Opinion | The sins of Zee’s promoters are now being visited upon investors

Trade

• Watchlist
• Portfolio
• Message
• Set Alert

 

 

Choose Stock Exchange: BSE LIVE NSE LIVE

26 Aug, 2025 12:21

Volume

Todays L/H

More

×

Zee Entertainment Enterprise's (ZEE) investors are a shell-shocked lot. On January 25, the stock came crashing down to Rs 299.70 on the NSE, losing 30.9 percent in a single day. Its subsidiary Dish TV lost 37.4 percent.

Yet, just a few days ago, the company had delivered exceptionally good results for the December 2018 quarter. It handily beat estimates by showing profit growth of 50.5 percent from a year ago, while EBITDA (earnings before interest, tax depreciation and amortisation) margins were as high as 34.8 percent. Both advertisement and subscription growth showed strong traction.

Brokerages had nothing but praise for the company's results. Motilal Oswal called it 'a stellar show'. Edelweiss Securities said a re-rating for the stock was imminent. HSBC and Citigroup raised their targets for the stock. CLSA had a price target of Rs 670 for it.

The trigger for the crash was supposed to be an article in The Wire that alleged the Serious Fraud Investigation Office (SFIO) was probing demonetisation deposits linked to the Essel group, of which Zee Entertainment is the flagship. The Essel group management has denied the allegations.

But while The Wire story may have unearthed fresh facts, these allegations are not new. Media reports had earlier said the Videocon group had alleged, in a legal dispute, that a company associated with the Essel group was being probed by the SFIO for making deposits of over Rs3000 crore in cash during demonetisation -- essentially the same story The Wire has now carried. The Essel group had denied the allegation earlier too.

Why then the sudden fall in the stock? It was also well-known that the promoters of the group had pledged their shareholdings in Zee Entertainment for loans taken by a maze of group companies. A Bloomberg Quint investigation last December put the amount of debt taken by these companies at Rs 17,000 crore.

There had been other straws in the wind. A 2017 report in the Indian Express had said that the promoter firms had pledged Zee shares to raise funds through the offshore route. The story was part of the Paradise Papers revelations relating to the legal firm Appleby about offshore investments by companies. The transactions dated back to 2013.

That promoters' shares had been pledged to fund the debt of group companies is an old story. Indeed, Edelweiss Securities said in its note after the recent third quarter financial results that 'ZEE's re-rating is imminent despite concerns on group entity's debt and promoter pledging.' When the promoters announced that they were seeking to sell half their stake in Zee, ostensibly for fuelling their global ambitions, there was widespread speculation that it could be a desperate attempt to raise funds to repay the debt. Moneycontrol had pointed out, 'In an interesting development in November, Zee Entertainment's promoter (Essel Group) announced their intention to sell up to 50 percent of their around 42 percent stake to a strategic partner by March-April, most likely a global player. Multiple reasons are speculated for stake sale, including the high share (around 59 percent) of pledged promoter shares and increasing competition from global over-the-top (OTT) platforms like Netflix and Amazon Prime.'

Investors too remained uneasy. Despite the good financial results for the third quarter, the stock had slipped slowly and steadily for the last one year.

In an open letter to creditors on January 25 after the stock crash, in what was essentially a contrite mea culpa, Essel Group and Zee Chairman Subhash Chandra apologized to his creditors -- bankers, NBFCs and mutual funds. He acknowledged he had made several botched business decisions that had cost him dearly. He said the IL&FS debacle had diminished the promoters' ability to service their borrowings. He blamed 'negative forces' for the crash in the stock and stressed that all their operating companies were performing well and the strategic sale process was still on. Finally, he urged the lenders 'not to react in an anarchical manner and to maintain patience, till the process of ZEE Entertainment's stake sale is completed.' It was a desperate cry for help.

That would be cold comfort to investors, reeling under the stock meltdown on January 25. Chandra's letter said that the interest and principal amounts due had been serviced till December, but evades the question of whether any default had taken place. Nor does it say anything about what sums are due for repayment or for interest payments and whether the promoters will be able to meet their obligations. The letter does not give any information whether the fall in the share price on January 25 was due to lenders unloading pledged shares. It doesn't say whether there had been any margin calls. NSE data show that 24 million shares of Dish TV were sold by lenders ECL Finance Ltd and IIFL Wealth Finance Ltd on January 25.

While Chandra has insisted that the Zee stake sale is on track, the question is whether prospective buyers will now smell blood and offer much less to the debt-strapped promoters. The situation is still fluid and it remains to be seen how lenders will react on January 28, particularly mutual funds and NBFC creditors. A rush for the exits, particularly as the wounds from the IL&FS crisis are yet to heal, could have severe repercussions. As Chandra wrote in his open letter, 'if the lenders react in a panic situation, it will only hurt them and us.'

The pressure on the stock will remain till more clarity emerges. For investors, it's a reminder that even if a company is doing well, the risks from promoters’ other business interests should not be underestimated.

Coming hard on the heels of the Sun Pharma episode, investors will do well to re-evaluate promoter risk.

​