Shareholders must stop pact with Suzuki arm

A very pliable board of directors of Maruti Suzuki India Ltd (MSIL) has done grave injustice to its minority shareholders. The board has agreed to contractual arrangements for expansion with a 100 per cent subsidiary of Suzuki Motor Corporation, the dominant shareholder. The dominant shareholder can dictate the terms for any contractual arrangement. Some of these which would give scope for conflict of interest are:

(a)Transfer pricing of vehicles from the 100 per cent subsidiary to MSIL. The cost of production and adequate cash to recover the capital expenditure would be returned to the 100 per cent subsidiary;

(b)Lease rental on land, as land continues to be on the books of MSIL;

(c)All assistance in executing the project to be provided by MSIL;

(d)Ownership and development of newer products and brands.

The positives stated by the company, that MSIL benefits from the interest expense of not investing, is not tenable as MSIL is a net cash flow-positive company. Incremental cash generated would be better utilised for capital investment for this expansion. There is no compelling business logic for such an arrangement, when MSIL had the necessary capital to make investments. It looks like the SMC subsidiary will enjoy the benefit of no business risk with assured vehicle offtake by MSIL and assured return on investments, while MSIL will bear the business risk of cyclical vehicle sales, competitive pressures, pricing and cost pressures.

Minority shareholders should oppose this move, and register a complaint with the Securities and Exchange Board of India. They will have to be given a chance to vote on the contractual arrangements with the 100 per cent subsidiary, as these are related-party transactions. Suzuki, as the promoter, should not get to vote on these. Shareholders should oppose and vote against such contracts.

The author is founder and managing director, InGovern Research Services, a corporate governance research and analysis firm