India is a unique country in terms of media ownership. There are no cross-media ownership laws, except in TV, where broadcasters and cable distribution firms cannot hold more than 20% of a DTH (direct-to-home) company and vice versa. More importantly, India does not have any restrictions on the market share of a media company in a specific segment; only in FM radio there is a stipulation that a private firm cannot own more than 15% of total stations auctioned by the government.

These anomalies have obviously resulted in a distorted media market. Horizontally, Bennett, Coleman & Co Ltd (BCCL) owns a large newspaper chain (The Times of India, Economic Times and Navbharat Times), a thriving TV network (Times Now) and one of the largest digital media empires (www.indiatimes.com). Vertically, the Mumbai-based Zee Group owns TV channels, cable distribution and DTH business. In many cases, business groups have both horizontal and vertical presence.

In fact, there has been little debate on cross-media ownership in India. In February 2009, the telecom regulator, TRAI, recommended that there should be a cap of 20% on ownership of one media company in another, or if the same owner was present across different media, either horizontally (i.e., print, TV, radio and digital) or vertically (i.e., broadcasting and distribution). Now, the regulator has issued a consultation paper, and asked for public suggestions on these critical issues.

Read the TRAI consultation paper here.

However, past experiences indicate that a mere equity cap to prevent cross-media ownership will be a futile exercise. Both Indian and foreign promoters have easily side-stepped government-imposed holding restrictions in several sectors. If indeed TRAI is interested to check ownership patterns in media, it has to think beyond straightforward equity. The regulator has to move away from such a simplistic solution if it is serious about preventing cross-media linkages.

Here are a few examples of how promoters exercise management control over other companies, even as they legally adhere to the respective equity caps in several sectors. One will also witness how they influence board decisions even if they hold minimal or no stakes.

Exceeding the caps indirectly
In the telecom sector, for example, the ceiling for foreign direct investment (FDI) had been set at 49%, which was increased to 74%. However, in both cases, foreign firms enjoyed equity holdings above this limit, directly and indirectly. For instance, take the case of Hutchison Essar, which was later sold to Vodafone. The Hong Kong-based Hutchison, through Hutchison Telecommunications International, registered in Cayman Islands, directly acquired 52% in the Indian company. Another 22% was directly owned by Mauritius-based firms. So, the total foreign stake was 74%.

What was not disclosed to the policy makers was that an additional over 12% stake was indirectly owned by Hutchison. Two Indians, Ashim Ghosh (4.68%) and Analjit Singh (7.58%), claimed that theirs was not FDI. However, it turned out that Hutchison had indirectly bankrolled these purchases by giving security to the financial institutions, which lent Ghosh and Singh the required capital to buy their respective stakes. In effect, the two Indians would do nothing against Hutchison’s wishes. And the Hong Kong-based entity actually enjoyed direct and indirect control over 86.26%. (http://www.delhiscienceforum.net/telecommunications/217-revisiting-fdi-caps-in-telecom-.html)

In some cases, if the FDI cap is 49%, the foreign firm A directly owns this stake in an Indian company B. Another domestic firm C owns the remaining 51% to comply with government policy. But in C, while the local promoter(s) owns 51%, the remaining 49% is controlled by foreign entity A. Thus, A has a much higher 73.99% holding (49% directly, and 49% of the 51% owned by C, or 24.99%, indirectly) in B, even though the FDI cap is 49%. Such cases have also been seen in the telecom sector.

One has seen such instances in the media sector itself, as there are cross-holding restrictions in TV. Although a broadcaster or cable distribution firm cannot hold more than 20% in DTH, and vice versa, there are several business groups that completely control businesses in all the three sub-segments. This is either done by floating new companies to pursue different activities, or holding higher stakes indirectly through layers of corporate ownership – company A has stake in B, but A is owned by C, C by D, and D by E, in which the promoters have a majority holding.

Veto powers through private contracts
Private equity firms have perfected this art of wielding substantial influence over board decisions, even when they have minority stakes (of 20% and below) in unlisted companies. In such cases, the private equity firm signs a private contract with the promoter(s) of the unlisted firm, which gives the former veto powers over any decisions taken by the board that may require substantial investment, entail expansion into new markets, and imply huge expenditure on marketing.

Take the example of DE Shaw, an American private equity firm with a capital of over $20 billion, which invested Rs 117 crore to buy an 18% stake in Amar Ujala Publications, the publishers of a widely-circulated Hindi daily. DE Shaw signed an agreement with the Indian promoters, and one of its clauses was deemed “affirmative vote rights”. It implied that unless the directors appointed by DE Shaw gave an ‘affirmative’ nod to certain decisions, they could not be approved by the Amar Ujala board.

Such decisions, as they were specifically listed in the contract, included issues like mergers and acquisitions, changes in the share capital of the company, minor alterations in business plans that were already approved by the board, payment of dividends to shareholders, and even the launch of new products and any expenditure on promotional activities exceeding Rs 5 crore. Clearly, the board, minus the support of DE Shaw’s directors, could not take key decisions. Similar contracts can be inked in cross-media ownership cases, even as they limit equity exposure to the specified cap.

Loan as a tool for control
Recent instances show that loans have become a common tool to influence the management decisions in media and non-media companies. Thus, in cases of cross-media ownership, a print media company may give huge loans to another TV channel. Such financial exposures can then be used by the former to dictate content and other decisions taken by the channel. Many Indian business groups have used this technique to control media without officially or legally having any stakes in the latter.

Let us consider the example of the deal between Reliance Industries and Network18 Group, which owns channels such as CNN-IBN, CNBC 18 and CNBC Awaaz. In January 2012, Reliance decided to invest Rs 1,700 crore in Raghav Bahl’s TV network. However, it was structured in such a complex manner that Bahl publicly claimed that Reliance had no stakes in his group. Legally, he was right; in fact, even the money was routed through a so-called independent trust.

First, Reliance formed a trust, Independent Media Trust (IMT), to route the Rs 1,700 crore. The money did not go to the listed TV companies or their subsidiaries. Instead, it was personally given to Bahl, or his privately-controlled firm through which he owned his stake(s) in the TV channels. More importantly, the amount was given as a loan, or optionally convertible debentures, which carry an annual interest and can be ‘optionally’ converted into equity at a later date.

Until the conversion of the debentures into equity, the money was legally more like a loan than ownership. Even after the conversion, if it happens in the future, IMT would own the shares, not Reliance Industries – not to forget that IMT would own shares in Bahl’s private firm and not in the listed companies that actually managed the channels. Can’t media magnates use similar techniques to flout cross-media ownership caps, both horizontally and vertically?

The mystery of Form IV
Anyone who owns a print publication knows the importance, or lack of it, of Form IV. Every year, in the month of March, print owners have to publish this form in their respective publications, which lists out the names of individual and corporate shareholders, who own more than 1% equity stake in the entity that owns the print product. However, the law does not ask the shareholders to list how much percentage they own, and whether they are related to other shareholder(s) in the same list.

New regulations related to cross-media ownership need to also look at more transparent disclosures of media ownership in general across platforms. Therefore, there is a need to strengthen the norms in Form IV; in fact, a similar reworked form, which lists shareholders, their holdings and their relationships with each other, for TV networks and digital media. Disclosures are as important as restrictions, limits and caps put on cross-media connections and linkages.

Clearly, an equity cap will not control cross-media ownership. What is required is a series of measures that curtails control exercised by promoters through other means, and also additional and more transparent disclosures, which are available in the public domain.