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In Favour Of Maruti & Suzuki Gujarat Plan

Published on Thu, Nov 26,2015 | 22:22, Updated at Thu, Nov 26 at 22:22Source : 

Are Related Party Transactions per se bad?

A practitioner of good governance cannot be judgemental and cannot base his opinion on set prejudices. It is vital that before pronouncing one’s judgement on an issue, the matter must be examined thoroughly and evaluated against benchmarks set for the subject matter and only after such analysis opinion be expressed on the matter/or issue under debate as good or bad governance practice.

In general, Related Party Transactions (RPTs) are frowned at and treated as a not a good governance practice. Experience of SES, while evaluating the transactions for the purpose of issuing its advisory, has not been too encouraging. Given the scanty and sketchy information available it becomes very difficult to objectively evaluate a RPT and differentiate between abusive RPT and an acceptable RPT. However to avoid any bias against RPTs and terming all RPTs as abusive, SES as a matter of principle examines all the RPTs against following criteria:
• Disclosures & Transparency
• Fairness to Minority / non-controlling shareholders
• Benefits to the Company
• Need for the Transaction
• Why only RPT; why not transact with other party (ies)

It is only when any proposed transaction meets all the above criteria, SES is comfortable giving its favourable opinion on any proposal and therefore SES is of the view that all RPTs are not per se bad and only abusive RPTs are to be discouraged. However, many a times SES finds that the information contained is not sufficient. And in few of these cases SES still gives a favourable opinion as SES believes that the transaction is in the interest of the Company.

In the present case, before SES presents its opinion, it is important to recapitulate the history of the transaction under consideration. The transaction was first announced by Maruti Suzuki India Ltd. (MSIL) in January 2014 and had raised lots of debate in the media and investment Community. While many gave the transaction a thumbs down, SES was of the opinion that transaction was a win-win situation for MSIL’s shareholders. However facing lots of criticism in media, there was an interview of Management of MSIL in media, SES found the same to be a bit offensive and against shareholder democracy and found few points which contradicted the original announcement. Post this interview, SES released its second Report highlighting the issue and opposed the transaction purely on account of attempt to muzzle shareholder dissent and contradictions with earlier release. Followed by the interview, there was an official announcement by MSIL, clarifying doubts of shareholders in which SES found that majority of the issues raised by SES were addressed. This showed responsiveness of MSIL to criticism as also concern for shareholders voice. SES thereafter released its third Report favouring the transaction. MSIL later on released an analyst presentation and drafts of Contract Manufacturing Agreement (CMA) and Lease Deed (LD) with Suzuki Motors Gujarat Ltd. (SMG) a subsidiary of Suzuki Motors Company (SMC). SES analysed the agreements and presentation in detail and found level of disclosures of high order and did not find anything that was against Minority Shareholders. SES released its fourth report in series in June 2014 favouring the transaction.

As it is a public knowledge, opinion of SES was at variance with other analysts/ Advisory opinion, at this juncture a greater responsibility is cast upon SES to examine the issue afresh and ensure that opinion of SES is issued after taking into consideration all possible issues regardless of its previous opinion. SES examined the proposed transaction once again in great detail, compared Contract Manufacturing Agreement and Lease Deed with drafts circulated earlier and could not find any adverse issue with the exception of lack of clarity related to Royalty. In order not to be on the wrong side, SES communicated with the Company as SES felt that existing CMA had a scope that Royalty could be paid on the same product both by the Suzuki Motors Gujarat (SMG) and MSIL.

The Company has clarified to SES that SMG may pay royalty to SMC but the same will not be more than what MSIL would have paid on the same product.

While, whether Royalty being paid by MSIL is justified or not? Is it high? Or how long it shall continue? Are debatable issues, it is not at all a subject matter of discussion for this Postal Ballot and it is agnostic to structure/ route for expansion of MSIL, therefore the issue has not been examined from that perspective.

SES after examining the issue once again reiterates its earlier stand that the shareholders support the transaction. Our recommendation is based on our detailed analysis which follows. In nut-shell:

“SES does not find that by the proposed structure SMC is placed in any better situation than what it is in Maruti at present or what it would have had, had the expansion been implemented through a division or Subsidiary of MSIL. It is in driver’s seat at present in MSIL due to majority ownership and exercises the powers through the Board it controls. On the contrary, although SMC will own 100% equity in SMG, still it has practically given up all the rights that an owner has, be it financial rights or operation rights. Though the fact remains that those political rights given up are indirectly available through MSIL, yet economic rights are surrendered to the extent of public holding in MSIL as benefits of equity investment in SMG by SMC will be reaped by all shareholders of MSIL including public shareholders. Further as far as risks are concerned, MSIL is exposed to same risks as it would have, had the expansion was done in house. SES cannot question whether expansion is desirable or not as it is management decision and it is also not a subject matter at present.”

The full SES report is attached here.

Disclaimer: The information/opinions expressed in this report/newsletter are those of the author. This website has not verified the accuracy of the claims made in the report/newsletter, nor does it agree or disagree with, or endorse any information/opinions contained therein.
Attachments : Maruti Suzuki India Ltd_SES Proxy Advisory Report_PB_15 December 2015.pdf

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