How Raghav Bahl’s investors got screwed

IN 2007, Network18 floated the Indian Film Company (IFC) on London’s Alternative Investment Market (AIM), a small exchange with few regulatory hurdles. The IFC was a film fund created to finance the production and distribution of feature films, a new area of interest for a group that had, so far, been content to operate only on television and the internet. “I invested money on the face value of Raghav Bahl, that’s it,” Deepak Gupta, a large investor in the Indian Film Company, told me. “I had heard a lot of stories about him. I had great faith in the guy.”

 

Bahl sold his investors the proposition of a disciplined Indian film industry. He wasn’t alone in this. The middle of the previous decade saw the rise of marketing and finance professionals—“soap sellers”, the politician Amar Singh called them—in Indian films. They populated marketing and distribution departments, ran studios, and set up investment opportunities. Bahl was among the first of these to solicit foreign investment in an organised way, promising change in what was a sexy, if deeply feudal, business.

Gupta says he bought into the message, and the messenger, for reasons he couldn’t fully explain. Bahl wove visions of growth and dazzling returns in a promising industry—a mine waiting to be tapped by professionals. “It will enable high quality international investors to reap the benefits of the structural changes and growth opportunities being thrown up by the Indian film industry,” he proclaimed at the time. The IFC aimed to produce or acquire an improbable 40 to 50 films for release each year. And generating returns for his shareholders was among Bahl’s first priorities, he said. He would bring investors an annual return of 20 percent, “if you manage the capital efficiently.”

 

My intention was not to stay there for very long,” Gupta said on a phone call from Dubai, where he lives. Gupta was a “fund manager kind of guy”, he told me—an early investor who typically sold high quickly, preferably for a five or ten percent gain. He invested £3.6 million in the IFC, he told me, and waited for the fund to list. He told other investors that he hoped to cash in within a couple of months. The fund opened on the morning of 18 June 2007 at 99 pence, and it traded only a percentage higher for the rest of that day. Not unreasonably, Gupta had expected the fund to rise dramatically, in keeping with volcanic IPOs everywhere before the crash of 2008. Instead, the fund soon began a rapid descent: within months, the stock lost almost 20 percent of its value.

As the stock crashed, IFC’s management, led by Bahl, declared it remained optimistic. It had turned a profit with the success of Jab We Met and Welcome in its first ten months, and claimed, in its annual report of 2008, that it would benefit from “the effect of a number of positive dynamics” within India’s various film industries. As the promoter and managing director of Network18, which held 18.18 percent of IFC, a stake worth Rs. 80 crore, Bahl, backed by management, told shareholders in Network18’s own annual report that year that although the value of their investment was down, IFC was profitable and had a “positive net worth”. Therefore, “no provision for diminution in value … is considered necessary in the accounts”.

But Bahl reserved his optimism for his publicly listed companies. In private, he stated otherwise. On the 2008 balance sheet of an unlisted Mauritius company, BK Media Mauritius Private Limited, which held IFC stock, he said he expected the value of the investment in IFC to fall. “Considering the current economic scenario and a conservative accounting policy,” he wrote, “provision for impairment has been made against these investments as per management’s estimates…”

IFC’s independent shareholders grew restless with the growing chasm between the fund’s performance and the management’s continuing assertion that it was faring well. By 2008, they began to demand more detailed numbers, and asked questions about how the company’s chief asset, its movie portfolio, was valued.

“They refused to give us numbers,” an investor named Atul Setia said to me. “As investors we saw hit film after hit film, and nine months later we would expect the numbers to be pretty good, but they never were very good. It was a frustration investors had, and they couldn’t understand what was going on in the company.” Finally, in late 2008, Setia travelled to Mumbai with Deepak Gupta to persuade Bahl and the board to bring about change. Their meeting with the board was a disaster; Setia and Gupta left with the distinct feeling that no one was interested in their proposition. Soon after, in a highly publicised manoeuvre in January 2009, Gupta and others came together to form the Indian Film Company Requisition Group—a pressure tactic to acquire representation on the IFC’s five-member board of directors, which included Bahl, Shyam Benegal, and Lord Meghnad Desai. By now, IFC stock was trading at around 25 pence, down by 75 percent from its listed price. Reports depicted the episode as a campaign to have Bahl evicted from the company, but Gupta denied this emphatically to me. “We did not want a hostile takeover,” he said. “Who among us had the experience to run this business? Were we ready to kill our own money?”

As a result of the agitation, Gupta and Setia both won positions on the board, giving them the authority to look into the heart of the company’s financials. Gupta discovered that the fund’s CEO, Sandeep Bhargava, was not only responsible for buying movies, but also for valuing them—disparate responsibilities that together constituted a conflict of interest, Gupta believed. He urged management to get an independent evaluator, given that “60 to 70 percent” of the company’s valuation was based on its stockpile of movies.

In July 2009, out of the blue, Network18 Holdings, a Cayman Islands subsidiary of Network18, made an offer to buy back IFC’s shares. Shareholders were offered 40 pence a share. “But here’s the real catch,” Gupta said. “The stock was trading at 26 pence, but in its books, the company valued its assets at 113 pence a share. They wanted to buy back at 40p.”

For the two years during which the fund had lost value, Gupta had tried with increasing desperation to sell his stake, but couldn’t find a purchaser. By the time I called him, six years after his initial investment, distance had given him perspective. Gupta admitted he had not researched the market, and had instead been led by a tempting growth story. He hadn’t heard closely the fund manager’s utterances before the IFC listed (“… the perception of greater liquidity has made [the Alternative Investment Market] an attractive destination for a lot of companies”). The fund’s price hadn’t risen because, until the buyback offer, there had been simply no demand for its shares on the AIM. “It’s a sucker’s market,” Gupta said about the exchange. “There’s just no liquidity there.” This was true. Over one 30 trading-day span in 2009, the fund’s shares changed hands on only five days. For the other 25, there were no buyers.

Gupta, Setia, and the others decided to sell. By 7 September 2009, Network18 Holdings had purchased nearly 60 percent of IFC. In total, the Network18 group ended up possessing over 80 percent.

But there were more convolutions to come, and this time Network18’s shareholders would be affected. In October 2010, Gupta and Setia learnt that a Cyprus-based company named Roptonal had offered to purchase Network18’s IFC shares for 115.56 pence each. Roptonal was a subsidiary of Viacom18, in which TV18 held a 50 per cent stake. At the time, Chawla was the group CEO of Network18, as well as the CEO of Viacom18—which put him in charge of both buyer and seller. In effect, Network18’s Bahl and Chawla had undervalued IFC’s shares at first, and then, in doing a deal with Viacom18, which they held sway over, acquired a seemingly high value for themselves.-from Caravan