ZEE calls out “unjustified and incorrect comments” in Invesco’s Open Letter

Amid the intensifying row with Invesco Developing Markets Fund and OFI Global China Fund LLC, Zee Entertainment Enterprises Ltd (ZEEL) Board has responded to an open letter dated October 11, 2021, by Justin M Leverenz, Chief Investment Officer of Invesco Developing Markets Equities. In its disclosure to the bourses, the ZEE Board sought to draw the attention to the “unjustified and incorrect comments” made in Invesco’s Open Letter and raised two specific concerns.

First of the concerns is regarding the “Non-Compete Fee”. ZEE Boards letter stated that in the merger deal with Sony, the latter insisted that the erstwhile promoters of the Company do not engage in any competing business with the merged company. “In lieu of such non-compete obligations being undertaken by the present promoter group, the promoters of Sony will be transferring approximately 2.11% shares in the merged company to the promoter group,” ZEE Board said, adding that this would be a secondary transfer from the promoters of Sony and not a primary issuance.

Punit Goenka, MD & CEO, ZEEL, had earlier informed the ZEE Board that in February 2021, he was approached with merger another deal by Invesco. As per the deal, which didn’t materialise, the promoter group of the Company was offered 3.99% shareholding of the merged entity, that is, no dilution in the existing stake of the promoter group of the Company, and Goenka was further offered employee stock options (ESOPs) (with no vesting conditions), representing approximately 4% of the shareholding of the merged entity. Accordingly, the existing promoter group of the Company along with Goenka would have held up to 7-8% in the merged entity.

The ZEE Board pointed out that by way of comparison, the quantum of shareholding proposed to be transferred to the promoter group in the Sony deal is substantially less (by as much as approximately 4%) than what was being proposed by Invesco in the deal brought by them.

The second area of concern that the ZEE Board letter highlighted was “Increase of promoter group’s stake to 20%”. Invesco, in its Open Letter, had raised concerns stating that “the Zee-Sony announcement casually mentions that the ZEE promoter family will have the right to raise their stake from 4% to 20%, without specifying any manner in which this meaningful change will actually happen.”

The ZEE Board pointed out that the public announcement released by ZEE clearly states that “the promoter family is free to increase its shareholding from the current - 4% to up to 20%, in a manner that is in accordance with applicable law”, indicating that the promoter shareholding in the merged entity will be capped at 20% and that there is no right provided to the promoters to increase their stake.

The ZEE Board also responded to Invesco’s reference to a SEBI advisory letter dated June 17, 2021, which the investor called an “extraordinary regulatory rebuke”. The ZEE Board insisted that Invesco’s Open Letter ignored the remaining observations in the letter, whereby SEBI acknowledged that the Company had undertaken corrective measures and had directed the Company to place these corrective measures before its audit committee.

It may be noted here, that SEBI’s advisory letter stated that an examination by SEBI into the affairs of ZEE had revealed various irregularities, including:

• Large outstanding dues from the related parties were continuing without any definitive recovery plan
• Systems and processes with regard to documentation of advances required corrective action
• Letters of comfort were issued by directors of the Company without informing the Board
• Inter corporate deposits provided to Oscar Investments Ltd were assigned to related parties for recovery.

SEBI directed ZEE to place before the Audit Committee and the Board in the upcoming meeting, the implementation of the corrective action with regards to observations of Grant Thornton in its Audit Report.