Why is Zee stock witnessing so much volatility?

As the markets head towards the final day of the trading for the week, all eyes will be Zee Entertainment Enterprises Limited (ZEEL). Since the start of the week, the stock has been registering high volatility. On Wednesday, the stock price tanked around 10 per cent after Reliance Mutual Fund sold its entire holding in the company worth about Rs 410 crore in the open market. More than 6.6 crore shares of the company changed hands on the National Stock Exchange. As per reports, Reliance MF unwound its position in the shares, which were with the fund house as an underlying asset for the group's debt papers.

The Zee group went into an agreement with a large number of mutual funds and other lenders, who controlled the shares of group companies as collateral for those debts, to not sell their shares for around six months. The promoters pledged to sell the stakes in its group companies to repay the money raised from fund houses. Notably, Reliance MF was the only fund house which did sign the agreement with Zee group and eventually sold its entire holding.

Thursday was a day of relief for Zee Entertainment as its stock surged over eight per cent after the company clarified its stance on the concerns raised over the audit of its financial statements. In a regulatory filing, the company said that the standalone and consolidated financial statements for FY19 was in progress by Deloitte Haskins & Sells, LLP and the board meeting will be held as per schedule on May 27. The stock further turned bullish as the company told stock exchanges that the stake sale process undertaken by the Essel group is in an advanced stage. The analysts are expecting the volatility to remain in the short term.

How did things go sour for Subhash Chandra-led Zee entertainment?

Unable to raise funds and pay off debt, Subhash Chandra, the promoter of ZEEL, had decided to sell his stake in the company in November 2018. The burden of debt had increased after the Essel group took over Videocon DTH in mid-2018. Further adding to his headache, stocks of ZEEL nosedived in January, following a report published in The Wire alleging the Essel group of carrying out transactions with companies that are under the scanner for suspected deposits during demonetisation.

Desperate to raise funds, Chandra, who has been under pressure from lenders to pay up, won a three-month reprieve to find a buyer for ZEEL. In order to raise funds, Chandra pledged shares to lenders including banks, NBFCs and Mutual funds. Pledging of share means that ZEEL shares are offered as collateral to lenders in exchange for immediate funds.

It is one of the most common scenarios in a volatile market with tight liquidity conditions. Interestingly, higher pledging could trigger volatility in the company's stock price. This is because the overall value of the pledged collateral is directly linked to the share price. As the share prices turn bearish, the value of pledged collateral also tanks and due to this very reason, the ZEEL stock is witnessing huge volatility in the stock market.