Prime example

Maruti Suzuki has set a good benchmark in corporate governance by agreeing to seek approval of its minority shareholders to set up a new unit in Gujarat as a 100 per cent subsidiary of the Japanese parent company.

The proposal for the new unit had attracted strong protests from shareholders including financial institutions and mutual funds, who felt that the new arrangement is against the interests of the company of which they are a part. They own about 44 per cent of the company and rightly felt that a change in the nature of the company can be effected only with their knowledge. According to the controversial proposal, Maruti would only have been vendors of the cars manufactured in the Gujarat facility. The idea of mark-up of the price of cars sold by the new unit to Maruti will also be reviewed now.

The new decision mandates approval by a three-fourths majority of the minority shareholders for the proposal. The company has promised that it would not go ahead with it if the approval is not forthcoming. In the normal course when a publicly held company makes an important change in its investment plan minority shareholders have the option of accepting it or exercising an exit facility. In the  Maruti case the shareholders had no such choice. Maruti had stated that the law did not specifically lay down such a condition. But this is only a legal argument because some provisions of the updated Companies Act which may be applicable in such situations have not been notified. This will  have to be made more definitive. It can be done by amending the rules if necessary or by the Securities and Exchange Board of India (SEBI) laying down new norms for future guidance.

Shareholder activism is not strong in India because corporate decision-making and practices have not developed and matured, though companies have grown in number and strength. Boards have to keep all investors’ interests in mind, not just of the controlling majority. It should be noted that some independent directors of Maruti had also expressed concerns over the original proposal. Maruti has done well to heed these concerns and hopefully it will set a precedent for future. It also underlines the need for vigil and alertness on the part of shareholders on matters that affect their interests.