The 350-crore-rupee mystery: The financial transactions that led to SEBI's order asking VCPL to make an open offer for NDTV

Questions over NDTV’s ownership, and investigations into the Roys’ financial dealings, pose a serious threat to the network’s future. raj k raj / hindustan times
28 June, 2018

On 26 June, the Securities Exchange Board of India (SEBI) ordered Vishvapradhan Commercial Pvt Ltd (VCPL) to make a public offer for acquiring shares of NDTV. In 2009, VCPL had indirectly assumed a controlling stake in the media company, by giving a loan of Rs 350 crore to its promoters Radhika Roy and Prannoy Roy Holdings Pvt Limited, effectively acquiring 52 percent of NDTV. SEBI stated that this was done in violation of their takeover norms. SEBI noted that the takeover exercise “has been conveniently couched as a loan agreement.” It further directed VCPL to pay 10 percent interest on top of a takeover fee to the former shareholders of the company.

In his December 2015 cover story, Krishn Kaushik detailed the financial troubles of the NDTV network. The following extract from the story covers in detail the cycle of loans and the murky finances that have haunted the network since 2008. The trail of bad loans started with an initial loan to from IndiaBulls Finance, and led to the VCPL’s loan of 350 crore. From there, the trail only got murkier, raising serious questions about Radhika and Prannoy Roy’s hold over their channel. “VCPL’s transactions are key to the question of who owns and controls NDTV,” Kaushik wrote.

Throughout NDTV’s existence, the Roys have exerted complete control over the network’s editorial vision and its business strategy. But a chain of transactions, beginning in 2007, which is mentioned in the recent Delhi High Court affidavits, suggest that their influence may have waned considerably.

That year, Radhika and Prannoy Roy decided to buy back a 7.73-percent stake held by another shareholding entity, GA Global Investments. Promoters may have different reasons for buying back shares, such as if they anticipate that their price will rise, or want to further consolidate their holding in the company. Often, as it was in this case, the deal is struck at a price higher than the market rate—NDTV’s stock was hovering at around Rs 400 at the time, but the Roys bought shares back at Rs 439.

As per Indian stock market regulations, this triggered an “open offer,” which allows other shareholders to sell stake—up to a prescribed limit—to the promoters at the same price. These regulations are meant to ensure that when a large shareholder strengthens her ownership, minority shareholders are given the option to exit if they feel their investment will be affected.

(Even while the open offer was on, the Roys entered into another deal, in March 2008, which possibly violated capital markets regulations. They signed an agreement with Goldman Sachs to sell the investment bank up to 14.99 percent of the NDTV stake they held. The deal also gave Goldman Sachs special rights in the company, including the right to nominate a director on the board. This deal was not declared to any of the authorities or shareholders, and the transactions, which eventually resulted in Goldman Sachs gaining 14.6 percent of NDTV’s stock, were presented as open-market sales. Oddly, one director that Goldman Sachs nominated said in a letter—responding to a letter from the stockbroker Sanjay Dutt—that he was a “nominee of certain funds managed by Goldman Sachs which were invested in the Company.” Whose money had come through the bank remains unclear.)

As they prepared to buy back stock, the Roys found themselves short of money. To plug the shortfall, in July 2008, the Roys borrowed Rs 501 crore from India Bulls Financial Services. The loan marked the beginning of a chain of borrowing that haunts the Roys’ account books to this day.

The chief cause for the troubles that ensued was bad timing. As the Roys were carrying out the open offer, the housing loan crisis hit the United States and triggered collapses across global markets. NDTV’s stock took a beating, like those of many other companies, globally and in India. From Rs 400 at the end of July 2008, the share price crashed to less than Rs 100 by the end of October. The Roys watched the value of the shares they had just bought nosedive. It was like the floor had collapsed even as they tried to build a house.

To repay the India Bulls loan, the Roys took a loan from ICICI, of Rs 375 crore, at an annual interest rate of 19 percent. To obtain this loan they offered as collateral their entire personal shareholding, as well as that of RRPR, a total of 61.45 percent of NDTV’s stock.

A December 2010 report in the newspaper Sunday Guardian, co-authored by the journalist Prayaag Akbar—the son of MJ Akbar, who owned the weekly along with the senior advocate and BJP member Ram Jethmalani—described the workings of this ICICI loan as “financial chicanery,” and said the company had “indulged in financial misdemeanours and malpractices in connivances with ICICI.” The article claimed that the value of each pledged share was Rs 439, when in fact the price at the time the loan was granted was Rs 99. It alleged that “the worth of the collateral was far less than the amount given” as loan.

