Private treaties, a public (& investor) menace?

The Pyramid Saimira scam, where one of the former promoters of the company forged a Securities and Exchange Board of India letter (Sebi) and got it distributed to the media with the intention of making a quick buck, also opens another can of worms:  the so-called “private treaty” business where media houses link up with corporates for mutual benefit.

This, experts said, is far more dangerous to investors and causes great losses in their wealth in the form it is currently practised..

Pyramid Saimira has a private treaty agreement with Bennett Coleman Company Ltd, the publishers of the Times of India and the Economic Times.

Says the top official of a bourse, who did not wish to be named: “I think this Pyramid Saimira scam has very serious implications for the market. If the media is not going to govern itself and does not maintain strict Chinese walls, they should be made to. If you ask Bennett, they will say we have disclosures on our site. But how many lay persons would know that? If you are going to write about a company in which you have vested interests, you have to make a crystal clear disclosure at the end of the article. There should be a clear demarcation.”

Echoes U K Sinha, chairman, UTI Asset Management Company: “We are not very happy about these media deals. This is not a healthy development. This should not happen. The Securities and Exchange Board of India has all the powers. It should act.”

But Times Private Treaties CEO S Sivakumar denies any editorial involvement in the treaties business.

He told DNA over phone that it doesn’t matter if the investor doesn’t know, and the journalists also do not know the links of his organisation with the corporate about whom stuff is being written. But, at the time of conversation with Sivakumar last Saturday, www.timesprivatetreaties.com  website, which is open to all (including Timesgroup editorial), had an industry-wise list of companies in which BCCL had investments in. But, this list has since been removed from the website.

Today, many media houses have some private treaty arm.

The Dainik Bhaskar group, which half-owns Diligent Media Corporation, which publishes the DNA, also has a private treaty business, as does a unit of the Hindustan Times group.

Says Arvind Mittal, CEO of the private treaties business at Dainik Bhaskar: “There are two aspects to this. First is the internal discipline of the company —- whether they tend to influence editorial. If they do, then that can happen even for cash advertising. So I don’t think that is specific to private treaties. Secondly, there is a Chinese wall in our company between editorial and marketing. In the treaty agreement itself, we mention that there will be no influence on edit. In the day-to-day working also, even if there are any requests, we politely say no. There is no sharing of information with edit.”

“We have about 34 companies in our portfolio worth about Rs 100 crore. We have companies in education, herbal medicines and builders. We are looking to diversify sectorally and geographically,” Mittal adds.

The private treaties business head of another media house, who did not wish to be named citing silent period before the results, said: “Every company has different procedure. Our team does it without knowledge of anyone else. Nobody in the editorial comes to know.”

So what’s this private treaty business?

It was started by Bennett some time ago. The model began with the unholy intention of selling editorial space —- and readers were not most of the time informed that what is written is what a person/ company has paid to get published —- or, in other words, it’s advertising, not dependable journalism.

The business was initially executed through Bennett’s division that was popularly called ‘Medianet’.

Somewhere during the heady days of stockmarket boom, this entered the stock market.
Says stock market veteran and columnist R Balakrishnan, “I don’t like private treaties. At times when you need to speak up, you have to keep quiet. That is not good for anyone.”

Bennett’s ‘only-on-paper’ entity went on a deal-signing spree with more than 200 companies promising to help them get media coverage and participate in its growth in return for giving Bennett a shareholding.

Bennett’s private treaties business had a portfolio of nearly Rs 4,000 crore of shares at boom valuations —- or roughly equal to the company’s annual revenues. 

Following the collapse of the stock market, the mark to market losses of this portfolio exceeds Rs 1,500 crore for Bennett, say sources. But this story is not one about a company’s bad portfolio of shares. It is a about a toxic business model, whose noxious elements are contaminating the whole stock-market ecosystem.

“By preventing the reporting of negative stories and encouraging positive slants in text and headlines, there has been a systematic, long-running attempt to mislead —- whether intentional or otherwise —- which leads to artificial stock prices which hurts thousands of unaware investors when a scam such as Pyramid breaks out,” says  another market source.

The lay investor is taken for a ride because none of the stories that were used to pump up share prices give disclosure —- that the publisher of the newspaper has a vested interest in the company being written about since it has invested in it and is “hand-holding” the company’s public affairs.

“If this is not brazen insider trading, what is?” asks a senior marketman, not wishing to be named.

Sebi had earlier taken a position that it’s for the media houses to take a call on this matter. But the position may have become untenable now because Sebi has to act as the guardian of small investors, said the marketman.

A senior Sebi official, on the condition of anonymity, told DNA: “They must at least make a disclosure of the deal when they are publishing such stories. Otherwise, it misleads investors.”

Bijay Murmuria, past president of Association of National Exchanges Members of India, said: “Today, it is leading to lot of misinformation. Somehow, this needs to be streamlined. Some companies have come to the market. Some companies are still in the pipeline. Sebi have to come up with some rules.”

 Stock market’s grand old man, KR Choksey, says there should be complete transparency in private treaties. “It is good for both issuing company and the company buying stake.”