Network 18 Part II---The restructuring game

 

The world will never really know if Geeta Gupta and Rakesh Gupta who set up SGA Finance and Management Services Private Limited (SGA Finance) back in 1996, had any great business plans for it back then. For not soon thereafter, they handed over control of the company to Vidya Devi and Anil Jindal. From the evidence available, since the latter two took over, they too didn’t seem to have any either.

In the event, the company might well have ended up becoming one of those tens of thousands of corporates that exist merely as a record in the Ministry of Corporate Affairs but otherwise seem to have no discernible business purpose. But fate in the form of Raghav Bahl and Ritu Kapur, the promoters of the Network 18 Group, had willed otherwise. They would choose this shell company as their flagship to oversee a media empire that they helped create in later years.

But unlike the frog that had been kissed by the princess to instantly turn into a handsome prince, it would be a while before SGA Finance would transform itself into Network 18 Media & Investments with a sizeable public ownership and controlling two other listed companies collectively commanding a market capitalisation of roughly Rs 4,000 crore.

If for nothing else but their initial baby steps in incorporating a small company and nurturing it over the years before handing it over to Raghav Bahl and Ritu Kapur, the Guptas and the Jindals deserve at least a footnote in the history of Network 18 Media & Investments, were it ever to be chronicled.

Why would the promoters of Network 18 acquire control over an obscure non-banking company such as SGA Finance, pump cash into it and set it up as the parent company holding investments in the media operations of the Group?

 

The uplinking guidelines

The roots of that transformation lay in the uplinking guidelines for Indian broadcast companies that the mandarins at the Shastri Bhavan headquarters of the Ministry of Information & Broadcasting came up with. A welcome feature of these MIB guidelines issued in March 2003 was that they at last recognised that there was little justification for keeping private Indian companies out of broadcasting current affairs and news programmes when practically every other facet of the Indian economy was opened up in the 1991 era of liberalization.

Indian companies in the broadcast business no longer needed the façade of an overseas corporation broadcasting programmes beamed at an Indian audience when all the grunt work was done by the Indian company locally. Television Eighteen India (TEIL) thus no longer required a Mauritian intermediary for its operations in the Indian market.

But the guidelines threw up a regulatory challenge for the company from an altogether different quarter. The uplinking  guidelines spoke of circumstances under which the Government would permit companies incorporated under Indian company law to set up television channels for broadcasting current affairs and news out of India. The principal requirement was that the company had to have a ‘dominant investor’ owning a minimum of 51% of the equity capital,  who was also an Indian.

 

This was a problem for TEIL as the promoters of the company clearly failed this ownership test. Their stake in the company had fallen to 26.11% by end March 2002. It is not clear how a company in which promoters had a 75% stake in the immediate aftermath of the public offer of shares in December 99/January 2000 could have fallen so drastically as it appeared to have done by March 2002.

But slip it did and in the process fell foul of the up-linking guidelines on the requirement of a dominant (51%) Indian investor in control of the broadcast operations. By this time, the plans for launching a Hindi business news channel were well under way and TEIL obviously couldn’t be the platform in view of the fact that promoters didn’t control 51% of the equity stake in the company.   

 

Working towards becoming a dominant investor

Infusing fresh funds into TEIL by way of a preferential allotment in favour of the promoters was perhaps an option. But the promoters either didn’t have the money or if they did, were disinclined to do so. We will never know. But what we do know was that they (the promoters) acquired SGA Finance when the incumbent directors resigned in 2003 and Ritu Kapur and Raghav Bahl became directors in that company in quick succession.

From a small capital base of a mere Rs 25 lakh, equity in the company was ramped up first by Rs 2.75 crore in March 2003 and again by another Rs 2 crore in January 2004 to take the paid capital in the company to Rs 5 crore.

SGA Finance then incorporated a 100% owned subsidiary (SGA News) which would go on to launch the Hindi channel in January 2005. But it would take a lot more than the Rs 5 crore that SGA Finance had mobilised by way of equity contribution from the promoters to launch a news channel and keep it going in the initial years. It is here that TEIL was to play a crucial part in sustaining the Hindi channel.

In 2004-05 TEIL subscribed to the preference capital of SGA News to the tune of Rs 25 crore. Since the funds infusion was by way of preference capital, SGA Finance’s 100% control over the ownership of SGA News was unaffected. It would supplement it in the form of investment in the equity shares of SGA News to the tune of an additional Rs 39.10 crore in 2005-06. That year also saw a significant development. TEIL’s and SGA Finance’s Boards proposed, and shareholders approved, a ‘scheme of restructuring’ involving the operations of those two companies.

