Though this newspaper does not subscribe to the argument made by proxy advisory firms, or some in the government, that there should be a cap on royalties paid by companies, there is little doubt that managements sometimes do take decisions that are oppressive to minority shareholders. Maruti?s parent Suzuki?s decision to set up a manufacturing plant in Gujarat through a wholly-owned subsidiary?the plant was to have been set up by Maruti earlier?is one which got many minority investors upset since it was never clear as to what the benefits were. While Maruti said Suzuki Gujarat would sell it the cars at a no-profit basis, there was no way of knowing whether the price involved a mark-up or not; it didn?t help that, in its second press release, Maruti said it would pay a mark-up to help finance the costs?since Maruti?s chairman RC Bhargava said the first tranche of capital, around R3,000 crore, would be brought in by Suzuki, presumably this applied to further infusions of capital as the plant expanded. Also, since Bhargava argued that Maruti would make more money from interest on the cash balances freed up since Suzuki would now be investing in the Gujarat plant, this raised a fresh set of questions. Since Suzuki has enough cash to invest in a lot more such Gujarat-like plants, would Maruti be reduced to just a marketing firm and would it make more money this way? There is nothing wrong with becoming a marketing firm, but investors need clarity on which direction their firm is headed.
Given several instances of trampling over the interests of minority shareholders, the new Companies Act brought in Section 188 to deal with related-party transactions (RPTs) and said that these transactions would have to be voted upon by the company?s minority shareholders?that is, Suzuki?s shareholdings would not be taken into
account for this vote. Sebi also came out with amendments in its listing agreement to incorporate this for ?material? RPTs that needed to be voted upon. These were defined as those where the transaction value exceeded 5% of the annual turnover of the company or 20% of its net worth?this, then, excluded Maruti?s purchase of parts from various vendors in whose companies it typically owns 5-10% equity. The problem, however, was that the rules for Section 188 have not been notified and Sebi?s Clause 49 will come into effect only from October.
Given the investor furore, and possibly the fact that Sebi had
begun asking Maruti for clarifications on the deal, the company did well to backtrack. There will be no mark-up to fund the Gujarat plant; if the deal is terminated, the plant will revert to Maruti at book value; most important, minority shareholder approval will be sought as if Section 188 had been notified. A victory for minority shareholders, but this is a power that needs to be used with care. If used unwisely, it can just as well end up crippling a company?any restriction on royalty payments, in the case of Maruti to Suzuki for instance, has to keep in mind the former?s competitiveness is wholly dependent on the latter?s R&D.
