Private treaties are no longer private

So you thought countries signed treaties with each other. But wait! There is another variety of “treaties” that are not just “private” but detrimental to the independence of the mass media in India. Such so-called treaties constitute clear conflicts of interest and result in the public at large, and investors in particular, being misled. Thankfully and rather belatedly, this pernicious practice — that was started by one of the country’s biggest media companies and soon followed by others — may be coming to an end.
The August 27 guidelines issued by the Securities and Exchange Board of India (Sebi) making it mandatory for companies publishing newspapers or magazines or broadcasting television programmes to disclose their shareholding interests in other companies which feature in their media offerings, has come not a day too soon. This unsavoury practice — of media companies receiving shares and other financial instruments from advertisers in lieu of cash for space or air-time — has been in vogue for at least the last five years.
Unsuspecting readers of publications or viewers of television channels are unaware why a particular company is being praised or why negative news about the company has been suppressed. As Sebi pointed out on Friday, such “agreements” end up compromising “the nature, quality and content of the news/editorials relating to such companies”. It added that “biased and motivated dissemination of information, guided by commercial considerations can potentially mislead investors in the securities market”.
One particular media bigwig devised such an “innovative” marketing and public relations strategy in 2005 when 10 companies allotted unknown amounts of equity shares to the media company as part of a deal to enable these firms to receive advertising space. The runaway “success” of the scheme turned this media company into one of the largest private equity in­vestors in India and by the end of 2007, the company boasted of investments in 140 companies in aviation, media, retail and entertainment, among other sectors, valued at an estimated `1,500 crores. By July 2008, the company had between 175 and 200 private treaty clients with an average deal size of between `15 crores and `20 crores, implying an aggregate investment that could vary between `2,600 crores and `4,000 crores.
Even as the private treaties scheme was apparently aimed at undermining competition to the particular media company, a number of its competitors started similar schemes. This company published the names of its private treaty clients on its website, besides glowing endorsements from representatives of companies who had “benefited” greatly from such schemes. What Sebi has now stated is that this disclosure is insufficient — each article/feature or story aired should carry a disclaimer.
It seemed the private treaties party would last forever, or well, almost, until something unexpected happened. The markets collapsed. This led to private treaties schemes losing much of their “sheen”. This was because the “success” of such private financial agreements was considerably contingent on share prices rising continuously. It may be recalled that the benchmark sensitive index of the stock exchange at Mumbai had peaked at 21,000 in January 2008 and has not exceeded that mark thereafter.
Besides the fall in share prices, there was another problem that cropped up. While the value of the media company’s holdings in partner companies came down, the former had to nevertheless meet its commitments to provide advertising space at old “inflated” valuations. That’s not all. The income-tax department of the ministry of finance decided to use the “old” prices at which the original share transaction had taken place for the purposes of computation of assessable taxable income of the concerned media companies on which corporation taxes are levied.
While media companies that indulged in such practices predictably denied that they provided favourable editorial coverage to “private treaty” clients and/or blacked out adverse comment against such corporate entities, the truth was difficult to verify simply because the exact content of the financial agreements that were struck were not open to public scrutiny. One advertisement that was published on December 4, 2009, in the Mumbai edition of a newspaper was titled: How to perform the Great Indian Rope Trick and cited the case of a retail chain.
What was being referred to was how this company’s strategic partnership with the media group had paid off. The advertisement read: “…with the added advantage of being a media house, (the private treaties arrangement)… went beyond the usual role of an investor by not straining the partner’s cash flows. It was because of the unparalleled advertising muscle of India’s leading media conglomerate. As (the company) furiously expanded, (it was)… ensured that (the company) was never short on demand… a better phrase for it — business sense”.
In many media organisations, news is sought to be distinguished from material that is paid for, called advertisements or “advertorials”, by using different or distinctive fonts, font sizes, boundaries and/or disclaimers such as “sponsored feature” or even the letters “advt” printed in a miniscule font size in a corner of the advertisement — which may or may not escape the attention of the reader. However, in certain instances, even a fig-leaf of a disclaimer was done away with.
On July 15, 2009, S. Ramann, officer on special duty, Integrated Surveillance Department of Sebi, wrote to the chairman, Press Council of India, Justice G.N. Ray, on this malpractice. It was only on February 22 this year that the council accepted Sebi’s suggestions to make mandatory disclosures of stakes held and the percentage of stake held. As is often said, better late than never — only time will now tell whether the practice of media companies striking private treaties with advertisers will subside in the future.

n Paranjoy Guha Thakurta is an educator and commentator