Subhash Chandra became a victim of the new Peter Principle

Yesterday, Subhash Chandra resigned as the chairman of Zee Entertainment Enterprises. The stake of Chandra and his family in the company is now down to 5 per cent.

On November 20, 2019, Chandra and his family sold 16.5 per cent of their stake in Zee to raise Rs 4,770 crore. This money will go towards repaying creditors that Chandra’s holding company, Essel Group, owes to creditors. These creditors include mutual funds and Russia’s state-backed lender VTB. Chandra’s holding company had defaulted on loans of over Rs 7,000 crore. The Rs 4,770 crore raised through a 16.5 per cent stake sale in Zee Entertainment will be used to repay much of the over Rs 7,000 crore debt.

The question is: How did Subhash Chandra, one of the most successful entrepreneurs of this era, get into this situation?

Sometime in 2009, Chandra made a presentation to the senior employees of Daily News and Analysis (DNA). Chandra, along with the Dainik Bhaskar group, had launched this ambitious newspaper to take on The Times of India. DNA never reached the heights it was supposed to, and had a very choppy existence for almost 14 years. Its print edition was recently shut down.

On that day in 2009, Chandra’s presentation was based around the management book First, Break All the Rules by Marcus Buckingham and Curt Coffman. The basic premise of the book was that great managers routinely break all the rules.

Chandra’s presentation clearly showed that he had taken a liking to the book. This wasn’t surprising given that Chandra had himself broken many conventional management rules over the years to emerge as a successful entrepreneur. One of the rules he had successfully ignored was to not get into newer unrelated businesses. Or, if I were to be a little brutal here, the old Lala model of doing business in India, where the Lala through his group had presence across a whole host of businesses.

As the Essel Group website points out: “For over three decades, Essel Group has been a leading business conglomerate having diverse business presence across Media, Entertainment, Packaging, Infrastructure, Education, Precious metals, Finance and Technology sectors. We have created an impressive track record of value creation in all our businesses that compares well with their respective industry peers.”

Along the way, Chandra had a lot of success through unrelated diversification. In the 1980s, Chandra mainly made plastic tubes for toothpaste under the Essel Packaging brand. After this, he got into the leisure park business through Essel World, which was set up on the outskirts of Mumbai.

The fact that he became India’s original TV moghul, despite having no background in the sector, is the best example of an unrelated diversification that worked.

But some of his other unrelated diversifications went nowhere. A great example of this is the Indian Cricket League (ICL). Chandra started a parallel cricketing league, much before IPL, and got a whole host of Indian cricketers to rebel from the Board of Control for Cricket in India (BCCI) and play for ICL. Ambati Rayudu and Stuart Binny were two young cricketers who moved to ICL.

Sadly, the experiment failed. The cricketers were abandoned. And Chandra, like any other businessman, decided to cut his losses. 

But his interest in cricket was at least linked to the TV network that he had built. It wasn’t a totally unrelated diversification. The idea was to create a cricketing property around the ICL and broadcast it over the Zee Network, get advertisers, and make money in the process. (Much of the success of IPL is based on the basic model of ICL. ICL’s only problem was that it couldn’t get the best Indian cricketers to play for it, given the monopolistic tendencies of the BCCI.)

Chandra also dabbled in the newspaper business through DNA. While, on the face of it, this newspaper business seemed like an extension of his other media business, that wasn’t the case. The TV business and the newspaper business work in totally different ways, which is why there is no company that dominates both. The Times Group is a leader in the newspaper business and has a marginal presence in the TV business through its news channels.

Chandra also got the timing of entry into the telephony business all wrong. In 1999, he launched the Agrani satellite project to provide wireless satellite communication. But by then, mobile telephony had already taken off big time in India and Chandra’s business went nowhere.

The point being that Chandra had had great success in the past by venturing into unrelated business areas. He didn’t do well always, but did well enough number of times to continue being in the game.

Other than reading First, Break All the Rules, if Chandra had also been following economist John Kay, all this wouldn’t have happened. Many years back, Kay came up with the new Peter Principle. The original Peter Principle, enunciated by Dr Laurence Peter, essentially states that every person rises to his or her level of incompetence in a hierarchy. Simply put, as a person keeps getting promoted he is bound to be appointed to a job he is not good at.

The same is the case with companies which keep diversifying into newer businesses, until they land up in a business they really don’t understand. And that drives them down. Chandra met his match in the infrastructure sector. Essel Group’s diversification into the sector started in 2011. Chandra was not the only one betting heavily on the sector. Such was the spirit of the times that a whole host of entrepreneurs were betting that India had decoupled from the rest of the world after the financial crisis and would continue growing at a fast economic pace and so would the infrastructure sector.

Essel Infra got orders for building airports, roads, etc. All this required a lot of money, which led to heavy borrowing by the Essel Group. What Chandra and many other infra entrepreneurs hadn’t bargained for was the delays that were a natural part of any big infrastructure project in India. The delays came from lack of environmental clearances, lack of non-environmental clearances, problems with acquiring land, roadblock on policy issues as well as the non-ability of the promoters of projects to bring in their fair share of capital into the projects (see Economic Survey of 2014-2015).

Many projects did not take off. If projects did not take off, there was no cashflow. And without cashflow, there was no way the loan could be repaid. This eventually led to the Essel Group defaulting on its loans.

Also, Chandra couldn’t cut his losses. In a letter he wrote in April 2019, Chandra said: “As most of the infra companies, even we have made some incorrect bids … My obsession of not walking away from the situation has made me bleed Rs 4,000 crore to Rs 5,000 crore.” 

In that sense, he became a victim of what psychologists call the sunk-cost fallacy, where you keep throwing good money after bad.

Chandra is now trying to repay these loans by selling his stake in his crown business of Zee Entertainment. And that’s the good part of it.