Normally, it would need minority shareholder nod
Given that the stock price of Maruti Suzuki India Limited (MSIL) has risen despite all the furore over parent Suzuki’s decision to own the Gujarat plant—prices rose from R1,701 before the announcement to R1,737 on Friday—it is easy to see shareholders don’t seem to share the concern of various institutional investors, and advisory firms. Indeed, minority shareholders in India have rarely been exercised about the concerns aired on high royalties or inter-group mergers—share prices of companies criticised by proxy advisory firms may have fallen off in the immediate aftermath of an announcement, but they have bounced back sooner rather than later. For instance, had small shareholders acted on the advice of proxy advisory firms who felt the Hindustan Unilever (HUL)’s royalty payments were too high and sold the stock in January 2013, they would have lost a 50% hike in the share price in the space of six months which resulted from the FMCG major’s parent announcing an open offer. Indeed, had it not been for the royalties paid by Maruti to its parent, the Indian firm would not have been able to come up with new products essential for it to compete in the market.
But just because the market doesn’t seem to be paying attention to red flags being raised doesn’t mean firms should give corporate governance the go by. More so in the case of multinationals who boast of strong corporate governance norms—Suzuki, for instance, is proud of the fact that it does not pay generous dividends to shareholders, nor give ESOPs to employees. Maruti’s chairman RC Bhargava is on record, on multiple occasions, saying that Maruti will earn more money from its cash hoards—basically, that the interest earned will be greater than the margins it would have got had it financed the Gujarat plant as planned originally. The problem, however, is that not too many are buying the argument, more so since part of the Gujarat plant’s costs are to be financed by Maruti through a mark-up on the cars it buys from Suzuki Gujarat.
But even if you were to assume Bhargava has got his maths right, there is the larger problem of the optics—had the new Companies Act been in place today, Maruti would have had to get the proposal to allow Suzuki to set up the plant passed by its minority shareholders. Had the Companies Act in place—indeed, while parts of its Rules have been notified, some others haven’t. Section 188—for which the Rules have not been notified, but could any day—requires that the sale or purchase of goods between related parties be voted by a special resolution in which the majority shareholders have to abstain. And just a month ago, Sebi notified a change in its Listing Agreement to align with the new Companies Act which makes this mandatory for ‘material’ transactions. Under this, a related party transaction is ‘material’ if it exceeds 5% of the annual turnover or 20% of the net worth of the company, whichever is higher—logically, this will apply to the Suzuki Gujarat plant. Except, Sebi’s Board decided the rules would come into effect only from October 1. In such a situation, whether or not Bhargava’s numbers are right, Maruti should get the agreement voted on by minority shareholders since that is what both the Companies Act as well as Sebi are saying.