBITDA (earnings before interest, tax, depreciation and amortisation) margins grew by 34.8 percent backed by advertisement and subscription.

However, the group’s debt kept on increasing partly because of refinancing loans and funding loss-making business ventures. According to the Bloomberg Quint report, Essel Group had pledged shares worth Rs 17,449 crore as of September 2018. Its 15 investment companies and 87 operating companies have raised loans close to Rs 17,000 crore in total.

This time around the mea culpa from Chandra has only added to investor doubts which resulted in the share price crash.

The toughest battle yet

However, the poster boy of India’s television industry may have to fight a tougher battle this time. A strategic partner is too important for Chandra to make his global dream a reality. The reason why he has been desperately looking for a global strategic partner is that he has realised his limits and what he needs to make Zee a sizeable player in global media scene.

Zee needs technology backbone and distribution clout across the world and that he would not be able to do through his core cable television channels. Globally, cable and satellite companies have been suffering for many years. It is the time of Netflix that has redefined the rules of the game by reaching 137 million subscribers across 190 countries through the internet, anytime, on any screen.

That’s exactly what Chandra wants to replicate, but with tweaks that he believes would work better. Chandra wants his OTT platform Zee5 to the next level: immersive entertainment, hoping to give Zee audiences the pleasure to “touch, feel, smell” while they consume video content. Further, he wants to blend e-commerce and payments with OTT and control the viewers’ home environment (lights, security solution, heating, ventilation, air conditioning, etc).

Zee Entertainment has said it targets is to generate at least 30 percent of the firm’s revenues from Zee5, its over-the-top platform that was launched in February. While the company has not disclosed revenues from the OTT business yet, Zee5 had 41 million average active users as at the end of September. It is available in 190 countries, disseminates content in 12 languages, and already has digital rights for 3,000 movies.

Naturally, Chandra needs global strategic partners who could help him build India’s Netflix. And, the plans have just got shattered the day before India’s Republic Day.
Sounak Mitra is an Associate Editor, Moneycontrol. He has been writing on corporate issues and policy for more than 15 years, having previously worked with Mint, Business Standard, Mergermarket, The Telegraph and The Times of India.

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