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In a relief to mutual fund managers, who were opposed to auto major Maruti Suzuki’s Gujarat plant deal, the company’s board on Saturday decided to seek shareholders’ nod on the matter and did away with a contentious issue in its earlier proposal.
Maruti’s decision that the entire capital expenditure of the Gujarat subsidiary will be funded by depreciation and equity brought by parent Suzuki Motor Corp (SMC) without the “mark-up” , as was initially planned, was welcomed by these investors.
While many on Dalal Street were opposed to the broader proposal to get Suzuki to develop the Gujarat plant, instead of Maruti, fund managers were also crying hoarse over the mark-up proposal. Maruti would have ended up paying additional mark-up cost for the vehicles produced in the Gujarat plant. The mark-up cost would have been above the production cost.
With this issue sorted out, fund managers have decided to tone down their opposition about the deal.
“We are happy that this issue has been sorted out and do not want to pursue the matter further,” said a fund manager of a mutual fund, which was opposed to the deal earlier. Mutual funds, which held 5.5 per cent in Maruti, were arguing the company had the cash to build the Gujarat plant, instead of Suzuki’s arm.
Although Maruti’s plan was not against law, analysts said the company did not follow the best corporate governance practices, prompting the Securities and Exchange Board of India (Sebi) to look into the matter.
In the wake of the opposition, the board decided to seek approval of minority shareholders, such as funds, FIIs and insurance companies, which hold 44 per cent in the company, for the plant. The company is not required to do so, as Section 188 of the Companies’ Act is yet to be notified. Companies need to get a nod from majority of the minority shareholders under Section 188.
Maruti’s Chairman R C Bhargava said 75 per cent of the minority shareholders would have to approve the proposal through a special resolution. This means if more 11 per cent vote against the plan, it would not go through.
But, with some funds softening their stance, there is a glimmer of hope for Maruti. The mutual fund manager, quoted above, said he would now vote in favour of the resolution. Business Standard spoke to three other fund managers, who said they were undecided. A lot would depend on the voting stance taken by LIC, which holds 6.9 per cent, and FIIs, which collectively own close to 21.5 per cent.
Officials at corporate governance advisory firms said it was a victory for minority sharehoders.
“It is an incident that makes all institutional investors realise the power of collective action. The pressure of institutional shareholders, Sebi asking for a clarification and publicity had resulted in them realising the importance of taking minority shareholders along on such decisions,” said J N Gupta, founder and managing director of corporate governance firm Stakeholders Empowerment Services.
Amit Tandon, managing director of shareholder advisory firm IIAS, agreed that scrutiny from multiple segments had probably resulted in the change of mind.
“They have looked to address a number of concerns, including mark-up and the issue of fair value versus book value. It seems a tall order for them to get a nod to it from minority shareholders,” he said.
