Hyundai's Rs 31,526 crore related-party transactions under scrutiny

Proxy advisory firms divided over supporting the transactions

As seven key related-party transactions (RPTs) of Hyundai Motor India (HMIL), aggregating up to ₹31,526 crore, come up for shareholder approval in March, proxy advisory firms appear divided in their opinion.

 

Stakeholders Empowerment Services (SES) has voted against six of the proposed RPT resolutions while Institutional Investor Advisory Services (IiAS) voted in favour of all the seven RPT resolutions.

 

SES said that its research shows that proper scrutiny has not been done nor proper disclosures made to enable shareholders to take an informed decision.

 

It added that while analysing the proposed RPT resolutions, SES found the resolutions’ proposed amount was almost 40 per cent of the total revenue of the company.

 

If one considers only purchases, the value of RPTs proposed in the resolutions 1 to 5 (refer to chart), which are mainly purchase transactions, compared with total purchases in 2023-24, amounts to over 50 per cent, SES said in its report. 

 

“In addition, the company is transferring its own potential profit to these counter parties, which are promoter owned and mainly catering to the firm and small amounts to other group companies but very little to independent third-party clients,” SES said. 

 

It added that all RPTs are not bad. “However, when the counterparty caters only to its group companies, a question arises as to why a separate entity is created? Such counter parties should not become vehicles for transfer of profit. These counter parties — as long as they operate as cost centres and cost is shared in a proportionate manner — do not raise any conflict,” they added.

 

SES is of the opinion that the moment these operate as a ‘profit centre’ and the profits accrue to promoters, there are issues of conflict, especially when the rationale for RPT is not strong enough.

 

An HMIL spokesperson told Business Standard, “We are aware of the SES recommendations, and we are of the view that this is an isolated opinion. Another reputed proxy advisory firm IiAS has shared a contrary opinion to recommendations of SES, favouring all the seven resolutions and giving a clear go-ahead. Our commitment to the highest standards of corporate governance remains uncompromising, and we shall continue to uphold the interest of all stakeholders.”

 

HMIL has sought approval for material RPT transactions with Mobis India, Hyundai Motor Corporation, Hyundai Transys Lear Automotive India Private Limited (HTLAIPL), Kia India, Hyundai Engineering & Construction (HEC) India, Hyundai Motor De Mexico, and Hyundai Motor Manufacturing Indonesia. The voting for this will end by March 13, and results will be out by March 17.

 

SES has focused its analysis on three entities — Mobis, HEC and HTLAIPL — and has sourced data from a third-party vendor called ‘The Company Check’. It said HTLAIPL and HEC ‘appear’ to be surviving mainly on HMIL, which contributes to almost the entire business of HTLAIPL and HEC and over 50 per cent business of Mobis.

 

One of the major concerns that SES has is regards the construction-related transactions with HEC.

 

It noted that SES discovered that HEC has around 10 employees on its rolls. “Can a 10-employee company carry out a contract of ₹3,000 crore on its own and convince shareholders that HEC has global standard expertise and capabilities?” it asked.

 

SES went on to add that HMIL had awarded a contract for construction and development of a project work (in Gurugram) to HEC in October 2017, which the latter sub-contracted to Kotec Automotive Services.

 

Kotech, in turn, sub-contracted to YSSS India, which again sub-contracted the work to RT Construction to obtain manpower.

 

“HEC, Kotech and YSSS are all 100 per cent owned by foreign entities,” SES said in its report.

 

IiAS, which voted in favour of all the seven RPT resolutions including that of HEC, noted that HMIL had purchased capital goods from HEC aggregating ₹290 crore in FY24.

 

“The company should have provided a detailed explanation for the proposed limit of ₹3,000 crore for FY26, which is significantly higher than the quantum of transactions in the last three years,” IiAS said.

 

However, it reasoned that as redevelopment of the Talegaon plant requires significant capital expenditure over a relatively short period of time, it assumes that capital goods will be purchased from HEC for redevelopment of the facility.

 

As for some of the other key RPT resolutions, like the one with Mobis (₹12,525 crore), IiAS noted that they generally do not support sourcing parts from a promoter group entity.

 

“However, we recognise that Hyundai Mobis Co. Limited (Mobis), South Korea, is a separate listed company in South Korea and 84 per cent of its 2023 consolidated revenue is from enterprise group affiliates. Therefore, we assume this is a practice followed by Hyundai globally,” it said while supporting the resolution.

 

As for the ₹5,824 crore RPT with Kia India, IiAS said there are collaborations in the automotive industry for companies to jointly develop vehicles, share platforms and engines among other parts, which helps keep costs low.

 

Kia India is a 99.99 per cent subsidiary of Kia Corporation, which is a 34.34 per cent associate company of HMC. In FY24, transactions between HMIL and Kia India aggregated to ₹5,170 crore.  

 

IiAS also approved the RPT with Hyundai Motor De Mexico, where HMIL will export Hyundai cars such as the Grand i10, Grand i10 4 door and Alcazar to Hyundai Motor De Mexico, a distributor. In FY24, the transactions between HMIL and Hyundai Motor De Mexico aggregated to ₹1,690 crore. The approval sought for FY25 is ₹1,910 crore.