In January 2011, NDTV sued MJ Akbar and others for defamation in the Delhi High Court, and demanded Rs 25 crore in damages. The Roys claimed that their collateral was more than the value of the ICICI loan. In December 2011, the court restrained the newspaper from “republishing or recirculating” the article online or in print—it remains unavailable on the paper’s website. The case is currently pending in court. But though NDTV insisted that the story was defamatory, the transaction had come to the notice of authorities. In April 2013, Sanjay Dutt wrote a letter about it to the Reserve Bank of India; the central bank responded the next month saying that the loan “is already receiving our attention.”

The ICICI loan was only one link in the larger chain of borrowing that the Roys were trapped in, which had begun with the India Bulls loan. To repay ICICI, on 21 July 2009, the Roys took another loan, of Rs 350 crore, from an entity named Vishvapradhan Commercial Private Limited, or VCPL. The source of this loan was Mukesh Ambani’s Reliance Industries, which routed the money to VCPL through a subsidiary. Prannoy and Radhika signed the agreement for RRPR. On behalf of VCPL, the agreement was signed by KR Raja—an employee of Reliance Industries.

The terms of this loan were quite extraordinary. First, the Roys were required to divest a significant chunk of their personal stock in NDTV and transfer it to RRPR, taking its total shareholding from 15 percent to 26 percent of the company. Then, control of RRPR was effectively handed over to VCPL. (Even this transaction, which preceded the loan, raises serious questions of propriety. Radhika and Prannoy sold their shares to RRPR at Rs 4 per share when the market price was more than Rs 130. Had they sold at the market price, they would have made significant “capital gains”—or profit from the sale of an asset. This would, in turn, have attracted taxes. It is possible that selling the shares at a lower price saved the Roys crores in taxes. The Roys have defended their decision in the past, claiming that it was a transfer between promoters, and that they were entitled to sell their stock at any price they chose.)

After the Roys’ shares were handed over to RRPR, NDTV received Rs 350 crore from VCPL, which they used to repay the ICICI loan. On 9 March 2010, the Roys together transferred an additional 3.18-percent stake of NDTV, which they held personally, to RRPR, at Rs 4 per share, taking RRPR’s total shareholding in the company to 29.18 percent. VCPL then paid an additional Rs 53.85 crore to RRPR, taking the total amount it loaned to NDTV up to Rs 403.85 crore.

The agreement gave VCPL the right to convert the loan into 99.99 percent of RRPR’s equity—effectively, complete ownership—not just during the period of the loan but even after—“at any time during the tenure of the Loan or thereafter without requiring any further act or deed on the part of the Lender.” Puzzlingly, this meant that regardless of repayment, VCPL could officially take over RRPR at any time it wanted. For all practical purposes, this was a sale of 29.18 percent of NDTV to VCPL—a greater share than the individual holdings of Radhika and Prannoy Roy.

Under the agreement, RRPR was to have three directors, one of whom was to be appointed by VCPL. NDTV could not sell or raise further equity, file for bankruptcy, or do anything that would affect RRPR’s shareholding, without VCPL’s consent. (Additionally, the Roys were also barred from selling or transferring their own shares in the company.) These conditions ensured the Roys no longer had any control over RRPR, which owned nearly one-third of NDTV’s stock; effectively their control over NDTV itself was seriously weakened. (The loan agreement did contain one token term of relief: that VCPL could not “interfere with the editorial policies of NDTV.” However, in a situation where so much control over the company was handed over, such a safeguard could be almost meaningless.)

From VCPL onwards, the loan trail gets murkier. The company’s documents showed it had no assets, businesses or transactions on its books before the NDTV loan. To lend to RRPR, in the 2010 financial year, VCPL itself borrowed Rs 403.85 crore from Shinano Retail, a wholly-owned subsidiary of Reliance. VCPL forwarded this money to RRPR as an unsecured, interest-free loan. (The links between VCPL and Shinano form an Escherian stairwell that lead to Reliance no matter where you begin. VCPL’s directors, Ashwin Khasgiwala and Kalpana Srinivasan, were both employees of Reliance. VCPL shared the same address as the Reliance subsidiary Shinano, which in turn owned part of VCPL. And VCPL’s second owner was also a Reliance subsidiary.)

In its affidavit to the Delhi High Court, the income tax department was categorical in what it thought of VCPL. Quoting its own earlier report, from June 2011, the affidavit stated that VCPL “has no business activity and is not a genuine concern.” It added that it had forwarded details of its investigations into this “allegedly benami” transaction, to the relevant assessing authorities.

