Zee can merge with Sony because its creditors were not its creditors

Or how a pinky promise can get you a multi-million dollar loan

Subhash Chandra after the NCLT judgement

I have a feeling that this isn’t going to be the last time I quote this section. Here’s me from a couple of months back:

If you’re a billionaire interested in multiple lines of business that have nothing to do with each other, the normal way to go about it is to make separate companies for each business. That way, your companies are insulated from each other. If one of your companies takes a lot of loans and things get out of hand, it won’t affect all your other companies that might be more responsible or even debt free.

Or if you use one of your companies to commit fraud, your other companies would remain unaffected. If you’re this billionaire, you want to ensure that your fraud is limited to your designated fraud-indulging company, without having its effects spill over into your other companies.

The billionaire here is Subhash Chandra. He does a bunch of unrelated things: media, construction, packaging, a lot of other stuff. One of his companies is Shirpur Gold Refinery which on paper was a gold refinement business but was really just a loan stealing business.

Another of Subhash Chandra’s companies is Zee Entertainment. Zee is more legit, it owns real businesses like some television channels and a music label. Zee Entertainment wanted to merge with one of its competitors, Sony Pictures, and has been trying to get approvals for nearly two years now.

The idea behind having multiple companies doing different things is that if one of your companies messes up, the others aren’t affected. Shirpur might have been a front for stealing money, but that shouldn’t be affecting Zee merging with Sony just because they have the same owner. But then there was a chance that the Shirpur stuff might affect Zee’s merger? Zee had creditors too and they didn’t want Zee’s merger to go through before they were paid back. Subhash Chandra now had a recorded history of stealing lenders’ money, after all.

Anyway, earlier this month, the NCLT finally decided that the Shirpur stuff doesn’t affect Zee’s merger and Zee’s creditors weren’t actually Zee’s creditors. From its order:

… none of the above petitioners are the direct creditors of Zee nor have any privity of contract with Zee whose scheme of merger is pending for approval before this bench.

and,

… all the above petitioners are having claims against the other entities of Essel Group among which Zee is just one of the entities.

there’s more,

This bench further observes that the above petitioners having failed in ensuring recovery of their alleged dues from other entities of Zee through the above referred legal proceedings are opposing this scheme of Zee as a last resort for their recoveries.

Zee’s apparent creditors had lent money not to Zee but to other companies part of Essel Group, Subhash Chandra’s holding company, and saw this as a “last resort” to get paid back.

Here’s one of the supposed creditors. Axis finance had lent ₹100 crore ($12 million) to Cyquator Media Services in 2018 keeping Zee’s shares as collateral. In 2019 Cyquator missed an interest payment, so Axis Finance sold the Zee shares it held, but by then its share price had fallen and it could only recover 40% of the original amount.

There’s also IMAX Corporation—yup, yup, the Canadian theatre company whose equipment Nolan loves—that says that E-City Entertainment, another Essel company, owes it $25 million. Since 2006! It’s been 17 years!

My favourite creditor though is probably JC Flowers. JC Flowers is an American distressed debt investor, you know, the kind that are going after Byju’s. Those like Axis Finance and IMAX presumably didn’t expect to be in this situation. But JC Flowers chose it!

In 2018, Yes Bank lent ₹377 crore ($45 million) to Essel Infraprojects Ltd (yes, another Essel company). This was before Yes Bank’s founder was jailed for fraud, money laundering, etc., and the bank was still giving out loans to any company that asked. Yes Bank, of course, imploded in 2020 and suddenly had new owners who were stuck with these loans that weren’t likely to be repaid, ever. So Yes Bank sold these loans to JC Flowers for super cheap. It’s JC Flowers’ business to negotiate, fight, whatever, with borrowers to get their money back, and that’s what it’s doing here.

Here’s the NCLT in its order:

… the claim of JC flower being the assignee of Yes Bank who has lent credit facilities to Essel InfraProject Ltd. arises out of a letter of comfort given by Dr. Subhash Chandra.

…

The Hon’ble Bombay High Court in Yes Bank Ltd. Vs. Zee Entertainment Enterprises Ltd. and others held that a letter of comfort is not a guarantee when the letter simply mentions that issuer will take steps to ensure repayment by the borrower.

When Yes Bank was deciding whether to lend to Essel Infraprojects, Subhash Chandra took out a nice piece of paper and wrote, “Hey man can you lend this money please? I’ll help you get it back later, pinky promise,” and Yes Bank believed it and gave the company ₹377 crore apparently without any collateral. More from the NCLT:

this bench is unable to understand as to how Yes Bank lent such a huge amount to EIL basing on a mere letter of comfort of Dr. Chandra which is not a guarantee as per law. We can understand if such act is done by a layman without knowing law but not by a financial institution that deals with public money.

I can probably help the bench understand how Yes Bank lent this huge amount on a mere letter of comfort. Yes Bank’s founder is now in jail! For fraud! That’s how!

I don’t think JC Flowers was expecting much from this particular loan. But hey, no harm in trying, right? Look at IMAX! This entire episode was just a way for everyone to rediscover why billionaires form multiple companies in the first place.¹ If you’re going to steal your lenders’ money—and this is definitely not financial advice—you know you don’t do it with the company that might go for a merger in the future.

1. The funny part is that Zee Entertainment actually did have creditors. IndusInd Bank and IPRS. Zee waited and waited, but then it settled with them before the NCLT’s hearing.