Subhash Chandra, Chairman Zee Entertainment (Photographer: Scott Eells/Bloomberg)

Are Essel Group’s Mutual Fund And NBFC Lenders Living In Denial?

BloombergQuintOpinion

On Sunday a clutch of mutual funds and non banking finance companies gave Subhash Chandra a longer rope to hang them with.

They agreed to not trigger a default on the Rs 11,500+ crore he’s borrowed from them even if the value of the collateral underlying the loans drops further. Shockingly, they also agreed to standstill if an actual default takes place.

Chandra, the founder of Essel Group, pledged a substantial portion of his shares in the group’s flagship media companies Zee Entertainment Enterprises Ltd. and Dish TV India Ltd. to borrow thousands of crores to fund privately-owned infrastructure projects.

Already the value of those shares has fallen substantially. Zee’s stock price is down almost 30 percent just this year and over 40 percent in the last 12 months.

And yet the lenders have agreed to standstill. For eight months.

There is also no mention of Chandra adding to the collateral.

As per the consent, the lenders have agreed that there will not be any event of default declared till September 30, 2019, due to the movement in the stock price of Essel Group’s mentioned listed corporate entities.
Essel Group Statement (Feb. 3, 2019)

It seems these lenders have learnt nothing from a decade of similar such behaviour by India's banks, which ever-greened loans and lived in default denial till finally the RBI had to push them into an asset quality review, realistic provisioning and eventually order them to file bankruptcy proceedings against several highly indebted companies run by high-profile promoters.

Now it’s the turn of MFs and NBFCs to live in denial.

Because History Repeats Itself

By his own admission Chandra made poor business decisions, as revealed in a recent public statement he made.

As most of the infra companies, even we have made some incorrect bids. In usual cases, infra companies have raised their hands and have left their lenders with non performing assets, but in our case, my obsession of not walking away from the situation, has made me to bleed 4,000 crore to 5,000 crore of rupees. Despite the loss making projects, we continued to pay the interest and the principle, by borrowing funds against our shareholding in listed companies.
Subhash Chandra Statement (Jan. 25, 2018)

But it seems, oblivious to this deep indebtedness, or despite it, the lenders kept rolling over their loans till IL&FS Ltd. blew up. Chandra himself admitted that’s when the rollovers stopped.

The situation at hand, became further unmanageable after the IL&FS issue, came to public light. Till then, we were managing our borrowings efficiently. The IL&FS meltdown stopped the roll overs, diminishing our ability to service our borrowings.
Subhash Chandra Statement (Jan. 25, 2018)

Soon after, in November 2018, Chandra announced he was going to sell up to 50 percent of the promoter stake in his leading public listed company Zee Entertainment. Even at that point the media magnate did not come clean with the reasons, claiming the sale was in order to find a partner to help Zee capitalise on new media trends.

Bah.

A BloombergQuint investigation showed the promoter stake sale was more likely prompted by the huge burden of debt taken on by Chandra's companies to fund unviable infrastructure projects.

A BloombergQuint investigation finds that such a sale may be inevitable given the approximately Rs 17,000-crore total debt raised by 15 investment arms and 88 operating companies of Chandra’s promoter group—the Essel Group.

Besides its investments in media companies, many public listed, the promoter group has over 100 privately held subsidiaries and affiliates with varied business interests, including road, urban infrastructure, power, water management and solid waste management projects.

Many of these non-media businesses are loss making, raising concerns about the group’s ability to repay debt.”

But the Essel Group denies that.

(Read full story here.)

Then came allegations of illicit cash transactions by other companies allegedly related to the Essel Group. Aided by large speculative positions on group stocks, as detailed in this BloombergQuint investigation, Chandra’s publicly traded companies saw a 37 percent fall in their share prices.

Since the same shares serve as collateral in the loans extended by MFs and NBFCs, Chandra quickly hammered out an informal arrangement with the lenders to arrive at a standstill. That informal arrangement was formalised this Sunday and extended upto Sept. 30, 2019.

Who Are MFs And NBFCs Protecting?

The lenders may argue they had no choice but to agree to a standstill. Triggering a default would mean selling the collateral shares. A substantial portion of the promoter’s shares in key listed group companies are pledged and large scale share sales would drive prices lower, hurting recovery.

All good defences. But...

They should have thought of this when allowing Chandra to pledge more than half his shares in key group companies, in some cases even more than half.

What guarantee do lenders have that the share prices won’t fall anyways? They’ve been on a decline for months – Zee is down from Rs 600 per share in January 2018 to Rs 350 now.

Besides, every media asset acquirer now knows Chandra’s sale of his Zee stake is a distress sale. And unless he’s selling a controlling stake, any premium to current market price will be tough to get. So far he's said he's selling up to 50 percent of the promoter stake.

There are few buyers for infrastructure projects. IL&FS is already first in line to sell several.

What’s worse is the standstill covers an actual default. As BloombergQuint reported earlier eight Essel Group entities have debt maturing in 2019. Of that, four large entities have outstanding debt worth Rs 2,750 crore maturing before August, according to data available on Bloomberg. So far the group claims to have serviced debt but now even if they stop, the standstill holds. This makes the compromise by lenders even more egregious.

To be clear, the Essel Group has said in the event a lender breaks the standstill no penalty clause will apply. Phew! It also said it has offered them a sweetener to adhere to the standstill. But offered no details regarding that.

Eyes Wide Shut

So who does the standstill serve? The stakeholders of MFs and NBFCs or Subhash Chandra?

The statement issued by the Essel Group on Sunday is a dead giveaway.

During the second round of a detailed meeting held between Essel Group Promoters and lending entities, the belief and trust in the intrinsic value of the Group’s assets and its promoters’ earnest intention towards complete repayment, was again showcased and reinforced by all the lenders.
Essel Group Statement (Feb. 3, 2019)

“Belief” and “trust”? Do lenders need reminding that these are commercial arrangements not friendships. If collateral values fall they are obligated by their fiduciary duty to demand additional collateral or sell collateral or exit.

To pretend a default isn’t a default in the hope that at some time in the future it may be reversed is a violation of their legal responsibility to stakeholders.

The smugness with which this compromise between Chandra and lenders has been arrived at is further evident in the statement, the last paragraph of which reads:

The group of lenders, including MF and NBFCs, expressed their firm stance, to support the management of Essel Group. Reaffirming their belief in the promoters’ expertise, experience and earnest efforts towards generating value for their stakeholders, the lenders were extremely confident that within the mentioned time frame, a positive outcome will be achieved.

Are the lenders relying on the same “expertise” and “experience” of the promoter that helped create this debt mess in the first place?

Entrepreneurs may take outsized risks, but lenders are caretakers of public money.

They seem to think by shutting their eyes their poor lending decisions will disappear. It’s time investors in these MFs and NBFCs opened theirs.

Menaka Doshi is Managing Editor at BloombergQuint.