NDTV to Zee: How promoter's pledging can doom the company?

If there is one lesson we can learn from the ongoing battle between NDTVs promoters and Adani group is “Debt can be very dangerous”

On Tuesday, Adani group’s flagship - Adani enterprises announced that they would acquire a 29% stake in broadcast and digital news company NDTV. The news came as a shock to not just the general public but also to the promoters of NDTV - Radhika and Prannoy Roy. As soon after the announcement, NDTV released a statement that said, the company and its founders were neither aware of the acquisition nor they have given their consent to it.

Clearly, it wasn’t a typical business acquisition where papers were signed and hands were shaken after the deal. The acquisition was a hostile one. But how did it all happen? How did Adani acquire a stake in the company without the consent of its promoters?

Well to understand this acquisition we need to go back a bit in history.

It was 2007, NDTV was doing well, the company’s revenue had been rising, its share price was flirting with new peaks and maybe due to that, the promoters of the company decided to buy back the shares of the company. Initially, they wanted to buy back a 7.73-percent stake held by another shareholding entity, GA Global Investments. But their buyback triggered an open offer.

What is an open offer though?

Well, a huge change in the ownership of the company impacts the future of the company. And SEBI believes that whenever there is a massive change in ownership, minority shareholders should be given a chance to exit their investments as well.

So, if a promoter or an investor buys a sizeable part of the company from selected owners, then they have to make an additional open offer to the minority shareholders as well to buy shares from them. Then if any minority shareholder wants to sell their shares they can sell them in the open offer.

Promoters generally buy back the shares of the company when they believe the company would perform better in the future or they want to increase their shareholding. Whatever may be the reason, Radhika and Prannoy Roy were quite keen on buying back the shares as they bought back the shares at a price higher than the market rate—NDTV’s stock was hovering at around Rs 400 at the time, but the Roys bought shares back at Rs 439.

To fund such as massive deal Roys took a loan from Indiabulls Indiabulls Financial Services Limited by pledging NDTV shares as collateral.

What is Pledging of shares and how does it work?

Typically all loans are backed by collateral so that in case the borrower fails to repay the loan, the bank can sell the collateral and recover the amount. Now, some promoters keep their shares in the company as collateral while obtaining the loan.

For example, a promotor took a loan of Rs. 1,00,000 from the bank and he pledged his shares worth Rs. 1,50,000 to the bank. If the borrower is unable to repay the loan, then the bank has the right to sell these shares in the open market and recover the amount.

Sounds simple? It isn’t.

The value of the shares is highly volatile and changes every day. In the above example what if the value of shares plunges to Rs.80,000? Or even lower than that?

Then the bank would ask the promoters to cover up the amount of collateral by pledging more shares. So it is kind of tricky.

Wait, why are we discussing this?

Because that is what happened in the case of NDTV. Roys took the loan in 2007, post which the housing loan crisis happened in the United States which resulted in the collapse of global markets. NDTV’s stock too collapsed like those of many other companies, globally and in India. It went from Rs 400 at the end of July 2008 to less than Rs 100 by the end of October. In just a matter of months, the share price declined drastically.

When the stock took a beating, the collateral lost most of its value and Indiabulls asked the company to pay its loan. To repay the loan, Roys took another loan of Rs. 375 crores from ICICI bank at a 19% interest, and to obtain this loan, they again pledged their entire holding in the company of more than 61%.

NDTV was going through a tough time. The interest on the loan was massive, their entire holding was pledged with the bank. To get off the interest burden and repay the loan, Roys took another loan of Rs. 350 crores from a relatively unknown company Vishwapradhan Commercial Pvt. Ltd. (VCPL).  

In this deal, the lender and the lending agreement are both quite extraordinary!

VCPL gave NDTV an interest-free loan of Rs. 350 crores, in turn, NDTV gave convertible warrants to VCPL. NDTV gave VCPL warrants under which they could acquire close to 100% in RRPR holdings, a company created by the Roys which held around 29% stake in NDTV.

What are these convertible warrants?

Well, convertible warrants are financial instruments that allows you to buy shares of a company at a pre-decided price. 

NDTV gave VCPL warrants under which they could acquire close to 100% in RRPR holdings, a company created by the Roys which held around 29% stake in NDTV.

So, if VCPL decided to exercise the warrants, they would own RRPR holdings and a 29% stake in NDTV.

Some reports also suggest that Roys gave VCPL the ownership in the company, the loan was just to masquerade the agreement.

As in 2019, SEBI quoted “under the garb of a loan agreement, NDTV was being sold to VPCL, which amounted to commissions of a fraud upon the shareholders”.

Who is VCPL, though?

As per reports, VCPL was promoted indirectly by Mukesh Ambani’s RIL. The company though has been bought by the Adani group now. Just minutes after it was acquired by Adani’s media subsidiary, AMG Media Networks Ltd, they announced that they are exercising the warrants and are acquiring 29% stake in NDTV. 

Remember, when we said an open offer is triggered, whenever someone buys a massive stake in the company?

Adani too had to make an open offer to exercise the warrant and most probably after the open offer they would own more stake than the founders of the company.

Promoter pledging in case of NDTV resulted in Roys losing their ownership and influence over the company. In the case of NDTV, promoters lost their voice, while minority shareholders gained from the price rise. But in certain cases, promoter pledging is a curse for minority shareholders as well!

Zee Entertainment

Like in the case of Zee entertainment, the company was founded by Subash Chandra. He held a majority stake in the company through the Essel group till 2019. In 2019, a series of events led to Chandra losing his most priced possession ZEEL. 

What happened?

In 2019, Essel group wanted to expand its business and it entered the infrastructure segment. It took massive loans to fund its projects, and these loans were backed by ZEEL shares. In 2019, the promoter’s stake in the company was 22% and 90% of their holding was pledged with financial institutions.

Unfortunately, the company’s infrastructure business did not take off and it was left with billions of loans. Due to the bad reputation of the promoter group, ZEEL stocks started plunging, and with that, the value of the collateral started dipping.

As the value of the collateral eroded, lenders who extended loans to the group started getting desperate for their money. They had two options either to wait for the group to repay the loan or to sell the shares of the company in the open market.

Some financial institutions choose the latter options. When Essel group requested an extension of the loan period, some of its lenders sold the shares in the open market due to which its stock tanked 10% in one day and reached its 52 week low.

Had all its lenders chosen to sell the shares in the open market, there would have been a massacre. The share price would have tanked so much that the collateral would have lost all its value. Essel group then decided to repay the loan by selling its stake in ZEEL to Oppenheimer Developing Market funds.

Post the deal, Chandra lost its stake in the company, while minority shareholders who had invested in the company lost a lot of their investment.

So, a key takeaway from the NDTV-Adani tussle could be “Debt is dangerous” not just for the promoter but also for the shareholders.