On 30th September, the NCLT asked Zee Entertainment to call for a special EGM as requested by Invesco Fund. This could be a test of corporate governance at Zee and how the future pans out.
Why Invesco wants an EGM
On 11-Sep, Invesco Fund which holds 18% stake in Zee Entertainment, asked for the removal of Punit Goenka from the post of MD & CEO. It also called for the resignations of 2 other directors; Manish Chokhani and Ashok Kurien, which Zee adhered to. Later, Zee signed a merger deal with Sony Pictures with Punit Goenka as CEO for next 5 years. That forced Invesco to call for an EGM to decide on the composition of the board before debating on the merger.
An agenda for the EGM
As per Invesco, with an 18% holding in Zee Entertainment, they were the single largest shareholder. The ex-promoter group had just 3.44%, but was enjoying clout that was disproportionate with their holdings. Invesco’s concern was that the merger would lead to dilution of their own stake since Sony shareholders will get 53% of the merged entity and Zee shareholders only get 47%. But, Zee promoters will see their holdings rise due to the non-compete clause. At the EGM, Invesco wants a vote on the removal of Punit Goenka from the top job and the nomination of 6 of its own directors to Zee Entertainment board.
What are the likely next steps?
The counsel for Invesco Fund, Mukul Rohatgi, has rightly argued that Zee does not have the discretion on calling the EGM. The board is obliged, under Section 100 of the Companies Act 2013, to call for an EGM if shareholders with more than 10% paid-up capital demand for it. Zee board will take umbrage in the rule that any appointments or even removal from the boards of media houses needs the approval of the I&B ministry. However, that should be more of a technical point. The Zee board will have no choice but to call for the EGM.
What are larger implications?
The Zee – Invesco case is interesting as it is the case of erstwhile promoters who became minority shareholders. This was due to the stocks they had pledged as surety for infrastructure loans taken by their group companies. But there is a larger trend visible. In last few months, institutional investors are becoming a lot more assertive. We saw that in the case of PNB Housing, Vedanta delisting, Eicher, Lupin, Finolex and the list can go on. Zee is one more such case where the institutions are playing an activist role. Till date, most Indian companies have been used to institutional investors that are largely passive. Institutions are realizing that they can extract more value for their stakeholders by insisting on corporate governance. This is a new trend corporates must prepare for!
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