Sony-Zee merger will address corporate governance issues, say advisory firms

Corporate governance bodies, Institutional Investor Advisory Services (IiAS) and InGovern have backed the Zee Entertainment (ZEEL) and Sony Pictures Network India (SPNI) merger saying that with Sony holding the majority representation on the merged company’s board, it will enforce discipline on the corporate governance side. According to IiAS and InGovern, this will also be a huge positive for minority shareholders in Zee such as Invesco.

Sony Pictures to merge with Zee Entertainment

Corporate governance bodies had earlier raised concerns around mismanagement by Zee’s board of directors. Earlier this month they advised voting against the re-appointment of directors, Ashok Kurien and Manish Chokhani, on the grounds of misgovernance. Issued raised by IiAS and InGovern included significant erosion of shareholder wealth, accountability of losses in account of party-related transactions and especially the board favouring the promoter family, although promoter equity had declined drastically.

This included a lack of professionalisation of the board as well a 46 per cent raise in the promoter, Subhash Chandra’s son Punit Goenka’s, salary. Goenka is the CEO and the MD for ZEEL. The InGovern report also noted that it was strange that the board allowed such induction of a Promoter Executive Director into the Audit Committee. Further it noted that Zee is one of the few companies where promoters retain significant control despite having extremely limited shareholding, which is at 3.99 per cent.

Maintaining firm hold

With Sony set to enjoy the majority shareholding at 52.93 per cent, experts believe that it is going to maintain a firm hold upon the purse strings in this combined entity.

Sony deal lifts Zee Entertainment 31%

Shriram Subramanian, MD of InGovern Research Services noted, “While the motivation for Zee is the pressure brought on by Invesco, from Sony’s perspective, it is a huge commitment to merge with a listed company and create the largest media company in the country. Sony will also be infusing $1.575 billion in this deal; therefore, Sony will likely seek representation on the board and will ensure greater governance of the company.”

While calling for ousting MD and CEO Punit Goenka from the board, Invesco did not suggest any alternatives, which is why Subramanian believes that this merger is likely to be a positive for minority shareholders like Invesco. “From a minority shareholders perspective, this is a huge positive, as Invesco sought removal of Punit Goenka without an alternative plan, and this merger will provide the suitable alternative with Sony stepping in. Overall a minority shareholder will be a shareholder in the leading media company with better corporate governance,” said Subramanian.

Better quality of supervision

Hetal Dalal, President of IiAS, further added “The deal between Zee and Sony, if it happens, is good from both an industry perspective, and for shareholders. There are, however, several steps along the way where the deal contours need to be better fleshed out before investors begin to believe that their concerns are quelled”. Dalal, however, believes that if the deal goes through, they expect that Sony is likely to be holding the purse strings by bringing in a new CFO for the merged entity and Punit Goenka will be reporting to a different board. “A majority of whom will be nominated by Sony. To this extent, we expect the quality of supervision on the management to be greater and should reduce the risk of related party transactions and governance failures” Dalal said.

The promoters (Essel Group) will still be enjoying around a four per cent stake in the merged entity, where 2 per cent shares are being transferred to the promoter family to prevent them from participating in conflicting businesses. It, however, remains open for Chandra-owned Essel Group to increase its stake to 20 per cent over time, according to the merger agreement.

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