“We’re disappointed that ZEE has resorted to a reckless public relations campaign”

Invesco Developing Markets Fund (formerly Invesco Oppenheimer Developing Markets Fund) has released an open letter in which it has expressed “disappointment” with ZEE over the public spat relating to an Extraordinary General Meeting (EGM).

The letter by Invesco read, “We are disappointed that the leadership of Zee has resorted to a reckless public relations campaign in response to the overwhelming demand from shareholders for leadership changes at Zee.”

It added, “These actions and rhetoric are aimed at avoiding true accountability for the governance lapses and shareholder value destruction that the current leadership and Board have presided over. We are calling on Zee shareholders to join us in asking why the founding family, which holds under 4% of the company’s shares, should benefit at the expense of the investors who hold the remaining 96%.”

The full letter read:

Dear Fellow Shareholders,

On 11th September 2021, we called upon the Management and Board of Zee to hold an extraordinary general meeting of shareholders. The purpose of this action – unique in the almost 25-year history of our fund – is to enable all shareholders to vote on the proposed removal of the remaining nonindependent director and to add six additional independent directors to the Board.

Zee’s 40% stock price increase after our intentions became public demonstrates the frustration of Zee’s long-suffering investors and the appetite for change.

Through this letter, we are writing to (1) reiterate the urgent need for independent perspectives on Zee’s Board given the Company’s governance failures and prolonged underperformance; (2) reaffirm our resolve to pursue an extraordinary general meeting of shareholders (EGM) to hold the Board and management accountable; and (3) express our concerns over some of the terms of Sony’s proposed alignment with Zee, which unfairly favor the founding family at the expense of other shareholders.

Repeated governance failures and underperformance make the case for change at Zee clear.

1. Our initiative is driven by our belief that the promoter family of Zee, with the support of its current board of directors, continues to evade accountability to its ordinary shareholders, who own 96% of Zee’s equity. This lack of governance oversight by Zee’s current board has permitted Zee’s deep entanglement with the financial distress of its founding family, as identified in SEBI’s letter of 17 June 2021. In this extraordinary regulatory rebuke, SEBI mentioned “large outstanding dues from related parties,” “letters of comfort issued by Directors of the Company without informing the Board,” and alongside other observations, concluded that “actions of the Company are not in the best interest of shareholders.” These matters are in the public domain and you, as shareholders, are as aware of them as we are. We note that on the eve of our EGM requisition, Indian stock market indices had more than doubled in the preceding five years, whereas the stock of Zee had more than halved in the same period. This is a somber report card.

2. As long-term investors, we regularly engage with our portfolio companies. Over the past two years, we initiated several friendly and well-meaning conversations with Zee’s management to support a revitalized situation at the Company. These discussions included suggestions around disclosures, capital allocation, ring-fencing, distancing Zee from the long shadow of other family “group companies” and indeed, also included thoughts around strategic alignments. This prolonged and regular engagement has yielded nothing other than platitudes such as “Zee 4.0.” On the eve of our EGM requisition demand, Zee remained a highly under-valued asset, mired in innuendo and financial volatility. Zee cannot achieve its potential without strengthening its governance framework.

3. Since our EGM requisition, we have witnessed the strange spectacle of Zee’s management, with the support of its current Board, going to great lengths to deny what Indian law deems a statutory right to ordinary shareholders. These actions, which ostensibly are being taken in the “best interests of all shareholders,” as Zee’s communications claim, are in fact indicative of a management team that places self-interest over the interest of the institution it leads, its employees and all other shareholders, as well as a Board whose permissive culture has enabled this behavior and its consequences. This is precisely why we believe Zee’s Board needs to be strengthened with independent directors who take their jobs seriously, who robustly debate vital decisions and who serve as guardians of all shareholder interests.

4. As fiduciaries to our own investors, our North Star has always been to help guide Zee to achieve its potential. The foundations of good governance lie in the demarcation between individuals and institutions, and the reconciliation of self-interest with the paramount goal of furthering shareholder interests. It is our belief that a better governed Zee would have been at a very different pedestal than where it finds itself today. It would most certainly have avoided the reputational damage and the shareholder value erosion of the last few years. To that end, we are certain in our conviction that putting in place healthier governance structures at Zee is in and of itself a value accretive action.

Strategic alignments are welcome but must be fair to all shareholders.