Why Reliance wasn’t the biggest problem at Network18

Raghav Bahl, the founder and former managing director of Network18, which was taken over by Reliance recently in a deal worth Rs 4000 crore. Getty Images
02 June, 2014

I spoke to an editor at one of Network18’s magazines over the phone on Thursday night. He had survived last year’s layoffs, but the cull had claimed good reporters and editors around him, hardening him to the company. Further, senior management had shown misplaced sympathy: the Firstpost editor R Jagannathan published a teacherly column soon after the layoffs, advising readers and presumably sacked employees on “ways to beat the current job gloom.” The events convinced the editor to keep his relationship with his employer strictly transactional. He would only do what was asked of him, nothing more. For a company defined by the hardy entrepreneurial spirit of its founder, Raghav Bahl, this sentiment was significant. “Now I just do my job,” the editor said.

At its best, Network18 was organised and professional, and people wanted to work for it. They offered employees stock options, and their human resource department really was about people. Bahl’s wife, Ritu Kapur, was in the uncommon position of being the company’s promoter, as well as one of its television producers. Of course, people treaded lightly around her, but they couldn’t remember her pulling rank; even as Network18 grew into a mighty media company, the owners hung out with the crew.

Bahl created an organisation with strong leaders, and he left them, by and large, to follow their own instincts. This was partly out of necessity—the company’s expansion spurred Bahl to gradually withdraw from journalism and production to focus on management. During this transition, one of his old employees told me, when Bahl was faced with conflicts between his roles as a journalist and a business owner, he began to lean increasingly towards the latter.  As an entrepreneur in search of growth, Bahl sought funders persistently, people who once worked closely with him said. This worked for a while, with Network18 expanding incredibly fast. But when the slowdown came, the money dried up, and Bahl borrowed money from Reliance on terms that left him at its mercy. As a consequence, even though Bahl continued to lead the company, “you could not write about Reliance,” a Firstpost employee told me this weekend.

The focus, since, has been on corporate ownership of Network18, and rather less on how the company’s finances were managed before Reliance’s loan. Investors were unhappy with the company’s performance (the stock is worth a tenth of what it was seven years ago, even after news of the takeover), and analysts were unimpressed by its opaque numbers even before Reliance entered the picture.

The problems began at some point in the 2000s, when Network18 (then Television Eighteen—a name Bahl struck on at a golf course) became several companies. Many of them were enterprises that functioned as businesses should. But the operations and balance sheets of these companies merged and detached often, allowing the company’s management to value assets in ways that were lawful but nonetheless confounding to outsiders. “If they hadn’t run the place like such cowboys,” the Network18 editor said, “it could have been a good place to work.”

One feature of these exercises was the convoluted issuing of equity: a large restructuring in 2011 left small investors furious, and analysts wondered how the company had allocated debt during an earnings call. Bahl pointed out that the management had done as its valuers had recommended, but that could really mean anything; in one instance last year, I found that a valuer had based its assessment on information provided by the company.

Other vagaries of accounting were apparent in the footnotes of the company’s public documents. For instance, it acknowledged hiding losses over Rs 650 crore in a footnote on page 82 of its 2013 annual report, using a method that, accountants told me, would give them pause. “There are reporting related loopholes that allow you to do this,” an equities analyst told me. But while assessing the company’s finances, he added, “any analyst worth his salt would take [what they did] into account.”

An analyst, Deepak Shenoy, noted that Bahl’s firms loaned large sums of money to a trust that purchased Network18’s shares. “I would question the presence of such a trust,” Shenoy wrote. “If it’s not a stock option scheme, why should it even exist, and why is it funded by the company?” Capital flowed between his public companies and private companies in tax havens, disappearing and appearing in the fine print of these companies’ financial reports. The transactions his companies undertook were so many, and so complicated, that a flowchart I created to simplify the balance sheet of one company—BK Media Mauritius Pvt. Ltd—for just one year, looked like this.

Last year, when I asked Haresh Chawla, the former CEO of Network18, whether the company worked in the interests of its minority shareholders, he replied, “Ask the promoter.”

A year after the traumatic sackings brought on by serious debt, Reliance’s takeover of Network18 will result in Bahl earning a massive sum. He leaves behind an influential journalistic organisation in the hands of a powerful funder, but it is in the throes of a crisis. His employees are disillusioned. (The Firstpost employee described the site’s priority as “speed first, correct later,” an approach he shook his head at.) His shareholders are dissatisfied. One of his former investors described him as a “typical Indian entrepreneur.”

Last December, Govindraj Ethiraj, a former managing editor at CNBC-TV18, said something that stayed with me: “He makes you feel like you’re in it together.” This has been one of Bahl’s great accomplishments: to make people forget, over and over, where they placed their faith, and where they were putting their money. But while people forget, numbers have long memories, and the trail they have left through Network18’s sprawl of companies bears closer examining, ideally by India’s market regulators.

Rahul Bhatia  is a reporter. He has worked for The Caravan, Mint and ESPN Cricinfo