All eyes on Zee, Dish TV stock movement

The prospect of a further plunge in the shares of Zee Entertainment and Dish TV, which would deepen the disarray in the Essel Group, has put their managements and investors on edge. Following the sharp selloff on Friday, mutual funds holding debt securities of entities owned by Essel Group’s promoters led by Subhash Chandra face the risk of investments being marked down, leading to an erosion in the value of schemes and sparking a crisis of confidence in the debt market.

While the agreement between Zee promoters and lenders, including mutual funds, to provide a three-month breather while a buyer for Zee Enterprise is found, could provide some respite to the group’s shares, concerns over promoters’ indebtedness would keep investors in debt MFs, which hold the securities of promoter entities, on the tenterhooks.

At least 11 mutual funds — HDFC, Aditya Birla Sun Life and ICICI Prudential among them — have an exposure of Rs 6,600 crore to the Essel Group’s debt securities.


Senior industry executives said a large chunk of this lending has been to promoter entities with shares as collateral. Non-banking finance companies (NBFCs) too have lent to promoter firms.

Zee Enterprises slumped 26 per cent and Dish TV fell 33 per cent on Friday after a news report alleging links between Essel Group and Nityank Infrapower and Multiventures, a company being probed by Serious Fraud Investigation Office (SFIO) for deposits of over Rs 3,000 crore after demonetisation. The slump intensified due to sale of pledged shares, which market participants believe belonged to the promoter group. ECL Finance, lending arm of Edelweiss Group, and IIFL Wealth Finance sold approximately 24.3 million shares of Dish TV, equivalent to 1.3 per cent of company equity, on Friday.

The stock slide prompted group chairman Subhash Chandra to issue a statement in which he apologised to bankers, NBFCs and mutual funds for wrong bets on infrastructure. He also accused “negative forces” of trying to sabotage Zee Entertainment’s strategic sale.

Any further drop in stock values will force lenders and mutual funds to offload pledged shares unless promoters provide fresh equity as collateral. Executives of MFs holding Essel group debt securities met the group management on Saturday to understand how promoters plan to deal with the crisis.

“We’ll continue to follow news flow on companies/group — await details on pledged shares that the company is likely to provide in the next few days, as well as colour on the group’s liquidity/deleveraging process near-term,” said Citi’s Aditya Mathur and Surendra Goyal in a client note after a conference call with analysts over the weekend. “These are likely to have an important bearing on the stocks, possible shareholding changes and play an important role in the consummation of any deal for Zee.”

Many mutual funds and a handful of NBFCs loaned money to at least 16 Essel Group and promoter entities, which pledged shares or property as collateral. Promoters have pledged almost 60 per cent of their 42 per cent in Zee Entertainment. Ratings depend on the quality of the collateral — shares or property. Zee promoters pumped borrowed money into the infrastructure business but losses there hit repayment capability. While the group has been able to service debt through rolling over of loans, the stock crash could make this difficult, forcing promoters to raise money elsewhere.

After the slump, the coverage ratio — the minimum shares required as collateral — for some fund houses has come down to 1.1 times, said a money manager. Hypothetically, if the share price falls by a further 11 per cent on Monday, a mutual fund will not have enough shares to cover its investment in debt securities. Depending on the company, its credit rating and risk profile, mutual funds generally have a cover of 1.5-3 times. When share prices fall, lenders have two options — one is to ask for more collateral from the promoter. The other is to sell some of the shares to maintain the coverage ratio. It could not be ascertained if mutual funds sold shares of the company on Friday.

“It is one of those peculiar cases of the company being healthy while promoters are heavily indebted. Stress at promoter level is impacting the company,” said a senior executive at a large mutual fund owning a sizeable chunk of Zee shares and with exposure to the group's debt instruments.

Friday’s crash in Zee and Dish TV prompted some distributors and financial advisors to ask rich clients over the weekend to pull money out of mutual fund schemes with exposure to the group’s debt. These instruments are held across various credit risk funds, dynamic bond funds and corporate bond funds.

“If the stock price continues its slide, we could see a lot of redemptions from HNIs (high net worth investors). If the fund house does not write down its investment, it could affect the remaining investors in the same,” said the research head of a private banking outfit.

In the recent past, investors have suffered losses in debt mutual fund schemes, which fully wrote down investments in Infrastructure Leasing & Financial Services (IL&FS). A few other schemes have written off a fourth of their investments in SPV of road projects of IL&FS.