The terms of the restructuring were that there would be an exchange of assets between TEIL and SGA Finance which would be settled by way of issue of shares by both companies, to the shareholders of the other company.  TEIL would give away its digital assets, such as they were, and as compensation, the shareholders of TEIL would get 12 shares of SGA Finance for every 10 shares they held in TEIL. 

Similarly, SGA Finance would give up its media business (the Hindi channel) and in return its shareholders would get paid in the form of shares of TEIL at the rate of 3.67 shares in TEIL for every share in SGA News. The Hindi channel was deemed so valuable that SGA Finance which held 94% of the stake in SGA News, ended up getting a large number of shares in TEIL.

From an ownership of 55.66 lakh shares in TEIL prior to the scheme of restructuring of the businesses involving TEIL and SGA Finance, the promoters’ stake in TEIL went up to 2.94 crore shares out of a total equity base of 5.24 crore, post-restructuring. Consequently, SGA Finance ’s stake would now overwhelm that of the stake held by the public shareholders thanks to the new shares in its possession.

From an ownership stake of 26.43%, the promoters’ holdings now went up to 56.03% thanks to the new shares allotted for giving up the Hindi business news channel. Thus the public shareholders were reduced from a position of majority strength in TEIL prior to restructuring, to that of a minority stakeholder in that company, after the restructuring.

Now, SGA Finance has also taken on board a number of new shareholders (public shareholders of TEIL) because it had to pay in shares the consideration for the media investment and digital assets bought over from TEIL. This resulted in the promoters of SGA Finance becoming a minority shareholder relative to the vast horde of new shareholders who had come on board. The promoters held, prior to the new shares being allotted under restructuring, one crore shares in the company.

But the scheme of restructuring envisaged public shareholders being allotted 2.38 crore new shares, thus comfortably surpassing the shares held by the promoters. It is true that the promoters of SGA Finance too would be allotted new shares under the scheme of restructuring. After all, they were the promoters of TEIL and they did own shares in that company and they too were entitled to additional shares in the company.

But the ownership structure in TEIL was so skewed in favour of public shareholders (which started the problem in the first place) that the numbers in favour of the promoters didn’t stack up to give them a 51% majority stake.

Now, they could have lived with that situation as, after all, they didn’t feel threatened over losing management control of TEIL even though their stake in the company had fallen below the 51% mark for quite some time then. But the problem was with the MIB guidelines for uplinking clearly decreeing that there must be a ‘dominant investor’ who is an Indian.

In other words, it was not enough for TEIL to be owned by a ‘dominant investor ’ who is also an Indian, which SGA Finance undoubtedly was. It was equally necessary to show that the dominant investor in SGA Finance was also Indian. Now, an amorphous group of public shareholders could obviously not become that ‘dominant shareholder’ who is Indian for the purposes of the MIB’s guidelines.

The ownership profile of public shareholders can change every day with the shares being traded in the stock exchange in sizeable volumes. The shares held by a native public shareholder today could become a share held by a foreign institutional investor the next day because the former sold his stake in the market and the buyer happens to be a foreigner.

It was necessary, therefore, for the promoters of SGA Finance to beef up their stake in SGA Finance. This they proceeded to do by getting RB Investments Private Limited, a promoter group company, to apply for new shares in SGA Finance and get them allotted. Accordingly, they applied for, and were  allotted, 1.47 crore shares in SGA Finance. RB Investments was incorporated on June 30, 2006 with an investment of 5000 shares in it, by Raghav Bahl and Ritu Kapur each.

 

Finding the money to buy controlling shares

As company data later revealed, this was to cost them close to Rs 175 crore. Now, where would they get the money from between the date of incorporation and the date of purchase of shares in mid November 2006? There is no official record of the source of money. But what is on record is that Raghav Bahl had, between August and November 2006, raised cash by selling 28.85 lakh shares of TEIL at prices ranging from Rs 600 per share to Rs 900. While itemised transaction details are not available for all 28.85 lakh shares, for those for which details are available, the sum mobilised was to the tune of Rs 158 crore.

Now who bought those shares?  None other than SGA Finance itself. The money that SGA Finance would have had to pay for those purchases were settled against the monies due on the application for the issue of new shares made by the promoters earlier. So now promoters got 1.47 crore additional shares over and above what they already possessed and more importantly, they now held more shares than the public shareholders in SGA Finance.

