Corporate Governance Issues Come Back To Haunt Zee Entertainment

Zee Entertainment Enterprises Limited’s (ZEEL) shareholders, OFI Global China Fund and Invesco Developing Markets Fund have called for an Extraordinary General Meeting to replace the current Managing Director, Punit Goenka, from the company.

The shareholders together own 17.88 per cent of Zee.

Last week, institutional advisory firm, IIAS, had advised shareholders to vote against the adoption of standalone and consolidated financial statements for the financial year 2021.

It had also recommended shareholders to vote against the reappointment of Ashok Kurien and Manish Chokhani, both of whom were non-executive non-independent directors at Zee.

According to IIAS, Kurien was a cofounder of ZEEL who had been classified as a non-promoter, without shareholder or regulatory approval.

Further, both of the directors had failed to address several corporate governance issues that were raised by older directors.

IIAS had opposed the reappointment of Ashok Kurien and Punit Goenka in 2020 too, during the company’s AGM. Both Kurien and Chokhani stepped down from as directors just a day before the AGM.

Zee has not received much investor interest over the past few years. The stock had given absolute returns of 65 per cent over the past five years, whereas the Sensex has doubled during the same period.

One of the main reasons for the underperformance is the questionable corporate governance at the company.

For instance, Siti Cable and Dish TV, both companies of the Zee Group, owed a huge outstanding payment to ZEEL. The issue has been dragging on since 2019, and the companies still have a part of the payments outstanding.

ZEEL has already provided for a loss on Siti’s receivables.

Dish TV, a group company owned by Subhash Chandra’s brother, is facing a similar battle as Yes Bank, which owns a quarter of the company’s shares has proposed to oust the current management.

The shares of both Dish TV and ZEEL have moved up by 25 and 40 per cent respectively after the news of management changes came in.

Along with the receivables crisis, ZEEL also faced a crisis resulting from its promoter group’s diversification in the infrastructure sector. Since the infrastructure sector requires a large amount of capital, ZEEL’s promoters looked to raise debt by pledging ZEEL’s shares.

But the infrastructure business didn’t do well and the lenders began selling ZEEL’s shares in the open market. The promoter family had to sell ZEEL’s shares to Invesco and Oppenheimer Funds in order raise capital to pay off the lenders.

Invesco has been an investor in 2002, and had complete confidence in ZEEL and its management back then. The promoter family’s stake fell to 4 per cent in ZEEL, which was the crown jewel of the Essel Group.

Nevertheless, just a few months after Invesco bought the promoters’ stake in the company, three directors quit the company citing several reasons such as high advances paid for films, financial issues, and laxity in corporate social responsibility spending.

The issues indicated several lapses in the company’s corporate governance.

At the AGM, Goenka was defensive about the corporate government standards followed at the company and chose to ignore the market’s positive response to the management rejig proposal.

He also said that the company was focusing on investing in the movie production and digital segment.

Another point of contention has been MD Punit Goenka’s high remuneration. The company had paid Goenka Rs. 13 crore as remuneration in FY21, compared to Rs. 9 crore in FY20 — an increase of 46 per cent.

In contrast, the median employee remuneration increased by three per cent for the year. Further, IIAS stated that Goenka would take a salary cut from April 2021, but the salary hike indicates otherwise.

However, Invesco and Oppenheimer are yet to highlight the reasoning behind their proposal. So far, they have only sent a letter to the company suggesting new directors for the board.

Nevertheless, the entire episode has brought forward the issue of corporate governance and shareholder activism in India. This is among the few instances where shareholders are battling promoters and the management for control of the company.

With the positive reaction to Invesco’s proposal, and Invesco’s strong shareholding, it is possible that their suggestions might sail through.