Zee seeks to clean convergence adventure from balance sheet

MUMBAI: It is finally taking a hit in its balance sheet for its adventurous forays during the peak of the dot com and convergence craze.

Subhash Chandra's Zee Telefilms Ltd (ZTL) is planning to write off the value of ZTL's investment of Rs 614.5 million in its wholly owned subsidiaries, Econnect India Ltd (EIL) and Zee Interactive Learning Systems Ltd (ZILS).

Consequent to this, ZTL has proposed to effect a corresponding reduction in its reserves and surplus by Rs 612.2 million to Rs 34483.6 million.

Breakup of ZTL's investments in EIL and ZILS:

EIL    Rs 210 million (2,10,00,000 equity shares of Rs. 10/- each)

ZILS    Rs 404.5 million (19,26,413 equity shares of Rs. 10/- each at a premium of Rs. 200/- per share)

Investments written off by Rs 614.5 million.

Reserves and surplus reduced by Rs 612.2 million.

Zee has already got board approval for the same. Now it is seeking its shareholders nod too, through an extraordinary general meeting scheduled to be held on 8 August 2003.

The move comes in the wake of a major capital reduction in EIL and ZILS, both of which have incurred heavy losses. The company has admitted that the two companies' net worth has been totally eroded in its notice to shareholders.

While EIL has a paid up share capital of Rs 210 million, the net worth of ZILS is pegged at Rs 405.3 million comprising of paid up capital of Rs 20 million and Reserves and Surplus of Rs 385.3 million (on account of its shares being issued at a premium of Rs 200 each to ZTL).

The accumulated losses and outstanding miscellaneous expenses of the two subsidiaries as on 31 December 2002 are as given below:

Subsidiary    Accumulated losses    Miscellaneous expense not written off

EIL    163,957,067    43,397,962

ZILS    413,909,000    13,810,000

Under the proposal, the ZTL board says it wants to extinguish the losses of EIL by reducing its paid up equity share capital from Rs 210 million to Rs 2.6 million.

Similarly, ZILS will also undertake a capital reduction from Rs 20 million consisting of 2 million equity shares to Rs 500,000. The Rs 385.2 million which it got from its issue of shares to ZTL at a premium of Rs 200 per share will be shown as a credit in the balance sheet.

ZTL has said that the losses in Zils are on account of a general slowdown in the information technology business globally and those in EIL to a general slowdown in the dotcom business. This news comes in the aftermath of the dotcom slaughter, which left many Internet ventures in ruins. However, it should be noted here that regionally and globally, IT education, which was the mainstay of ZILS, was not greatly affected by the dotcom bust. Did the ZILS management follow an incorrect business model?

Despite the fact that Econnect has closed down a number of unremunerative channels on the portal and has been focusing on entertainment portals to supplement the business of its parent company ZTL, the company has not started making profits yet.

ZILS also has not been financially strong enough to generate profits even as recent efforts at non-performing operations and assets were discontinued. This despite the fact that ZILS has also closed down a number of loss making centers and has restructured the business to focus on the export of software and content development. 

It is pertinent to note though, that the Zee Group has been plugging its KidZee foray into pre-primary education on its television channels with a plan to roll out 100 centres through the franchising route. The kids education initiative is being charted through ZILS.

The Zee management says the current accounting exercise will not impact its ability to service its liability in respect of the paid up or unpaid share capital.

Market analysts say the markets have already factored in losses incurred by subsidiaries of Zee Telefilms and don't expect any reactions to the resultant capital reduction in ZTL. Following the write-off, the current assets position is expected to be more in line with Zee's present financial position.

(Figures have been approximated to one decimal place)

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