IN a bout of shareholder activism not often seen in India, institutional investors have written a second letter to Maruti Suzuki India (MSIL) questioning the opacity of the decision to house the new manufacturing unit in a 100% subsidiary of Suzuki Motor Corporation (SMC). In a strongly-worded missive, a clutch of 16 investors on Tuesday asked the Maruti management to quash this “oppressive transaction” to save the company from becoming a “shell” entity. While the first letter was signed by seven institutional firms, the second one has the assent of the remaining nine.
Meanwhile, four independent directors have also raised concerns, saying they have only accorded an in-principle approval to the proposal and have sought legal opinion on issues relating to price fixation and royalty paid by the Gujarat plant to the SMC. The directors are understood to have expressed the view that they do not want any mark-up on the cars produced at the proposed Gujarat plant and want clarity on what kind of royalty would be paid by the plant to the SMC. They have expressed a view that it would be better that the consent of minority shareholders is sought over the proposal and it would be best if the company provides an exit route to them by buying back their shares. These issues will come up for discussion at the company’s board meeting on March 15.
“We reiterate that the only fair and sensible course of action for MSIL is to pursue the Gujarat project on its own,” the institutions wrote. Institutional investors together hold close to 14% in MSIL while the promoters have a majority 56.21% stake. Investors were concerned that the decision of MSIL’s board in January to let SMC set up the Gujarat project to expand production facilities, through a 100% subsidiary would convert Maruti into a shell company over time. “This clearly is not in the best interest of MSIL and its shareholders and is in fact significantly detrimental to them,” they observed.
Maruti had called the Gujarat plant proposal from Suzuki on January 28 an “attractive one”. On this, the institutions have asked: “Please let us know as to whether the board invited such a proposal or if the board merely accepted an unsolicited proposal made by Suzuki. Further, please confirm whether the veracity and validity of Suzuki’s proposal was benchmarked with either alternatives/market rates in order to arrive at a view that the proposal was the best option/attractive one”.
Raising issues of corporate governance, the institutions have written: “It is rather intriguing that in the current environment where corporate governance and the role of independent directors, as indeed all other directors of any company, is subject matter of wide debate and scrutiny, that MSIL’s directors have chosen to lend themselves to such a blatantly wrong and value-eroding oppressive transaction”.
The letter points out that SMC had attempted a similar structure in 2004 which was shelved because the board of directors and the government of India had realised its import. “The same arguments that were valid in 2004 remain valid now. Even more, considering that MSIL, has the benefit of experience of the last 10 years and large cash surplus with it earning low returns”.
Responding to the issues raised in the letter, a Maruti spokesperson said: “Our purpose is to strengthen Maruti’s business and benefit all stakeholders including minority shareholders....We are communicating with them regularly to convey this intent and purpose”. RC Bhargava, chairman, Maruti, told FE: “Companies don’t take decisions based on investors’ complaints and there is no question of the board reviewing the proposal. These investors have said that Maruti will turn into a shell company without explaining how. As per our calculations, this proposal will get better profits for Maruti and that’s what all investors really want”.
Meanwhile, as reported by FE earlier, the Securities and Exchange Board of India (Sebi) is already taking a look at at the proposal as it concerns related party transaction. The new Companies Act requires all material dealings by company promoters seek a prior approval by the audit committee for all material related-party transactions. In February, Sebi too proposed to make this mandatory. All such transactions would also require to be approved by small shareholders through a special resolution, with related parties abstaining from voting, Sebi said. The Sebi code will be effective from 1 October 2014 and Companies Act 2014 is expected to come into force with effect from 1 April 2014. A material related party transaction is defined in the Companies Act 2013 as one which, in aggregate, exceeds 5% of the annual turnover or 20% of the net worth of the company during the financial year, whichever is higher.
The Street’s apprehensions have not been assuaged by MSIL’s clarification on February 26, in response to its first letter, in which some of the terms have been changed. While earlier, the Gujarat unit was to remain an SMC subsidiary, the company later said that if the contract manufacturing agreement expires, and in case is not extended by mutual consent, the “assets would be transferred to MSIL at a fair value to be determined by independent valuation”.
The company also later said the capex needs of the Gujarat subsidiary will be met by the depreciation of the subsidiary, an amount generated as net surplus from the car pricing and equity infusion from SMC, to the extent necessary. Analysts have maintained that it is not clear exactly how much the ‘net surplus’ will be though the company has said that the sum of the surplus and cost of production would be less than the price at which MSIL sells cars to dealers.