In the last several years, the government has extracted higher and higher dividends from public sector undertakings, or PSUs, in order to bridge its fiscal deficit. Also, these PSUs are coerced to buy shares of other PSUs from the government so that its disinvestment target can be met. Never have shareholders raised their voice against such practices. Also, while fund houses are trying to become vocal about the rights of minority shareholders, banks and financial institutions have chosen to remain silent. In the Maruti Suzuki case too, the initiative was taken by fund houses. The state-owned Life Insurance Corporation, which has a 6.93 per cent stake in the car maker, joined the bandwagon only after it was approached by the fund houses to do so. Given their large shareholding in a wide range of companies, their role in securing the interests of minority shareholders is pivotal. True, the ecosystem for shareholder activism has improved. The new Companies Act provides board representation for minority shareholders and class action suits. Investor advisory firms have emerged. But unless the institutions take the lead, shareholder activism will remain muted.
The turn of events at Maruti Suzuki does not address another huge corporate governance issue: royalties paid by Indian companies to their overseas parents. As Business Standard reported last week, Maruti Suzuki's royalty payout of Rs 2,454 crore to Suzuki in 2012-13 was higher than the Japanese company's stand-alone profit of Rs 2,402 crore. The royalty was also higher than Maruti Suzuki's profit after tax of Rs 2,392 crore. Ever since the government liberalised the royalty rules in 2010, there has been a sharp increase in payouts to foreign collaborators. Even though the management of Maruti Suzuki may argue that the royalty hike was necessitated by the appreciation in the Japanese currency, there are at least four issues here. One, high royalty is iniquitous to minority shareholders because it is like a super dividend to the foreign shareholder. Two, it reduces the net profit, and therefore causes the valuation of the Indian company to fall. Three, since royalty is a commercial arrangement, minority shareholders have no say in it. They are seldom told the reason why it has been changed. Lastly, the negotiations for royalty are often between the foreign promoter and the managers it has put in place. These managers have no incentive to drive a hard bargain; if they do, they could simply lose their jobs. It is, in that sense, a negotiation between non-equals. While shareholders need to take up this issue in earnest, the government would do well to revisit the royalty rules.