Mumbai: In a notable shift, leading proxy advisory firm Stakeholders Empowerment Services (SES) has revised its earlier recommendation and now supports Zee Entertainment Enterprises Ltd’s (ZEEL) proposed preferential issue of fully convertible warrants to promoter group entities. The development comes after Zee issued a detailed rebuttal to SES’s original stance opposing the move.
The warrants, priced at ₹132 apiece, are set to be issued on a preferential basis to the promoters and would convert into equity shares within 18 months. Zee shareholders are scheduled to vote on the proposal at an extraordinary general meeting (EGM) on July 10, which will be conducted virtually. Voting will take place electronically between July 6 and July 9.
SES’s Initial Objection: Governance and Valuation Concerns
In its original proxy report dated June 26, SES had recommended shareholders vote against the resolution. It had flagged concerns around the pricing methodology of the warrants, stating that the price should have included a fair premium for the optionality inherent in warrant instruments.
According to SES, the use of the SEBI-mandated volume-weighted average price (VWAP) formula – more appropriate for equity shares – failed to capture the time value and volatility premium typical of warrants. The advisory firm argued that a Black-Scholes model or similar option-pricing method would have been a more appropriate valuation basis.
Furthermore, SES raised the possibility that the issue, by offering upside exposure to the promoters at a relatively low premium, could potentially disadvantage minority shareholders.
Zee’s Rebuttal Prompts Reconsideration
Zee responded on June 28 with a formal rebuttal, calling SES’s assessment “theoretical” and out of touch with practical and regulatory realities. The company highlighted that the proposed issue price of ₹132 was actually higher than the SEBI-prescribed minimum of ₹128.58.
More notably, Zee pointed out that on May 1 – the day the proposal was approved by the Board – its stock was trading at ₹106, a level close to its 52-week low of ₹90. By agreeing to the ₹132 issue price and not seeking repricing despite market volatility, the promoters demonstrated long-term commitment and confidence, the company argued.
Zee also underlined the benefit of immediate capital infusion. The warrant structure mandates an upfront payment of 25% (₹33 per warrant), giving the company working capital now, even though conversion will occur over the next 18 months.
SES Changes Its Call in Addendum
Taking these arguments into account, SES issued an addendum to its report on July 4, reversing its earlier position. The advisory firm acknowledged that while its preference for using option-pricing models like Black-Scholes still stands in principle, the specific circumstances around Zee warranted a more pragmatic approach.
SES re-anchored its analysis to the “undisturbed” market price of ₹106 (before the proposal became public) and noted that the ₹132 pricing implies a significant 24% premium. It also pointed to the broader media industry slump, where peer companies like Sun TV and Network18 have all posted substantial negative returns over the past year.
In light of the company’s performance, the sector’s challenges, and the stock’s rally after the announcement, SES concluded that defeating the resolution could harm shareholder value. The recommendation was accordingly changed to “FOR”, with the report now stating “no major governance concern identified.”
Implications for Shareholders and Market
For shareholders, the reversal represents a significant endorsement of Zee’s fundraising plans from an independent corporate governance lens. The capital raised—estimated at over ₹300 crore—could help bolster Zee’s operations after a rocky phase marked by the collapse of its merger with Sony and multiple legal challenges.
However, SES also cautioned investors to keep an eye on potential dilution from full conversion of the warrants and the need for Zee to generate strong returns on the newly raised capital.
A Case Study in Proxy Engagement
The sequence of events illustrates the growing maturity of India’s proxy advisory ecosystem. The SES addendum is seen as a case study in responsive stewardship, showing that proxy advisors can be both principled and pragmatic.
It also reflects the effectiveness of SEBI’s 2020 mandate requiring proxy firms to share reports with companies ahead of publication, allowing a window for issuers to respond and clarify.
For Zee, the revised recommendation comes as a reputational boost at a time when regaining investor confidence is critical. For the broader market, the episode highlights that while compliance with regulation is necessary, investor perception of fairness, timing, and strategic intent plays a vital role in corporate actions involving related parties.
Key points from the revised report:
SES had primarily objected to the proposed Issue on two counts:
1. SES’ antipathy towards Warrant’s Pricing, because SES believes that pricing of Warrants must be different from Equity.
2. The pricing was not done on Black Scholes Model, and the premium was too low. Both issues are more or less connected.
SES’s explanation given in the report, for the change in their advice:
• The Company has explained that if one examines the Warrant Proposal and timeline of the events, it appears that both the concerns are addressed. SES generally takes Undisturbed Price as a benchmark for determining fairness. Therefore, if SES considers the Undisturbed Price of ` 106 (prevailing at the time of announcement), then the Issue Price proposed at ` 132 is essentially at a premium of ` 26 (~24%).
• Therefore, based on the Undisturbed Price, the Warrants are at a premium, more or less. However, if the ICDR Formula Price is taken into consideration in literal terms, the premium drops significantly.
• The question is why should one (or even SES) consider the Undisturbed Price as benchmark? The answer is simple – The Market is dynamic, and one has to put a date as the benchmark. In many cases, after ICDR price is determined, the price can move either way – if it moves down, no one would shed tear for the Allottee, but if it moves up, should one ask for revision? The answer is simple, i.e., one has to stick to a benchmark date.
• Investors have seen the price move up by almost 35% post the news announcement; SES is placed with a question as to whether the current price will sustain in case the Resolution is withdrawn / defeated? As stated above, a straight answer is difficult, but chances are that it will fall.
• SES rejects the argument that promoter has kept its commitment. The reason is obvious, there was no option.
• Finally, keeping in mind that ZEE has had past negative issues, and that the Issue is at a premium to the Undisturbed Price, SES is revising its recommendation.
