Suzuki deal: Maruti may have to seek minority shareholders’ nod

MARCH, 04, 2014

New Companies Act mandates prior approval by audit committee for all material related-party transactions

New Delhi/Mumbai: Maruti Suzuki India Ltd may have to seek approval from its minority shareholders on a contract manufacturing deal with parent Suzuki, if a final agreement is signed after October. Several fund houses have raised concerns about the deal which has an in-principle approval from the Maruti board.

In order to enhance transparency in all material dealings by company promoters, the new Companies Act mandates a prior approval by the audit committee for all material related-party transactions. In February, the capital markets regulator Securities and Exchange Board of India, or Sebi, said it too proposed to make this mandatory.

All such transactions would also require to be approved by shareholders through a special resolution, with related parties abstaining from voting, Sebi said. The Sebi code will be effective from 1 October 2014 and Companies Act 2014 is expected to come into force with effect from 1 April 2014.

A material related party transaction is defined in the Companies Act 2013 as one which, in aggregate, exceeds 5% of the annual turnover or 20% of the net worth of the company during the financial year, whichever is higher.

“It is expected that purchase agreements between Maruti and Suzuki Gujarat will exceed this limit and hence will come under Sebi’s purview,” saidAmit Tandon, managing director, IIAS, a Mumbai-based corporate governance advisory.

In January, Suzuki Motor said it would invest Rs.3,000 crore in the plant and sell the cars it produces to its subsidiary Maruti Suzuki, a significant change from an earlier plan where the latter would have built the plant itself. The announcement raised concerns that Suzuki could sell the cars at a higher price to Maruti than it would have cost the latter to produce them itself.

Interestingly, Maruti owns the land on which the factory will come up, and will lease it to Suzuki Gujarat. A group of fund managers wrote to Maruti’s chairman R.C. Bhargava asking the company to reconsider the deal because it was unfair to the company’s shareholders.

The Gujarat plant will have capacity to produce 1.5 million cars and will be set up in phases over the next three to four years. In the first phase, the plant will produce 250,000 cars a year. A Maruti Suzuki spokesperson said that his company “will continue to follow the legal requirements at every stage”. The business arrangements between Maruti Suzuki and Suzuki Motor Gujarat include a contract manufacturing deal for sales of cars, and a rent agreement for land lease owned by Maruti Suzuki and leased to Suzuki Motor Gujarat. “While Suzuki is free to set up another subsidiary, Maruti leasing out its land to Suzuki, and its agreement to buy vehicles from the new Suzuki subsidiary make the arrangement a related-party transaction,” said J.N. Gupta, managing director, SES Governance, a corporate governance advisory.

If Maruti does hurry the deal through, though, there’s little minority shareholders can do.

According to Sriram Subramanian, founder and managing director,InGovern Research Services Pvt. Ltd, another advisory, the Indian company is seeking to rush the deal. “These transactions should be ideally put to vote by minority shareholders as per the new Sebi norms,” Subramanian said. “Maruti Suzuki is seeking to rush these transactions before the new Sebi norms kick in.”

At this time, added Tandon of IIAS, the company’s shareholders have limited legal recourse. “They can try to engage with the company management and Sebi, and explore if there is any mismanagement by the board,” Tandon said. “We believe engaging with independent directors may be less productive, because as per our opinion, only three of the twelve directors on the board are truly independent.”