The war for Zee and a clock that's ticking away

Invesco has hired investment bank Jefferies, while Zee has hired JP Morgan to help them shore up support from institutional investors, according to two executives familiar with the development. Zee’s 350-odd institutional shareholders, who together own about 68% of the company, will eventually get to decide who gets control of the company: Invesco, which is the largest shareholder owning 17.88%, or Subhash Chandra, the founder who owns 3.99%. The remaining 10% shares in Zee are held by over 250,000 individual shareholders and small corporate entities.

JP Morgan declined to comment while an email sent to Jefferies went unanswered.

Outside of Invesco and Zee, how will the public shareholders, who together hold nearly 78% of shares, vote if an extraordinary general meeting (EGM) is held in the coming months? For now, no other shareholder has come out and spoken on the developments at the company.

One of the ways in which the mood of shareholders might have been discerned could have been if a contentious resolution had come up at Zee’s annual general meeting on 14 September. That would have happened had two independent directors of the company, due for reappointment at the annual general meeting (AGM), not quit the day before the meeting. Proxy advisory firm IIAS had recommended that shareholders vote against the reappointment of these two directors. But in the event, Ashok Kurien and Manish Chokhani resigned the day before the AGM, which meant the resolutions for their reappointment didn’t come up for voting during the meeting and the votes cast during the electronic voting process preceding the AGM were rendered infructuous.

It’s worth paying attention to the sequence of events. On 20 August, Zee published its annual report, which gave notice for the AGM on 14 September. The electronic voting ended at 5pm on 13 September. That night, Zee informed the exchanges of two developments 42 minutes apart. At 9:16, the company informed that Kurien and Chokhani had resigned, citing personal reasons. At 9:56, the company said it had received a letter from Invesco on 11 September, asking for the removal of three directors—Punit Goenka, Manish Chokhani and Ashok Kurien. While the latter two were up for reappointment during the AGM, Goenka was not.

But the resignation of the two directors meant the opportunity to gauge shareholder mood was lost.

However, institutional investors reveal in filings details about how they voted as shareholders in investee companies. Mint reviewed available documents from seven such investors and found interesting patterns. While this offers an interesting glimpse into the thinking of some investors, it’s by no means a representation of how the universe of Zee shareholders think.

At least five foreign institutional investors voted against the reappointment of both the directors, documents reviewed by Mint show. These are Legal & General Investment Management (LGIM), British Columbia Investment Management Corporation (BCI), American Century Investments, APG and California Pension Fund. None of the five shareholders hold more than a 1% stake in Zee, and Mint could not independently ascertain the latest shareholding of these investors.

“We are holding the members of the Nomination Committee accountable for failing to ensure that all key board committees are fully independent. We are not supportive of non-independent directors sitting on key board committees," BCI said when it voted against the two resolutions.

Kurien and Chokhani were both on the board’s nomination and remuneration committee, which approves appointments to the board, its committees as well as key management personnel.

Legal & General Investment Management found similar reasons, too. “A vote against has been applied because LGIM expects the Committee to comprise independent directors," said Legal & General Investment Management when it voted against the reappointment of the directors.

BCI and California Pension Fund declined to offer a comment on if the investors see merit in Invesco’s demand for a board reconstitution. An email sent on Monday to Legal & General Investment Management, American Century Investments and APG Asset Management seeking comment went unanswered.

This doesn’t mean that all foreign investors will indeed support Invesco’s resolution seeking a board reconstitution. For example, Norway’s Norges Bank Investment Management, the world’s biggest sovereign wealth fund, which owns a 1.89% stake in Zee, stamped its approval for the reappointment of the two directors.

There is at least one investor who approved the reappointment of directors but abstained from voting on the resolution to approve the financial statements and statutory reports.

It is not clear what triggered this action as normally an investor abstains from voting on a resolution like this when it is unhappy with general corporate governance. But had that been the reason, the investor would have held some of the directors accountable too and voted against their reappointment. But the City of New York Group Trust reaffirmed its support to the two directors. An email sent on Monday to the City of New York Group Trust seeking comment went unanswered.

Invesco will need at least half of the shareholders who vote on the special meeting to approve its recommendations. It won’t be easy for either Zee or Invesco to get the majority 50% of votes but Invesco has an edge for now as it holds 18%, as against only 4% with founders.

Directors’ actions

Some of the institutional investors might have been influenced by the recommendations of proxy advisory firm IIAS, which pointed to similar reasons as cited by these investors in their note.

