Media companies to disclose details of ad-for-equity business

SEBI vide press release PR No.200/2010 dated August 27, 2010 has published the new Press Council of India ("PCI") guidelines for media companies. These guidelines require media companies to disclose the details of the stake held by such media companies in various companies. Disclosures regarding such stake should also be made in the news report/ article/ editorial in newspapers/television relating to the company in which the media group holds such stake. Not surprisingly, the mainstream media in India has abstained from reporting this new requirement from SEBI.

Ad-for-equity business model

Under the ad-for-equity business model a company ("Client") buys ad space in newspaper/ television in lieu of its shares. The Client does not pay cash to the media company but issues its own shares to newspapers (in turn, media company buys equity in the Client). The media company gets paid only when it sells the shares of the Client after a period of time. These agreements between the Client and the media company are usually known as 'Private Treaties'. It has been alleged that apart from ad space in newspaper/ television, these Clients also get editorial (advertorial) coverage in newspapers owned by these media companies.

SEBI and the new disclosure requirements

Earlier this year SEBI had taken up its concerns with PCI, on the practice of many media groups entering Private Treaties with Clients as it felt that such agreements may give rise to conflict of interest and may result in dilution of the independence of press. SEBI also felt that such biased and motivated dissemination of information without appropriate and adequate disclosures, guided by commercial considerations can potentially mislead investors in the securities market and would not be in the interest of securities market.

PCI has accepted the following suggestions of SEBI and has issued the following guidelines vide press release PR/3/10-11/PCI dated August 2, 2010.

1. 
   
   
   Disclosures regarding stake held by the media company should be made in the news report/ article/ editorial in newspapers/television relating to the company in which the media group holds such stake.
2. 
   
   
   Disclosure on percentage of stake held by media groups in various companies under such 'Private Treaties' on the website of media groups should be made.
3. 
   
   
   Any other disclosures relating to such agreements such as any nominee of the media group on the board of directors of the company, any management control or other details which may be required to be disclosed and which may be a potential conflict of interest for media group, should also be mandatorily disclosed.
   
   
   

PCI also has expressed its apprehension that the brand building activities pursuant to Private Treaties without appropriate and adequate disclosures would not be in the interest of securities market.

Issues and challenges

1. 
   
   
   Ensuring strict compliance of these disclosure requirements would be tough task for SEBI as well as PCI. Firstly, it is the PCI, which have issued these guidelines and as such SEBI would have no role in the enforcement of these disclosure requirements. It means that the PCI would have to ensure compliance of these guidelines. The enforcement capabilities of PCI are questionable when compared to the capabilities of SEBI. Secondly, the guidelines merely states that 'the above suggestions may be kept in mind by the media'. Thus these guidelines are just recommendatory in nature. The PCI does not prescribe any penalty for non compliance with these guidelines.
2. 
   
   
   The guidelines have failed to define the scope of media companies. Under the ad-for-equity business model, it may not be necessary that the media company (which runs the newspapers/television channels) itself acquires stake in the Client. It might also be an associate company of the media company which acquires stake in the Client. Thus, in order to ensure full compliance, the disclosure requirements should also be extended to investment by associate companies in the Client.
3. 
   
   
   Apart from the above issues, one may also wonder about the locus standi of SEBI in taking up these issues with PCI. In its press release SEBI has stated that 'such brand building strategies of media groups, without appropriate and adequate disclosures may not be in the interest of investors and financial markets'. In most cases of ad-for-equity business/ Private Treaties, both the media company and the Clients are unlisted. Thus these companies (both media company and the Client) do not possess any threat to the interest of investors or financial markets. If SEBI's aim was to cover companies which may come out with public issues in future, these disclosure requirements should have been made a part of the issue documents/ prospectus.
   
   
   

Existing ad-for-equity business models

The Times Group has a 'Private Treaties' division known as the Times Private Treaties ("TPT"). TPT invests with potential, emerging or established brands with the objective of building brand value by advertising in Bennett, Coleman & Co. Ltd.'s media properties (like ET, ET Now, TOI etc.). Currently TPT has entered into 'Private Treaties' with companies (complete list is available here) including Multi Commodity Exchange of India Ltd., India Infoline Ltd., Artha Money etc. (Source: http://www.timesprivatetreaties.com).

Implications

These guidelines, if fully implemented, would bring in transparency in the reporting of news by media houses. All reports/ news/ editorials published by a media house in relation to a company (who is Client) should be followed by a disclosure that the media company holds a stake in such company (Client) or that the media company has entered into a Private Treaty with such company. This may also restrict the freedom of a media house to criticize a particular stance taken by Regulator (including SEBI) against a company (who is a Client), because the readers may, pursuant to such disclosure, link such criticism with the interest of the media house in the Client.

A copy of the PCI guidelines is available here.

A copy of the SEBI press release is available here.