Zee-Invesco battle puts spotlight back on corporate governance practices

The public battle between the broadcasting giant and a key institutional shareholder has precipitated a high-decibel debate on corporate governance practices

The corporate battle between Zee Entertainment Enterprises Ltd (ZEEL) and its largest shareholder, the Atlanta, Georgia-based Invesco fund, has once again put the spotlight back on Indian companies’ transparency and corporate governance norms.
 
In a previous recent corporate war, the Tata group versus Cyrus Mistry, the estranged former group chairman, the Mistry camp accused the Tatas of corporate governance lapses and lack of transparency. The Supreme Court did not find any merit in the charges and Mistry’s petition was dismissed. Similar accusations were also made in the fight between the Ambani brothers in the early 2000s but nothing was proved in the court.
 
In Zee, however, both the board and the Oppenheimer-backed fund are accusing each other of corporate governance lapses in their battle to control the Rs 6,665-crore company.
 
The fight between Zee and Invesco started when the latter asked the company to remove three of its directors, including Manish Chokhani, Ashok Kurien and CEO and MD Punit Goenka, citing corporate governance lapses. Invesco and its affiliate, OFI Global China Fund, own 18 per cent stake in the company. In order to avoid any showdown, both Kurien and Chokhani quit a day before the annual general meeting (AGM) when their nomination was to be voted on by shareholders.
 
Just a few days before Invesco’s notice, proxy advisory firm Institutional Investors Advisory Services (IIAS) had asked Zee shareholders to vote against Kurien and Chokhani.
 
It said Kurien was the founder of the Zee group and the company had reclassified him as a non-promoter, without any requisite regulatory filings or shareholder approval. Besides, IIAS said as a member of the Nomination and Remuneration Committee (NRC) of Zee, Kurien was also accountable for Goenka’s remuneration being raised 46 per cent higher than what shareholders had approved in the 2020 AGM, whereas employees were given zero raises.

 

On Chokhani, IIAS said after completing his five-year term as an independent director, Zee is seeking to re-appoint him as non-executive, non-independent director even though as member of audit committee for FY 2020 he is accountable for the losses against related-party transactions, which resulted in significant erosion in shareholder wealth.
 
 Zee promoters had to sell pledged shares in the company to repay bank loans after promoter-entities defaulted on bank loans. The founders now own only 4 per cent stake in the company while Invesco bought part of the promoter stake and emerged as the largest shareholder.
 
Significantly, though IIAS raised questions on Zee’s corporate governance record, three other proxy advisory firms — Stakeholders Empowerment Services (SES), Institutional Shareholders Services (ISS), and Glass Lewis — supported Zee directors and their re-nomination and did not find any issues of concern.
 
The divergence of views among the proxy advisory firms has confused investors such as mutual funds and institutional investors, which hold 78 per cent stake in Zee. They typically refer to proxy advisory firms’ reports for taking decisions. “Though we do refer to these reports, our voting decision is based on what our investment objectives are,” said an official of a government-owned insurance firm.
 
Within days of the AGM, Zee announced a merger deal with Sony India creating a new entertainment giant in India in which Zee group founder Subhash Chandra and his family will continue to hold 4 per cent stake, with the option to increase it to 20 per cent. Under the merger plan, Sony promoters will give the Chandra family a 2 per cent stake as non-compete fees.
 
Invesco raised this issue in its letter on October 11 and said Sony has “gifted” a 2 per cent equity stake to the Zee promoters in the guise of a “non-compete”, even though the current MD and CEO, Punit Goenka, will continue to run the proposed merged entity. “This is dilutive to all other shareholders, which we consider unfair. At the very least, we would expect such largesse to be contingent on the MD/CEO leaving the said position (thus raising the scenario of ‘non-compete’) or be structured in the form of time vesting and performance linked ESOPs, which we as shareholders welcome as a transparent way to reward performance and leadership,” Invesco said.
 
Interestingly, Invesco did not make a crucial disclosure in its communication that it was itself facilitating a merger proposal between two Reliance Industries-owned entities with Zee and had offered to the Zee promoters a better deal. Under the Invesco-RIL proposal, Zee founders would have ended with 8 per cent stake in the merged entity. The US-based fund did not make this disclosure even in the courts where it is currently litigating with Zee. The focus of Invesco’s litigation is on the Zee board rejecting its request to call an extraordinary general meeting to appoint its nominees and remove Goenka as CEO.
 
It was only after Zee disclosed on October 12 that Invesco was facilitating a merger transaction that the US fund admitted to the fact.
 
A few days ago, Zee patriarch Subhash Chandra in a televised interview suggested the Indian market regulator, the Securities and Exchange Board of India, and the Ministry of Corporate Affairs investigate Invesco without offering any details on the alleged breach.
 
Invesco did not answer emailed queries on its role.
 
Legal experts said the onus is on the company to make a disclosure about any merger and acquisition talks. “If Invesco had initiated a merger proposal, then the onus is on Zee to make the disclosure. Companies often do not make a disclosure as it would lead to a sudden spike in share prices,” said R S Loona, Managing Partner of Alliance Law.
 
Reliance, meanwhile, has steered clear of the controversy saying it will not go ahead with any hostile takeover and prefer to have the founder’s approval.
 
With both Zee and Invesco making accusations in public and the Bombay High Court set to resume its hearing on October 21, expect a high-decibel debate on corporate governance practices followed by both Invesco and Zee from next week.