LIC concerned about Maruti Suzuki's Gujarat deal
LIC's position would bolster the position of other institutional investors
 "LIC concerned about Maruti Suzuki's Gujarat deal")
A senior government official told BusinessStandard, "LIC is opposed to it. It is not a transaction which is beneficial to LIC." He, however, added that it is an administrative issue and the finance ministry has not given any direction to LIC in this regard. As of Dec 31, 2013LIC had 6.9% stake in Maruti Suzuki.
Domestic institutional investors together hold 13.98% stake in MSIL. LIC's position would bolster the position ofother institutional investors who have also been mulling approaching the Company Law Board (CLB) to challenge the company's decision. As per the provisions of Companies Act 1956 if an aggregate of 100 shareholders or shareholders holding 10 percent of the total capital share the same concern, they can make an application to Company Law Board under section 397 (oppression) or section 398 (mismanagement).
The matter will then go the courts, which will then take the final call.The concerns raised by LIC comes a day after 16mutual funds and insurance companies shot off a letter to Securities andExchange Board of India (Sebi) on March 13 seeking the market regulator's interventionto protect the interest of minority shareholders and rescind the deal. Minorityinvestors can engage with Sebi, who can use the provisions of Section 11B inthe Sebi Act, 1992 to intervene. This section essentially gives Sebi the powerto intervene in any matter which is detrimental to the interest of investors orthe securities markets. For Sebi to take action under section 11B, investorsneed to approach it, citing provisions under section 12A of the SEBI Act, 1992(which deals with fraudulent and deceptive actions of the management).
Sebi is currently investigating the matter. If they believe the case has merit, they may pass an order under this section and the directions provided under the order will be binding on Maruti.Separately,a member of MSIL board informed that some independent directors have raised their voice and written a letter against the financing arrangement for the Gujarat project.The protests from various quarters have comeat a time when the board of Maruti Suzuki is scheduled to meet on March 15 to finalise budgetary allocations for the coming financial year.
The Gujarat issue, it is learnt, will also come up for discussion at the meeting. SMCChairman Osamu Suzuki is already in New Delhi to attend the crucial meeting. Only last week (on March 5), four insurance companies and 12 mutualfunds in a letter opposed the car maker's decision to allow Suzuki to set up afully-owned manufacturing unit in Gujarat terming it a "blatantly wrong andvalue-eroding oppressive transaction", which will convert Maruti Suzuki into a"shell company".
These include mutual fund majors such as HDFC Mutual Fund, ICICI Prudential Mutual Fund, Reliance MF and insurance companies like Reliance Life and SBI Life.Seeking scrapping of parent Suzuki's plan to build a fully-owned factory in Gujarat, the shareholders saidthey failed to see how the deal, which would convert Maruti into a shellcompany over time, would benefit the Indian automaker. "We wish to remind youof your fiduciary duty and urge you to carry out the Gujarat project under theownership of MSIL", the investors and insurance companies have said in theirsecond letter to the MSIL management.
In January, MSIL board cleared a complex proposal to set up the new manufacturingunits in Gujarat through a fully-owned subsidiary of parent Suzuki MotorCorporation and not through the Indian listed company. MSIL, in turn, would buycars from the newly-formed company at cost.
The second letter follows an 'unsatisfactory response' by Maruti to the initialletter sent jointly by top fund houses. The letter asked if the proposal hadcome from Suzuki or if they had considered alternatives to see if it was trulythe best possible deal for the company.
"Please let us know as to whether the board invited such a proposal or if theboard merely accepted an unsolicited proposal made by Suzuki. Further, pleaseconfirm whether the veracity and validity of Suzuki's proposal was benchmarkedwith other alternatives/market rates in order to arrive at a view that theproposal was the best option..." said the letter. It also added that the pressrelease following their first letter did not address all their questions andonly served to reinforce their adverse opinion of the company's decision.
In the first letter that ran into seven pages, fund houses had analysed indetail how the Gujarat plant proposal was 'ill conceived'. The letter hadalso raised concerns on cash flows, incremental capex requirements for Gujaratproject and high royalty payments being doled out to SMC.
In the second letter, fund managers have once again asked the company toreassess the royalty payment structure. According to consensus estimates, overthe next three years, Maruti will have to pay around Rs 8,500 crore of its Rs22,500-crore pre-royalty operating profit to Suzuki as royalty, they say.
Over four years to 2012-13, parent SMC received Rs 7,000 crore (5.7% ofsales) as royalty. The pre-royalty operating profit (excluding non-operatingother income) over the past four years totalled Rs 18,800 crore. This implies aroyalty payment of nearly 40% of operating profits. Additionally,Suzuki received Rs 550 crore as dividends.
Fund managers said while the concept of royalty was justifiable, a bigcomponent of the value of car comprises bought items like bearing, batteries,etc. On these, vendors are either already paying royalty or incurring expenseson research and development or both. So, it is not fair to levy royalty on thetotal sale value of a car, as royalty should ideally be levied on the value ofa car's net of bought-out components. Further, fund managers say, royalty shouldbe linked to absolute sales and the percentage should come down as salesincrease.
According to the latest available data, fund houses together have an exposureof more than Rs 2,500 crore to the MSIL stock, which is more than 10%of the free-float market capitalisation. Institutional shareholders haveexpressed their decision to use their shareholding to continue opposition tothe decision. They have also been mulling approaching the Company Law Board toredress their grievances against the proposed arrangement with SMC.
"Since the last time we wrote to you, many other shareholders have endorsed andreiterated the sentiments expressed in the earlier letter and we collectivelyrepresent adequate ownership of the equity share capital...to legitimatelyoppose these decisions..." they said in their latest missive to the company.