Domestic investors plan to seek FIIs support on Maruti deal

Maruti's domestic institutional investors are looking to garner the support of FIIs against the Indian firm's plan to transfer Gujarat project to Japanese parent Suzuki Motor Corp.

Besides, domestic institutional investors are mulling to move the Company Law Board (CLB) on the deal.

Maruti Suzuki India 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 to make cars for the Indian car-maker at a proposed plant in Gujarat instead of manufacturing vehicles itself.

Separately, state-run Life Insurance Corporation of India (LIC) has sought clarifications from Maruti Suzuki about the Gujarat project. The private institutions are trying to rope in LIC to jointly oppose the company's decision.

A final decision with regard to drumming up support of Foreign Institutional Investors (FIIs) as well as moving the CLB will be taken only after the outcome of Maruti Suzuki's board meeting tomorrow is known, according to sources.

FIIs including HSBC, Credit Suisse and Norway's government pension fund together hold 21.5 per cent stake in Maruti Suzuki.

Maruti Suzuki, yesterday, approached market regulator Sebi, seeking its intervention to safeguard minority shareholders' interests and to ensure compliance with good corporate governance norms with regard to the deal.

Representatives of 16 institutional investors met Sebi officials at its headquarters in Mumbai yesterday and submitted a memorandum addressed to Chairman U K Sinha.

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

Maruti Suzuki 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 Maruti Suzuki are becoming sceptical about the deal and the matter is expected to be discussed in detail during the company's board meeting.

Earlier, seven mutual fund investors in Maruti Suzuki had written to the company 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 Maruti Suzuki, while the promoters have a 56.21 per cent shareholding.

The Securities and Exchange Board of India (Sebi) 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 Sebi norms, that come into effect on October 1, 2014, 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.

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 Maruti Suzuki 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.

Maruti Suzuki's board, in January, 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 Maruti Suzuki and its minority shareholders."

Institutional investors oppose the move because it would transform Maruti Suzuki into a distributor from a manufacturer.

Investors have said that turning the Gujarat project over to a Suzuki subsidiary instead of Maruti Suzuki would lead to a significant erosion of value for the Indian car maker. They are also concerned about the royalty paid by Maruti to its Japanese parent.

Investors said Maruti Suzuki has been facing declining returns on equity and the Gujarat plant would be the right opportunity to deploy cash profitability.