The Securities and Exchange Board of India (Sebi) is ‘taking a look’ at Suzuki Motor Corporation’s (SMC) proposal to house its new manufacturing facility in a 100% subsidiary in Gujarat rather than in its listed subsidiary Maruti Suzuki India (MSIL). Given that the vehicles will be sold by the Gujarat subsidiary to MSIL and that the Japanese automaker holds 56.21% in MSIL, the transaction is one between related parties.
It has, consequently, attracted the attention of the capital markets regulator. In mid-February, the Sebi board approved a proposal by which minority shareholders will need to approve all related-party transactions. While the decision will be notified shortly, the rule will come into effect only from October 1, 2014. “We are looking at the transaction even if the rules come into effect only prospectively in October,” a senior executive said.
The Street has been upset with SMC’s announcement made in late January and last week MSIL issued a set of clarifications in response to a letter written by a clutch of investors, in which some of the terms were changed.
While earlier the Gujarat unit was to remain an SMC subsidiary, the company now says that if the contract manufacturing agreement expires, and in case it 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 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.
However, analysts say it is not clear exactly how much the ‘net surplus’ will be though the company has said that the surplus and the cost of production would be less than the price at which MSIL sells cars to dealers.
In February 2013, Sebi came out with a circular related to scheme of arrangement under Sections 391-394 or 101 of the Companies Act, 1956, which mandated that listed entities would require its nod for mergers and acquisitions. Last year, Sebi had directed Ambuja Cements to seek shareholders’ nod for the two-stage restructuring proposal to merge Holcim India with itself. The Sebi direction came even after Ambuja Cements stated in July that the restructuring would be done via an agreement for which no shareholder approval was required.