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Network18 Trust Gets Big Loan From Company, Won’t Buy More Shares

Network18 has a press release in response to SEBI’s regulation on Employee Trust activitystating that the Network18 Senior Professional Welfare Trust (which is a promoter entity) owns nearly 1.6 crores of Network 18, and will not sell these shares but will no longer buy more shares from the market. (Actual holding: 15,922,729 shares, or 1.52% of capital – severely diluted due to the recent massive buy in by Reliance and the subsequent rights issue)

Remember that SEBI has banned ESOP trusts from buying shares from the stock markets, on Jan 17, 2013.

Remember also that Network 18 has in the past pledged its owned shares in TV18 and IBN18 , so that the trust could borrow money. (To buy Network 18 shares!)

Won’t Buy More Shares

While this is not a stock option scheme based trust, Network18 has decided to listen and not have the trust buy any more shares.

8. How the Trust/agency is proposing to deal with the existing holding (whether to be transferred to the employees, or to be sold in the market for transferring the benefits to the employees, if so, details regarding proposed date of such transfer or sale shall be given) Such date shall not be later than June 30, 2013:

The Network18 Trust was created with the objective of generating Wealth and employee
benefits for its large pool of employees over the medium to long-term horizon. In this
respect, the NetworkI8 Trust was duly tabled before the Board of the Issuer and
subsequently, specific approval from the shareholders of the Issuer was also obtained.

It was intended that the Network 18 Trust would monetize its holdings and distribute the net profits to its employees based on employee needs and opportunities that arise from time to time. The benefits that accrue in the form of stock appreciation will be shared with employees who stay and grow with the Issuer over several years. Accordingly, at no point in time was it envisaged that the Networkl8 Trust would grant stock options to employees.

As set out above, since the Network18 Trust is not formed for granting stock options to
employees, the Networkl8 Trust is not one, which deals in securities of the Issuer as
contemplated in the Circular. Since the Networkl8 Trust does not contemplate granting
options to the employees, the question of aligning the Scheme or the Networkl8 Trust to
the ESOP Guidelines does not arise and the shares held by the Networkl8 Trust cannot be transferred to the employees. These shares will continue to be held by the Network18 Trust for the benefit of the employees.

Meanwhile, in keeping with the overall spirit of the Circular, We hereby undertake that we
will suitably amend the Network18 Trust deed in order to prohibit the Networkl8 Trust
from purchasing the Issuer’s shares through secondary market
. Additionally, we would like to bring to your notice that the Network18 Trust has not engaged in any secondary market purchases concerning the lssuer’s shares since October 25, 2011.

The trust won’t buy any more, which is a good thing.

I would still question the presence of such a trust – if it’s not a stock option scheme, why should it even exist, and why is it funded by the company?

Network18 Loans More Than 500 crores to Trust in 2011-12

However, it seems that last year Network18 directly provided a loan to the Senior Professional Welfare trust . In the annual report 2012, Network18 has reported that it has not provided any shares as collateral to the trust – meaning that the earlier security (of IBN18 and TV18 shares) was withdrawn.

(Page 153)

Security provided in favour of the lender in connection with the loan to Network 18 Group Senior Professional Welfare Trust – Rs. Nil (Previous year Rs. 2,552,000,000).

Did the trust return the money? Apparently not, since Network18 has directly given this trust a loan now, of over Rs. 500 crores.

image

With more than Rs. 570 crores due from one entity – the Senior Welfare Professional Trust, which is a promoter linked entity – one has to wonder what happens if this trust can’t return the money.

The Trust Seems To Have Lost Money On Some Shares, At Least

However on the concept of the fund not selling shares, that much should be obvious since the trust seems to have bought shares at prices that are substantially higher than current market value. The last few purchases of shares – as revealed to stock exchanges – seem to have a loss of over Rs. 8.5 crore (85 million) at current market values. (Of course, shares purchased earlier might have a much lower price, which hasn’t been revealed)

image

Figure: Shares of Network18 bought by Network18 Senior Professional Welfare Trust

Of course, this cannot be conclusive that the trust has lost money but it’s quite likely, that unless the stock recovers from its lows, that the trust will find it difficult to service the loan or the interest cost. Look at the stock chart, from Network18’s owned site moneycontrol.com:

image

In context, the 574 crores represents about 1/4th of 2012 consolidate revenues (around 2,000 cr.). It would be wise for shareholders to question why this trust continues to be funded by the company, and if they might provision for any potential default.

Disclosure: No positions.

  • Ram says:

    Isn’t this now a Reliance company? In the larger scheme of things isn’t 500 Crores, therefore an insignificant amount?
    Will you take a bet that in due course of time that the trust will default and the entire amount will be written off…?
    Given the inscrutable network of innumerable entities that ensure smooth flow of money to taps in the backyard of right people, the company has appropriately ‘network’ in its name…