Mutual Funds Give Essel Group Free Pass On Share Fall, Debt Default

Mutual funds and non-bank lenders holding shares of Zee Entertainment Enterprises Ltd. pledged by Essel Group not only allowed a standstill till Sept. 30 if share price falls but also on upcoming obligations on these borrowings through non-convertible debentures.

“Yes, it will cover the interest and the principal amount up to date plus whatever the amount accumulates until the deadline,” Zee Entertainment Enterprises Ltd.’s Managing Director Punit Goenka said in a call with analysts. “This [standstill] is only against the loan against shares of Rs 13,500 crore. Any loans in the operating companies of the Essel Group are their responsibilities and not the promoters.”

The problem is that if the group promoter fails to meet interest or principal obligations on borrowings against pledged shares till Sept. 30, SEBI regulations make it mandatory for rating agencies to downgrade the Essel Group’s debt instruments to default. That would set off another crisis for mutual funds as they can’t invest in non-investment grade paper. Mutual funds had to write down the value of investments in Infrastructure Leasing & Financial Services group entities after they were downgraded to default, and also face concerns over their exposure to bonds of Dewan Housing Finance Ltd.

At least eight companies of the Subhash Chandra-led Essel Group will face payment obligation in the coming months as their debt matures despite the group buying time from lenders to bring in a strategic investor and pare its Rs 13,500-crore burden.

A potential default by Zee Group promoters will force fund houses to mark down these investments as well, impacting their net asset value unless they resort to side-pocketing—separation of stressed assets—as allowed by the market regulator. Aditya Birla Mutual Fund, which has the largest exposure to the Zee Group, didn’t respond to repeated calls from BloombergQuint.

This is an unusual situation, said an analyst with a rating agency on the condition of anonymity as the person is not authorised to speak to the media. The lenders are yet to disclose to the rating agencies the nature of agreement with the promoters of Essel Group, the analyst said.

Among the eight Zee Group promoter companies, four large entities have outstanding debt worth Rs 2,750 crore maturing before August, according to Bloomberg. The group’s promoters, BloombergQuint investigation found, owe creditors Rs 17,000 crore in all. The Essel Group has pledged shares of Zee Entertainment Enterprises, Dish TV Ltd., and Zee Media Corporation Ltd. against Rs 13,500 crore of loans, of which mutual funds and non-bank lenders alone account for around Rs 11,000 crore.

An Unknown Sweetener

Goenka said they have offered a “sweetener” to lenders beyond their dues in lieu of the standstill. But he refused to elaborate. “Lenders have mutually come together to allow us the time,” he said.

Lenders Sell Pledged Shares

The market value of Zee Group companies eroded by nearly Rs 14,000 crore on Jan. 25 as its its shares tumbled 27 percent by the end of trade amid concerns over the promoter’s debt. The stock price plunge brought the value of shares pledged with lenders below the collateral threshold, prompting them to offload shares of flagship Zee Entertainment Enterprises.

Lenders in the past 10 days sold nearly 2.43 crore shares of group flagship Zee Entertainment, bringing down promoter holding by more than 2 percent to 39.08 percent, Zee Entertainment informed exchanges. In total, lenders are estimated to have sold over Rs 1,000 crore worth of shares pledged by the Zee promoter group in the open market.

• Jan. 25, 28, 29 and Feb. 1: JM Financial Products Ltd., Catalyst Trusteeship Ltd., IIFL Wealth And Hero Fincorp and STCI Finance sold 1.69 percent pledged by Cyquator Media Services, a promoter entity.
• Jan. 25 and 28: IIFL Wealth and Hero Fincorp sold 0.85 percent stake in Zee Entertainment pledged by Essel Corporate LLP.