by Rahul Bhatia

The Caravan has a cover story on the Network18 group, and changes in the company following the investment from Reliance Industries. We bring to you two particularly interesting excerpts from an otherwise fascinating story on the rise of the Network18 group, which includes information on how it started up, details of recent layoffs in the company, alleged changes in editorial stance, the exit of Haresh Chawla, former group CEO at Network18, among other things. Read the entire story here.
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Network18 Promoter Group & Accounting

“From a finance perspective, it’s a company built to pull wool over shareholders’ eyes,” Deepak Shenoy, who runs the financial website Capital Mind, told me on a phone call from Bangalore. Shenoy posts regular dissections of company finances on Capital Mind, and has kept a running tab on Network18’s numbers, which he says indicate that it’s a company that “keeps hiding stuff under the carpet”.

In 2011, he discovered a befuddling note in the company’s annual report. Network18’s management took a Rs. 255-crore loan, but the money wasn’t for the company. It was for a confusingly named trust called ‘Network18 Group Senior Professional Welfare Trust’, over which Bahl, his wife, and his sister, Vandana Malik, exercised significant influence. The trust was provided this money even though Network18’s management knew it was unlikely that any “economic benefit will flow to the company from the trust,” according to the Network18 company’s 2011 annual report. The report also showed that the trust repaid Rs. 202 crore to Network18 that year, but still owed it nearly Rs. 150 crore. “Why the heck should a company give Rs. 255 crore of its own investments, as security against a loan to a promoter entity?” Shenoy asked. He observed that the trust controlled by the Bahls had used loans to purchase shares directly from the market in September and October 2011. “Effectively, the company’s money was used to help the promoters buy more shares from someone else,” Shenoy wrote. “This is brazen. I don’t know if it’s illegal, but it sure as hell should be.”

Network18’s annual reports and balance sheets do not always make easy reading for its shareholders. Indeed, for a company its size, Network18’s complex financial dealings tend to attract very little scrutiny. “The group is a serious wealth destroyer. It’s not funny how much wealth has been decimated,” a former head of one of the group’s several companies told me. “The strange thing is the lack of action against them from regulators.” I asked him why analysts weren’t more vocal about their concerns, and he replied, “If they do that, they won’t be invited to CNBC again.”

Indian Film Company:

In July 2009, out of the blue, Network18 Holdings, a Cayman Islands subsidiary of Network18, made an offer to buy back IFC’s shares. Shareholders were offered 40 pence a share. “But here’s the real catch,” Gupta said. “The stock was trading at 26 pence, but in its books, the company valued its assets at 113 pence a share. They wanted to buy back at 40p.”

For the two years during which the fund had lost value, Gupta had tried with increasing desperation to sell his stake, but couldn’t find a purchaser. By the time I called him, six years after his initial investment, distance had given him perspective. Gupta admitted he had not researched the market, and had instead been led by a tempting growth story. He hadn’t heard closely the fund manager’s utterances before the IFC listed (“… the perception of greater liquidity has made [the Alternative Investment Market] an attractive destination for a lot of companies”). The fund’s price hadn’t risen because, until the buyback offer, there had been simply no demand for its shares on the AIM. “It’s a sucker’s market,” Gupta said about the exchange. “There’s just no liquidity there.” This was true. Over one 30 trading-day span in 2009, the fund’s shares changed hands on only five days. For the other 25, there were no buyers.

Gupta, Setia, and the others decided to sell. By 7 September 2009, Network18 Holdings had purchased nearly 60 percent of IFC. In total, the Network18 group ended up possessing over 80 percent.

But there were more convolutions to come, and this time Network18’s shareholders would be affected. In October 2010, Gupta and Setia learnt that a Cyprus-based company named Roptonal had offered to purchase Network18’s IFC shares for 115.56 pence each. Roptonal was a subsidiary of Viacom18, in which TV18 held a 50 per cent stake. At the time, Chawla was the group CEO of Network18, as well as the CEO of Viacom18—which put him in charge of both buyer and seller. In effect, Network18’s Bahl and Chawla had undervalued IFC’s shares at first, and then, in doing a deal with Viacom18, which they held sway over, acquired a seemingly high value for themselves. IFC’s former shareholders weren’t entirely surprised. “We knew that one of the options [Bahl had] was to buy the company back at a very low price,” Setia said.

Roptonal’s offer to IFC’s shareholders valued the stock at 15 percent over its original listing price circa 2007. But Network18’s Rs. 80.78 crore investment in the fund had grown less than a percent in more than three years, due to a drastically changed exchange rate. It was a reality far removed from Bahl’s glittering initial promise of 20 percent annual returns to IFC’s investors.

Read the entire story here.

(c) 2013 The Caravan. Crossposted with permission. The Caravan is India’s first and only publication devoted to narrative journalism