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Zee: Reputation jinx

Jul 26, 2001

Zee, once the market favourite, is sailing in rough water on concerns regarding quality and transparency of its management. Apart from this, the company is rapidly losing its markets share to Star and Sony, due to lack of good quality content. The stock price of the company is not even one fifth of what it was a year ago. The lack of corporate ethics has proved detrimental for the stock price. The promoters maintaining links with scam tainted stock broker’s in an effort to keep stock prices up and then placing shares at high valuations with institutions has not gone well in the markets.

Zee had allotted 7 million shares to the Mauritius based company, Wakefield Holding in mid 1999. Wakefield was among the first five OCBs being probed by SEBI for having allegedly transacted heavily in K-10 stocks (including Zee). Wakefield had remitted a net amount of Rs 20 bn out of the country in FY01. A large part of these transactions pertained to Zee’s shares and are currently under investigation by the SEBI.

In FY00, Zee acquired 100% stake in Zee Multimedia Worldwide by allotting 249 m shares to two overseas corporate bodies (OCBs), owned by the promoter. One of the two OCBs identified by SEBI was Delgrada, which was allotted 176 m shares. The company’s stock price witnessed huge volatility during the period when the deal was announced.

SEBI is also scrutinizing the source of funds used by Zee last year for purchasing Star TV’s 50% stake in three joint ventures for US$ 150 m, in an all cash deal. During the same period, the company raised Rs 8 bn through private placement of shares with global investment bank Goldman Sachs. The regulators are keen to find out the reason for the Goldman Sachs placement and what did the company intend to do with the funds raised. Doubts are also cast over Delgrada’s role in this whole scene.

Perhaps, the more serious concern is the direct diversion of funds from the company. Zee provided a loan of Rs 2.2 bn to Essel Packaging, a promoter group company last year to buy stakes in some media companies (AB Corp. and B4U). But there are indications that these funds have been invested in the stock markets. The preliminary investigation report by SEBI has already documented the diversion of funds to the Ketan Parekh group.

Although, the Essel group had promised to return the funds by the end of June ’01, only Rs 600 m had been returned by that date. To repay the amount, the promoters have recently sold their 1% stake in the company to unnamed US investor and raised Rs 600 m. Still, the balance of Rs 1 bn remains unpaid till date.

These transactions by the promoters would continue to cast a shadow on the stock valuations unless there is evidence of change in corporate practices. At the time when the company is facing problems in improving cash flows, diversion of funds raises concerns over its sustainability of future growth. The company's operational performance continues to be under strain, given the intensity of competition. Though it has recovered some lost ground, Star rules the roost.

Zee has recently appointed an investment banker to hunt for a strategic partner. This is to help the company raise its profile in the international markets. The company expects the partnership would give it more opportunities to distribute the products globally and the required impetus to increase media assets, syndication revenues, technology advantages and access to capital markets. However, considering the current image of the company and its falling TRP rating, it might become difficult for the investment banker to find a suitable partner.

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