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Essel Group's Debt Overhang - Two Years and Counting

Aug 6, 2021 2:03 PM 5 min read

The last few days have been good for finances. On Tuesday, the markets rallied to record highs and investors got richer by ₹2.37trn ($31.9bn) 

Yet another party that was getting richer, or at least compensated, was the consortium of lenders to Essel Group companies. In his second open letter, Subhash Chandra Goenka, the Chairman of Essel Group and ex-promoter of Zee Entertainment (ZEEL), claimed that he had settled 91.2% of the Group's total debts to as many as 43 lenders. 

Just to jog your memory, Essel Group, the conglomerate which housed popular media businesses like ZEEL, Zee Media, Dish TV and Siti Networks, incurred debts to the extent of ₹16,000cr ($2.1bn) in March 2019, out of which close to ₹11,000cr ($1.4bn) were owed to mutual fund houses and NBFCs

Thereafter, the Group conducted several asset sales (including Essel Propack and stakes in ZEEL) in scorched-earth attempts to clear these debts. Subhash Chandra resigned as the Chairman of Zee, the crown jewel of Essel's assets and a company whose business he helped shape since the early 90's. Now, he is exploring new business opportunities in the "video in digital space". 

Today, we take a look at the factors which largely led to this debacle and where the pieces have landed so far. 

The Story So Far

Subhash Chandra didn't exactly rise from the rags. Rather, he joined his family business of commission agents and traders who procured and supplied rice to the Food Corporation of India. 

Soon he went into the manufacturing business, starting with packaging (plastic tubes) for FMCG items (the company was called Essel Packaging - later renamed as Essel Propack). From thereon, he entered the entertainment industry first by setting up the massively popular Essel World amusement park in Mumbai and then with the launch of Zee TV. 

Following are a few firsts in the entertainment sector that Essel Group has been involved in: the first amusement park (Essel World), the first Hindi language satellite channel (Zee TV), the first 24x7 Hindi language news channel(Zee News) and the first direct-to-home TV service (Dish TV). 

ZEEL, the company which owned and ran Zee TV, was incorporated by the Essel Group in 1992. Despite facing a formidable challenge from Star TV, the doyenne in Indian entertainment industry, Zee TV managed to increase its satellite market share to 65% in just two years. 

This was done in two ways. One, through standalone ventures by ZEEL like the launch of new channels, distribution subsidiaries, cable service expansion. Two, through partnerships with Star India - joint venture to lease transponders from Star's satellite network. 

By the year 2000, ZEEL had acquired its dominance in the entertainment segment. Next on its agenda was expansion into broadcast segments like kids' entertainment (which was done through a joint venture with the US-based Turner Broadcasting) and sports (which was achieved partly by acquiring Ten Sports channel's parent and by launching the unsuccessful pair of Indian Cricket League and Mumbai Football Club). 

Both the sporting leagues lost traction and eventually phased out. The partnership with Turner came to an end in 2018. The diversification of business by Essel proved heavy, among other exercises like investments in infrastructure, cruise lines, finance, education and other sectors. The unprofitable merger of Videocon d2h with Dish TV also gave a severe blow to finances. It so happened that by 2019, ZEEL remained the only profit-making entity in the Essel Group conglomerate. 


The Tipping Point

On January 25th 2019, The Wire published a report claiming that an Essel Group affiliate called Nityank Infrapower was undergoing investigation by the Serious Fraud Investigation Office concerning large deposits made by the company after demonetisation. 

Stocks of Essel Group companies plummeted by as much as 33%. ZEEL lost ₹14,000cr ($1.8bn) in market cap in a single day. The Group's defaults had shaken many financiers, in particular, NBFCs and mutual fund houses which had accepted pledges in the form of Essel Group's shares - shares whose values had descended into the trench since.

Naturally since most of Essel Group's shares were pledged as collateral against loans that were taken by the group companies, the promoters (i.e. Chandra) started facing enormous margin call pressures as the stocks took a hit. 

In an effort to assuage the fear of investors and appeal the lenders not to sell the pledged shares, Subhash Chandra wrote an open letter confirming Essel's increased debt levels and diminished ability to service those debts. 

However, the confirmation aka the "corporate bombshell", all but bungled the ongoing crisis. Three publicly-held companies of Essel - Zee Media, Zee Learn and Dish TV - turned into penny stocks soon thereafter. 

Running out of mitigating alternatives, Subhash Chandra decided to opt for divestments (at beat down prices, ultimately). Most of the group companies were wrapped up or sold under the banners of Essel Infra and Essel Finance. The bleeding cruise shipping business of Chandra was sold to a US-based businessman. 

Essel Propack was sold to Blackstone for $310m. Part of the pledged shares of Essel Group in ZEEL was sold to Invesco Oppenheimer (which owns 11% currently). A number of the 500-odd subsidiaries and shell companies that were being used to operate the Group's businesses were closed by the end of 2018. Many thousand employees were rendered jobless. 


Trickle Down Essel-o-nomics

The mutual fund industry has been hit hard by multiple defaults and crises over the last decade. What began as a series of landmark defaults with the IL&FS, Reliance ADAG and DHFL episodes, was further intensified under the effect of Essel Group's debacle. The total value of funds (especially fixed maturity plans or FMPs) exposed to Essel were close to ₹1,311cr ($176.8m) in April 2019. 

The poorly-managed financial mess created by Essel Group is also reported to have contributed to the collapse of Yes Bank as the promoters kept increasing their collaterals to secure the bank's exposure to the Group - an exposure that was pegged at ₹3,300cr ($445.2m). The possibility of Essel's debt situation ricocheting through the money markets was also quite real. 

Eventually, after continuing negotiations with lenders and by organising a flurry of asset sales over the last two years, the debt overhang has fizzled out in part. With changes at the helm through replacement of Subhash Chandra as the Chairman of ZEEL, his stake in the company is now down to 5% (down from 39.1% before the divestment, out of which nearly 60% were pledged with lenders). 


ZEEL's Turned Around Zeal

Five years ago, the company's market cap was in the range of ₹35,000cr ($4.7bn). Today, it lies somewhere around ₹19,383cr ($2.6bn). With reduced debts and an expanding presence across newer territories like OTT platforms (Zee5), it has partially managed to grow out of its ex-promoter's shadow.

FYI: In June, there were reports about a potential merger of ZEEL with Viacom18, a Mukesh Ambani-owned and managed entity. Those have been dismissed as "speculative".

However, as history stands witness, the financial distress that triggered the company's sale presents yet another picture of the poor state of corporate governance in the country. 91% of debt resolved or not, to those who hailed Subhash Chandra as a "good entrepreneur" who "handled crisis with dignity" instead of fleeing the country like some have, pointing at the wreckage of close to a third of ZEEL's m-cap is indication enough.

Investors' like to pick “restructuring plays” must be salivating, though. 


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