Maruti-Suzuki deal: institutional investors approach Sebi

Maruti-Suzuki deal: institutional investors approach Sebi

Maruti-Suzuki deal: institutional investors approach Sebi

Maruti's institutional investors today approached Sebi, seeking its intervention to safeguard minority shareholders' interests and to ensure compliance with good corporate governance norms with regard to the transfer of a Gujarat project to the car maker's Japanese parent Suzuki.

Maruti Suzuki India Ltd (MSIL) is facing stiff resistance from private sector mutual funds and insurance companies, which own almost 7 per cent of 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. The private institutions are trying to rope in LIC to jointly oppose the company's decision.

Sources said representatives of 16 institutional investors met Sebi officials at its headquarters here today and submitted a memorandum addressed to Chairman U K Sinha.

Sebi was approached days after the 16 investors wrote to MSIL Chairman R C Bhargava and other board members, seeking quashing of the "oppressive transaction" to save the company from becoming a "shell" entity.

Maruti has maintained the deal is in the best interests of shareholders and is in compliance with all norms.

There have been reports that some independent directors of MSIL are becoming sceptical about the deal and the matter is expected to be discussed in detail during a board meeting scheduled for March 15.

Earlier, seven mutual fund investors in MSIL had written to company Bhargava about their concerns and they were later joined by nine other institutional investors.

Along with LIC's 6.93 per cent stake, the institutional investors hold almost 14 per cent in MSIL, while the promoters have a 56.21 per cent shareholding.

The Securities and Exchange Board of India had already started looking into 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. If the Maruti deal does not get completed by this month, it would be subject to 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.

MSIL's board approved the proposal from Suzuki Motor to expand the production facilities in Gujarat through a unit "because it would result in substantial financial benefits to MSIL and its minority shareholders," according to a BSE filing on January 28.

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. They are also concerned about the royalty paid by Maruti to its Japanese parent.

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.