Essel Group’s Standstill Agreement Back in Spotlight

The standstill agreement between Essel Group and its lenders signed earlier this year is back in the spotlight for mainly two reasons. Two fund houses, Kotak Mutual Fund and HDFC Mutual Fund, who were part of the agreement, have recently received show cause notices from Securities and Exchange Board of India (SEBI). They had failed to make repayment worth hundreds of crores rupees to a few of their fixed maturity plan (FMP) investors, and other lenders, who were not part of the pact. The Essel Group has recently recovered funds by selling shares of the Group’s Zee entertainment, pledged with them.

With SEBI raising concerns, both the fund houses – Kotak Mutual Fund and HDFC Mutual Fund – decided to provide ‘liquidity arrangement’ to some of their certain FMP schemes which have exposures in Non Convertible Debentures of Essel Group companies – Edisons Utility Works Pvt Ltd, Konti Infrapower and Multiventures Pvt Ltd, which have defaulted in their debt repayment. In other words, these fund houses have opted for risk on the premises of the agreement.

Meanwhile, Anil Ambani’s Reliance Mutual Fund sold shares of Zee, raising Rs 410 crore that the Essel promoters pledged with the fund house to raise money. Although Reliance was not part of this agreement, irony is that Anil Ambani’s ADAG Group has also made a similar standstill agreement concerning pledged shares.

Reportedly, eight fund houses invested in 13 companies of Essel Group, with total exposure of around Rs 5,700 crore. As per several estimations, the group’s total debt amounts to around Rs 20,000 crore.

In January this year, the stock price of Essel Group companies including listed companies

Zee and Dish TV saw their stock price fall by 26% and 33%, after reports linked Group transactions with a company under probe by Serious Fraud Investigation Office, for alleged massive deposits made just after the demonetisation in 2016. Subsequently, several lenders, including Credit Suisse, sold part of the Essel group promoters’ shares in Zee Entertainment Enterprises worth over Rs 1,000 crore that were pledged with them. At such time, Group promoter Subash Chandra entered into a standstill agreement, with his lenders, mostly mutual funds and non-banking financial companies.

Accordingly, the Group was granted a moratorium till September 30 and the lenders’ consortium agreed not to release pledged shares till the period. Essel Group also claimed in a statement that more than 90% of the lenders who funded them against pledged shares are part of the agreement.

Zee Sale

The standstill agreement essentially became possible as Subash Chandra owns about 39% stake in Zee and the value associated with it, considering Zee’s role in India’s traditional television market, while its digital app Zee5 is growing fast, several corporate giants are showing more interest in its bidding.

It is to be noted that as per analysts’ estimates, if the standstill agreement was not achieved at that time, and Group lenders had released their pledged shares, Subash Chandra’s stake would have fallen to some 20%.

Also read: Unanswered Questions Over Zee-Pledged Shares with Credit Suisse