“He (Ashok Kurien) was a member of the audit committee in FY20 and is accountable for the losses on account of related party transactions as well as governance concerns outlined by previous independent directors—which resulted in significant erosion in shareholder wealth. Promoter equity was reduced to 3.99% on 30 June 2021," IiAS said in its note, as it recommended shareholders to vote against the reappointment.

“Manish Chokhani was on the Audit Committee in FY20 and is accountable for the losses on account of related party transactions, which resulted in significant erosion in shareholder wealth. As a member of the Nomination and Remuneration Committee, he is accountable for not professionalizing the board, especially given that promoter equity has declined to less than 5%. He is also accountable for the failure to address and adequately deal with governance concerns that led to the resignation of independent directors in the past," reasoned IiAS.

Shareholders could vote electronically on the reappointment of Kurien and Chokhani from 10 September until 5:00 pm on 13 September.

At the time of their resignations, Chokhani said he had stepped down “due to changed life circumstances and perspective post covid", while Kurien said he had stepped down “due to preoccupation". IIAS, the proxy advisor, said there should be regulatory scrutiny on the timing of the resignation of the directors.

“The notices (the resignation of the two directors and Invesco’s letter) were filed after the close of e-voting at 17:00 on 13 September 2021. This delay in filing of the notice and whether the resignations happened after the company was able to ascertain the shareholder vote, needs to be examined by the regulators," IiAS said in a note, dated 14 September.

The electronic voting process, typically done on the platform offered by a Sebi-registered RTA (registrar and transfer agent) or a securities depository, is guarded by a scrutiniser, typically an independent chartered accountant or practising company secretary hired by the firm.

Chokhani denied any knowledge of the outcome of voting ahead of his resignation. “I don’t remember clearly but I think I sent my resignation sometime in the afternoon (of 13th)," Chokhani told Mint. “I didn’t even know about the process of electronic voting until you told me," he said. Calls to Kurien went unanswered.

Since the matter is sub judice, the company cannot offer any comments," said a spokesperson for Zee, declining to comment on any of the questions relating to this story.

An email sent to Invesco went unanswered.

Invesco and Zee are now battling it out in multiple judicial forums after the Zee board rejected the investor’s call for an EGM, terming the demand illegal. On Wednesday, Zee founder Subhash Chandra made a televised appeal for support from the government and regulators in what he termed was a hostile takeover attempt of Zee by a foreign investor, who he likened to the East India Company. Chandra also alleged that Invesco was acting at the behest of a third party who is interested in acquiring control of Zee.

Invesco, which first picked a 7.74% stake in 2002, and later upped its stake by picking an additional 10% stake in July 2019, has not spelled out any reasons, beyond mentioning corporate governance issues, as the reason why it is demanding such wide-ranging changes at Zee.

Some point to the decline in the value of Invesco’s ownership over the last two years could have pushed the American fund manager to press such demands. Invesco spent ₹3,894 crore to buy a 10.14% stake in Zee at ₹400 a share on 31 July 2019, according to an analysis by Mint. This was in addition to the 7.74% stake it already held. At the time, Invesco’s total holding in Zee was worth ₹6,606.6 crore. On 11 September, when Invesco wrote the first letter, Zee’s shares were trading at ₹183 a share, implying a 55% drop in Invesco’s two-year-old investment to ₹1,360 crore. Invesco’s total holding in Zee halved to ₹3,141 crore.

Looming deadline

In this entire tussle between Zee and Invesco, time is of the essence. All appointments and removal of directors need only a simple majority of 50% until 31 December. Beginning next year, director appointments and removal will need the approval of 75% of shareholders, as a result of Sebi (Securities and Exchange Board of India) guidelines meant to empower independent directors. Since any shareholder meeting can be held only after giving at least a 21-day notice, this means Invesco needs to ensure that a date for the EGM is announced latest by 9 December.

“The odds tilt in favour of the management if Zee can continue to delay from holding an EGM," said a former executive of Zee.

This fight for control at Zee has a third interested party. On 22 September, 10 days after it received the letter from Invesco, Zee announced that it had agreed to sign a non-binding term sheet for a merger with Sony Pictures Networks India. Under the proposed deal, Sony will invest almost $1.6 billion and take a 53% in the merged entity. Sony, upon completion of the merged entity, will transfer 2% of equity to the founder of Zee, whose total holdings in the merged entity will become 4%. Sony has three months to complete due diligence.

The riveting wrangling over the control of one of India’s largest media companies will now likely wind through judicial forums. While allegations and counter allegations are bound to fly thick and fast in all directions, the moment of truth will only be if and when shareholders get to vote. Whether that cliff hanger of an EGM will take place and indeed if it can take place before the turn of the year are the big questions.