The Feud Between Dish TV and Yes Bank, Explained

The refusal of the board towards shareholder requests to conduct a shareholders’ meeting seems to have become second nature of the Zee group of companies this year.

Let’s rehash our memories. In September, Zee Entertainment created a market furor after its biggest shareholder, Invesco, demanded an Extraordinary General Meeting (EGM) to oust the Goenka family (aka Punit Goenka) from management.

And now, Dish TV, yet another group company, has decided to play hardball with its own shareholders, particularly, Yes Bank. The bank had previously demanded an EGM for the “reconstitution” of the Dish TV board (Translation: ouster of Jawahal Goel, Punit Goenka’s uncle).

The meeting, scheduled to be held on November 30th has been postponed for now. The case has also turned quite an interesting corner with the UP Police’s involvement.

Let’s see how.

Some Context

Currently, Yes Bank owns close to 25% stake in Dish TV. In May 2020, the bank invoked the pledged shares of Dish TV (the shares put up as collateral by the company in exchange for a loan) and thus emerged as its largest shareholder.

FYI, the loan in question amounts to ₹5,270cr ($704m) which Yes Bank had extended to the promoters of Essel Group in 2016. The same Essel Group (which controlled the Zee group of companies) previously headed by Subhash Chandra Goenka (elder brother of Jawahal Goel and father of Punit Goenka and the de facto patriarch of the Goenka family) that had been reeling under debt for years.

With the promoter entities of Dish TV continuing to default on loans, other lenders also joined Yes Bank in invoking the share pledges of Dish TV.

Yes Bank’s contention was primarily this. Dish TV’s present board is acting on the behest of promoters (read: Goenkas) who hold only 6% in the company whereas lenders who own close to 45% have limited management rights.

Be that as it may, the board of directors of Dish TV came up with a peculiar strategy to fend off the corporate activism of its shareholders.

The Rights Issue

On May 28th 2021, shortly following Yes Bank’s invocation of pledge, the Dish TV board approved a ₹1,000cr ($133.5m) rights issue.

Rights issue is generally a way for cash-strapped companies to raise more capital. The company offers its existing shareholders the “right” but not the “obligation” to purchase more shares at a discount to the market price on a future date.

If the shareholders choose to exercise this right, they increase their exposure to the stock. Also, because more shares are issued, the stock price is diluted and will eventually go down.

This means, if the rights issue of Dish TV becomes effective then shareholders like Yes Bank will see their own stakes being diluted. Not an incentive, surely.

Hence, the demand for reconstitution of the board.

Corporate Battle Ensues

Yes Bank approached the National Company Law Tribunal, the Allahabad High Court and the Supreme Court in quick succession. These are the ongoing contentions of both parties:

Yes Bank

• The rights issue was a decision taken in haste and with dubious intentions to keep the shareholders at bay. Hence, it must be repealed.
• The Managing Director Jawahar Goel and four other directors must be removed from the board.

Dish TV

• The Banking Regulation Act, 1949 puts a certain embargo on Yes Bank to operate the DTH (direct-to-home) business.
• Yes Bank does not meet the statutory requirement of 10% shareholding required to call an EGM (as per Section 102 of the Companies Act).
• Yes Bank’s shareholding is currently “under dispute” and is undergoing a criminal investigation.

This is where the story gets intense.

In September 2020, Subhash Chandra Goenka filed a complaint at a police station in Uttar Pradesh alleging that Rana Kapoor, the former MD and CEO of Yes Bank, had threatened to call back a loan given to Essel Group unless the company agreed to a merger between Dish TV and Videocon D2H.

In response to that, last week, the UP Police Department issued a notice freezing Yes Bank’s voting rights in Dish TV, just ahead of the scheduled EGM.

The notice was considered as a major setback not only to Yes Bank but to all private sector lenders who believe and accept equity pledges to be one of the most liquid collaterals. The intervention of a crime branch in a civil case was also thought to be excessive.

Apex Court to the Rescue

After its petition against Dish TV was delayed at the NCLT Mumbai and dismissed at the High Court respectively, the Supreme Court’s ruling brought some much-needed relief to Yes Bank.

The Court scrapped the notice issued by the UP Police and reprimanded it for overreaching in civil matters, particularly when the case was still pending before the courts. Freezing of shares and consequently the voting rights of an entity is something that even “company law tribunals had not done in the past. This will only lead to lawlessness in the country”, the Court said.

Yes Bank may have had a patchy history of lending activities, to say the least. But freezing the bank’s voting rights without due process is a judicial excess. When criminal law procedures are used to achieve civil law remedies, the outcomes are generally dangerous. It’s essentially a “short-circuiting” of justice which is sure to be a long fuse.

Legal and Financial Future

Over 94% of Dish TV’s shareholding is public, including lenders like Yes Bank, HDFC, IndusInd Bank, Clix Capital etc. As long as a shareholder has 10% stake in the company, they can requisition for an EGM or conduct one themselves if it isn’t called for within 45 days by the board.

So Dish TV’s argument that Yes Bank’s shares obtained through invocation of a pledge are invalid is immaterial so long as it holds >10% stake.

However, the quantum of Yes Bank’s stake could be disputed in light of the rights issue. The bank must prove that the rights issue was orchestrated by the board solely to dilute the bank’s stake and disable it from calling for an EGM.

But this is easier said than done. A rights issue could happen for multifarious reasons. It could, in fact, be critical for the survival of a company like Dish TV, a DTH company whose business relies disproportionately on outdated technology.

The company needs funds to upgrade that technology and replace old set-top boxes with new-age smart devices which is crucial to preserve its depleting subscriber base in an OTT age. In FY21, Dish TV reported a net loss of ₹677.75cr ($90.5m). Its subscriber base is 16 million large but it’s also experiencing a massive churn. Perhaps this is why the company is also exploring merger deals in the telecom industry, most recently with Bharti Airtel.

Having said that, Dish TV’s board sidestepping its debt-servicing responsibilities and using undue influence through criminal law enforcement for debt evasion sends the wrong message as far as upholding corporate debt obligations are concerned. The dispute, whatever it is, merits judicial scrutiny and justice of the courts. Any other manner of resolution could prove detrimental to preserving corporate integrity and governance.

(Originally published December 3rd 2021 in transfin.in)