They now controlled 2.60 crore shares to the 2.38 crore shares held by the public. They thus fulfilled the key requirement of not only being ‘Indians’ but additionally were recognised as the dominant shareholder In SGA Finance which in turn owned majority shares in TEIL. The loop of ‘Indianness’ was completed from the MIB’s point of view.

Was there some sleight of hand here? No. The promoters’ sale of their stake ahead of the completion of restructuring formalities was perfectly legal. Public shareholders too were buying and selling during those days. Equally, SGA Finance buying it from the promoters cannot be faulted. For one, the shares were bought at prices prevailing in the stock exchanges. Moreover, as a closely held company, as it was at that time, they were not answerable to anybody else with regard to their commercial decisions. Period.

 

But where is Network 18 Media & Investments Limited, the parent company of the Group? SGA Finance renamed itself first as Network 18 Fincap Pvt Limited and got converted into a public limited company. It went through one more round of name change and this time as Network 18 Media & Investments.

If Television Eighteen India did all the heavy lifting (financially speaking) for setting up the Hindi business news channel, it wasn’t much different when the time came for setting up the general news channel CNN-IBN. For a start TEIL invested Rs 19.70 crore in the equity of SRH Broadcast Holdings Private Limited (SRH). The latter was used as an investment conduit for all equity investments into Global Broadcast News, the company incorporated to launch the news channel, CNN-IBN.

In addition, TEIL invested Rs 44.29 crore directly into GBN to acquire a meagre 100 shares in GBN. The number of shares acquired may be miniscule. But because it involved payment of such a heavy premium (over Rs 44 lakhs per share) the total financial outgo for TEIL was in excess of Rs 44 crore.

Around the same time that TEIL and NMIL were engaged in a bout of restructuring between themselves, SRH, the principal investor in GBN, agreed to merge itself with GBN. But the only asset that SRH owned are the shares it had been allotted by GBN for whatever financial investments it made into the latter company. So GBN ended up transferring the shares that it stood in the name of SRH to the persons who were behind it as shareholders as a consideration for the merger.

Thanks to the first round of restructuring, the monies that TEIL invested in GBN now became the property of NMIL. So the shares of GBN, instead of getting allotted to TEIL, were now issued in favour of NMIL. Somewhere along the way, SGA News (erstwhile owner of the Hindi news channel, Awaaz) too ended up owning some shares in GBN which came to TEIL as part of the deal for taking over the Hindi business news channel.

But for some as yet unknown reasons TEIL preferred not to own these shares directly in its name but instead chose to set up a 100% owned subsidiary called RVT Investments and had them registered in that company’s name. Since TEIL is a subsidiary of NMIL, the shares held by NMIL directly and those warehoused in a 100% subsidiary of TEIL, are counted as one whole for determining the identity of the ‘dominant investor’ in GBN. Predictably, NMIL is identified as that ‘dominant investor’.

Between them NMIL, RVT Investment (a subsidiary of TEIL) and Raghav Bahl in his capacity as an individual investor collectively owned more than 51% of the shares of GBN.

As companies go, SRH Broadcast News Holdings had one of the shortest life spans. Its whole purpose of existence before it was subsumed by GBN was to midwife the birth of GBN as a broadcast company with a television channel under its belt. Once that was accomplished it disappeared without a trace off the corporate landscape.

In retrospect, its role seemed to have been one of acting as a conduit for structuring the investment cash flows in a manner that TEIL could not have directly carried out in its name. By January 2007, the company operating the channel CNN-IBN, Global Broadcast News, raised money from the public through an IPO which was as grand a success as the one by Television Eighteen India back in 1999.  

The fiscal year 2006-07 was an epochal one for the Network 18 Group for by this time, its television channels for broadcasting business news together with appropriate digital platforms for disseminating financial and business news/information (Money Control, News Wire etc.) were firmly established in the hands of TEIL.

The Group sought to use GBN as the corporate vehicle for foraying into Hindi news and regional languages, Marathi being the first. The company was also to mark its foray into general entertainment with a new channel in collaboration with American broadcaster Viacom.

From a small start-up business in the ‘90s for contract production of television programmes, the venture had evolved as a listed corporate player by the year 2000 and by the close of the financial year 2006-07 had becomes a business Group with three listed companies under its belt and innumerable subsidiaries and associate companies with interests in a wide array of businesses across the media, film, digital and e-commerce space.

 

* The author is an editorial consultant with The Hindu Business Line.