Institutional investors holding nearly 14 per cent stake in country’s leading car manufacturer, Maruti Suzuki India limited (MSIl), have approached Securities and Exchange Board of India (Sebi). Maruti’s institutional investors have asked the market regulator to intervene in the proposed transfer of car maker’s Gujarat plant to its Japan based parent company, Suzuki Motors limited.
Investors asked for Sebi’s intervention on the grounds of safeguarding minority shareholders’ interests and to ensure compliance with good corporate governance norms. MSIl has already been facing stiff resistance from private sector mutual funds and insurance companies, which hold almost 7 per cent stake in the company, for its decision to allow Suzuki Motor to make cars for MSIl at a proposed plant in Gujarat instead of manufacturing the vehicles itself.
Separately, State-run life Insurance Corporation of India (lIC) has sought clarifications from MSIl about the Gujarat project. lIC alone holds 6.93 per cent stake in MSIl and now the private institutions are believed to be trying to rope in the public sector insurer to jointly oppose MSIl’s decision.
As per sources, representatives of 16 institutional investors met Sebi officials at its headquarters in Mumbai on Thursday and submitted a memorandum addressed to Chairman UK Sinha. Sebi was approached days after the 16 investors wrote to MSIl Chairman RC Bhargava and other board members, seeking quashing of the “oppressive transaction” to save the company from becoming a “shell” entity.
On the other hand, MSIl continues to say that the deal is in the best interests of shareholders and is in compliance with all norms. Sebi has already started analyzing the issue and is currently studying the regulatory framework with regard to its possible line of action against the company and its promoters. While a new set of norms proposed by Sebi, which come into effect on October 1, requires such transactions to be approved by public shareholders of a listed company, there is some ambiguity about the existing law.
Promoters and related shareholders would not be allowed to vote while seeking approval for such transactions. The new Companies Act, which comes into force on April 1, 2014, also requires related-party transactions, including those entered into with promoter entities, to be cleared by public shareholders. Now if the MSIl deal is not completed by end of this month, deal would then fall under the purview of the new norms. Sources said Sebi is studying if Maruti’s Gujarat deal affects the interests of minority shareholders and whether it breaches provisions of existing corporate governance norms.
In their letter to the Maruti board, which includes four independent directors, the institutional investors had said they were concerned that the decision in January to let Suzuki Motor Corporation implement the Gujarat project to expand production facilities through a 100 per cent 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 had said in the letter. The institutional investors had said Maruti Suzuki board’s decision is “ill-conceived” in its entirety. It results in outsourcing of the core manufacturing activity that is fundamental and critical for the Indian car maker.
“Worse, such outsourcing is given to the wholly owned subsidiary of Suzuki through a related-party transaction on terms that are very unfavourable to Maruti Suzuki and its shareholders and blatantly favouring the future prospects and interests of Suzuki,” the shareholders had said. The institutional investors include ICICI Prudential MF, Reliance MF, l&T MF, UTI MF, SBI Mutual Fund, SBI life Insurance, Reliance life Insurance and Religare Invesco.
Institutional investors oppose the move because it would transform MSIl into a distributor from a manufacturer. Investors have said that turning the Gujarat project over to a Suzuki subsidiary instead of MSIl would lead to a significant erosion of value for MSIl. Fund managers said MSIl has been facing declining returns on equity and the Gujarat plant would be the right opportunity to deploy cash profitability. The parent firm received Rs 7,000 crore as royalty over the past four years, or 5.7 per cent of sales, the fund houses said, adding that in the next four years, Rs 8,500 crore would be paid as royalty.