A month after Invesco sought an extraordinary general meeting (EGM) to replace Punit Goenka as the chief executive and managing director of Zee Entertainment Enterprises, the Wall Street fund manager, the largest shareholder of the company, wrote an open letter to the other shareholders, highlighting the need to strengthen the independence of the board in light of the governance and leadership “failures” as well as a “prolonged underperformance” of the media giant.

While welcoming Zee’s proposed merger plans with Sony, Invesco Developing Markets Equities — which was considered an ally of the Subhash Chandra family since 2002 — has expressed concerns over some of the clauses in the proposed deal, such as the non-compete fee to be awarded to the Zee promoters, claiming that it will “enrich the Zee’s founding family at the expense of ordinary shareholders”.

It also suggests a way ahead for the company after the EGM vote called to oust Goenka and appoint six new independent directors, and a possible interim CEO.

“We are writing to reiterate the urgent need for independent perspectives on Zee’s board given the company’s governance failures and prolonged underperformance; reaffirm our resolve to pursue an extraordinary general meeting of shareholders to hold the board and management accountable; and express our concerns over some of the terms of Sony’s proposed alignment with Zee, which unfairly favour the founding family at the expense of other shareholders,” said the latter, written by chief investment officer Justin M Leverenz.

Invesco Developing Markets Equities is one of the largest emerging market funds in the world. As of August 31, it held investments totalling Rs 56,200 crore (about $7.7 billion) in India, representing about 15.8% of its total assets under management worldwide. It is the third largest foreign institutional investor in India with significant holdings in HDFC Bank, Tata Consultancy Services and Kotak Mahindra Bank among others. The fund invested in Zee first in early 2000’s and then doubled down in 2019, buying a 11% stake in the company from the Essel Group for Rs 4,223 crore, at a premium to the then prevailing price.

A Zee spokesperson did not respond to ET’s mail seeking comments.

REGULATORY REBUKE

In its open letter, Invesco cited a June 17 communication from the Securities and Exchange Board of India to the company, calling it an “extraordinary regulator rebuke” since it pointed to related-party transactions and letters of comfort from Zee’s directors without informing the board. According to Invesco, the Sebi letter concluded that “actions of the company are not in the best interest of shareholders”.

Invesco has argued that its initiative was driven by its belief that “the promoter family of Zee, with the support of its current board of directors, continues to evade accountability to its ordinary shareholders, who own 96% of Zee’s equity. This lack of governance oversight by Zee’s current board has permitted Zee’s deep entanglement with the financial distress of its founding family…”

As a long-term investor, Inveso has claimed, it has had regular engagement with Zee just like other portfolio companies. “Over the past two years, we initiated several friendly conversations with Zee’s management to support a revitalised situation at the company. These discussions included suggestions around disclosures, capital allocation, ring-fencing, distancing Zee from the long shadow of other family ‘group companies’ and, indeed, also included thoughts around strategic alignments. This prolonged and regular engagement has yielded nothing other than platitudes such as ‘Zee 4.0’,” the Invesco letter claimed.

Zee, therefore, has remained a highly under-valued asset, mired in innuendo and financial volatility, as per the fund manager.

In the last one month, since Invesco and Zee’s board and management have publicly fought, the Zee stock has appreciated 58%. Over a five-year period to the eve of Invesco seeking an EGM, the Zee shares are down 65% compared with the Nifty50 index that has seen a 100% appreciation, data shows.

Attacking the governance framework of Zee, Invesco wrote: “Since our EGM requisition, we have witnessed the strange spectacle of Zee’s management, with the support of its current board, going to great lengths to deny what Indian law deems a statutory right to ordinary shareholders. These actions, which ostensibly are being taken in the ‘best interests of all shareholders’, as Zee’s communications claim, are in fact indicative of a management team that places self-interest over the interest of the institution it leads, its employees and all other shareholders, as well as a board whose permissive culture has enabled this behaviour and its consequences.”

This compounds the need to install the independent directors, Invesco said. “It is our belief that a better-governed Zee would have been at a very different pedestal than where it finds itself today. It would most certainly have avoided the reputational damage and the shareholder value erosion of the last few years. To that end, we are certain in our conviction that putting in place healthier governance structures at Zee is in and of itself a value-accretive action.”

SONY MERGER

Invesco has reiterated its support to the recently announced non-binding term sheet from Sony Entertainment, but has also sought more clarity around the specifics, especially around the non-compete fee and the option vested on the Zee promoters that would allow them to rachet up their stake in the new merged company. “The non-binding agreement gifts a 2% equity stake to the promoters of Zee in the guise of a ‘non-compete’, even though the current MD & CEO of Zee will continue to run the proposed merged entity for the next five years. This is dilutive to all other shareholders, which we consider unfair.”

Instead, Invesco said, it expects such “largess to be contingent on the MD/CEO leaving said position (thus raising the scenario of ‘non-compete’) or be structured in the form of time vesting and performance-linked ESOPs”. This would be a transparent way to reward performance and leadership, it argued.

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. However, it remains silent on the modalities. “Will this change the majority control of Sony in the merged entity? Will it involve open market purchases, warrants, or some other financial instrument? If the latter, will said instruments/warrants to the promoter family be priced so as to advantage them at the cost of ordinary shareholders,” it asked.

THE ROAD AHEAD

If its proposal finds favour with other shareholders, Invesco said, six new independent directors will join the board of Zee and Goenka will be removed from it. “It will be the duty of this newly constituted board to deliberate on and make determinations on the future leadership of the company. Should the board so decide, it could appoint an interim CEO from among the exceptional talent available within Zee itself. In parallel, it might approve a formal search for a CEO from within the vibrant Indian media industry, where business leaders within Zee might also place their candidature.”

An independent board, Invesco said, would be “best placed” to perform this function. They will then also be able to evaluate other options through an independent auction process to maximise value for the company and its shareholders. “The new board could appoint an investment bank to evaluate all proposals for strategic alignments that might be probable, including the Sony proposal in its current or any revised format, as Sony might choose to present.”

It added: “We wish to clarify the issues on which we will not compromise in connection with any transaction, and where we will continue to make our voice, and our vote, heard. We will firmly oppose any strategic deal structure that unfairly rewards select shareholders, such as the promoter family, at the expense of ordinary shareholders. In all potential alignments, we expect appropriate disclosures regarding the future leadership and governance of the company.

While stating a “well-governed Zee” will be fully ready to realise its potential, either with Sony, another strategic partner, or as a standalone company, Invesco also expressed “deep disappointment with the functioning of the current board of Zee. Timely and appropriate action on the part of the independent directors, who serve as fiduciaries to shareholders, would have precluded the situation Zee finds itself in today. To the contrary, events of the last few days have further reinforced our suspicion that the current management and board of Zee appear unwilling to hear the voice of ordinary shareholders”.