In a related matter, also in the Delhi High Court, the income tax department clearly traced the source of the money that VCPL gave RRPR: “M/s RRPR Holdings Pvt Ltd. had taken a loan of Rs 403 crores approx. from M/s Vishvapradhan Commercial Pvt Ltd., which had taken loan from M/s Shinano Retail Pvt. Ltd. and M/s Shinano Retail Pvt Ltd. had taken loans from Reliance group of companies.”

The fact that Reliance stepped in and helped out a floundering NDTV is borne out by a call recorded at the time, between the senior journalist MK Venu and Reliance’s lobbyist Niira Radia. The recording, made by the income tax department, was leaked the next year as part of the tranche that is now collectively called the “Radia tapes.” On 9 July 2009, Radia told Venu that she and Manoj Modi, a close associate of MukeshAmbani, were visiting Delhi to meet Prannoy. “We need to support Prannoy, you know,” she said. “We feel it needs to be supported.”

VCPL’s transactions are key to the question of who owns and controls NDTV. Its loan to RRPR meant that Reliance effectively controlled 29.18 percent of NDTV’s shares, while the Roys’ combined share fell to around 32 percent. This much of the trail has been reported before, though not by mainstream media organisations. The media-focused website Newslaundry, in January 2015, used company filings with the ministry of corporate affairs to track the flow of money, and show that Reliance had acquired a substantial stake in NDTV.

But when Newslaundry asked Reliance about this loan, a spokesperson responded: “RIL does not have any direct or indirect interest in NDTV.” This seemed an unlikely assertion given the facts that were known.

However, the company appears to have told Newslaundry the truth. Investigations by the income tax department, and information available with the ministry of corporate affairs, show that the trail took a mysterious turn at this point, which severed the link between Reliance and NDTV. During the 2012 financial year, Shinano Retail—to whom RRPR owed money through VCPL—declared in its annual report that VCPL had repaid its loan of Rs 403.85 crore. But the money did not come from NDTV—RRPR’s records for the same year showed that it still owed VCPL Rs 403.85 crore (the company still owes this money). Thus, the money Reliance lent RRPR had been paid back—but not by RRPR.

How did this happen? The documents throw some light on the question, but still leave a lot unexplained. They show that during the 2012 financial year, VCPL received Rs 50 crore from Eminent Networks, a company owned by Mahendra Nahata, an industrialist, who is also on the board of one Reliance company. The transaction gave Eminent rights over VCPL’s loan to RRPR, worth Rs 403.85 crore. (Earlier this year, however, RRPR sent a reply to some queries raised by the income tax department and said that the “company had no relations with Eminent Networks Pvt. Ltd.”)

But this does not make intuitive sense. The value of a Rs 403.85 crore loan is, of course, Rs 403.85 crore. It does not stand to reason that VCPL would sell that loan to Eminent for a mere Rs 50 crore. Further, Shinano had declared that it received the entire Rs 403.85 crore from VCPL. But VCPL only had Rs 50 crore on its books that year, paid to it by Eminent. Even if it paid that entire amount to Shinano, that still left more than Rs 350 crore unaccounted for that Shinano claimed it had received from the company.

This discrepancy suggests that either Eminent, through VCPL, paid more than the Rs 50 crore it claimed to have paid, or that Shinano received less than the Rs 403.85 crore it claimed to have received. Alternatively, a third party, which is off the books, and still unknown, might have made up the shortfall, and paid Shinano Rs 353.85 crore, helping snip the link between Reliance and NDTV. (The same year, VCPL’s ownership also changed hands, from Reliance companies to entities related to Mahendra Nahata.) If a mystery party is involved, it is perhaps fair to assume that their payment of such a large sum of money would come with rights over the agreement VCPL has with RRPR and the Roys—namely, rights over all of RRPR’s shares, which Mukesh Ambani once held indirectly, and riders on the Roys’ personal stake.

NDTV should have declared the VCPL loan transactions to SEBI, as is mandatory for a publicly traded company when its promoter entity changes (RRPR was declared as a promoter entity, and the deal effectively changed its ownership). In response to a complaint from Sanjay Dutt, the regulator claimed in April 2015 that it was “unable to get its hands” on the loan agreement between VCPL and RRPR. This was odd: SEBI, as the market regulator, should have been able to access the documents of NDTV, a publicly traded company. Further, by this time, the document was already available with another government agency—the income tax department.

NDTV did not inform the ministry of information and broadcasting about these transactions either, although it is mandatory for news companies to declare loans and other agreements to the ministry. (That the deal was effectively a sale further complicates this problem.) What entity currently has indirect control over RRPR is for the moment unknown. It is clear, however, that the Roys’ move to strengthen their hold over NDTV by buying back shares has left them facing the prospect of losing significant control over their company.