Seven fund houses, including ICICI Prudential MF, Reliance MF and UTI MF, which hold 3.93% stake in Maruti Suzuki would approach SEBI over the carmaker's deal with its Japanese parent
The stand-off between Maruti Suzuki India Ltd (MSIL) and its investors, especially mutual fund houses, seems to be worsening as these institutional shareholders are now planning to approach market regulator Securities and Exchange Board of India (SEBI) after the car maker failed to address their concerns.
Seven fund houses, including ICICI Prudential MF, Reliance MF and UTI MF, may again approach the company and also its Japanese parent Suzuki Motor Corp (SMC), over the proposed Gujarat project, say media reports.
According to reports, fund houses are planning to approach SEBI in a day or two with regard to their concerns over a proposed deal to transfer a Gujarat plant by MSIL to Suzuki.
These seven fund houses together hold 3.93% stake in MSIL, while 6.93% stake is held by state-run Life Insurance Corp of India (LIC), which has also sought certain clarifications from the company on the Gujarat plant matter.
Earlier in January, Suzuki decided to take over the setting up of a plant in Gujarat, proposed by its subsidiary MSIL. (Read: Maruti Suzuki: InGovern recommends voting against proposed arrangement with Suzuki)
The parent company would invest in the plant through wholly-owned unit Suzuki Motor Gujarat Pvt Ltd, which will manufacture vehicles exclusively for MSIL.
Mutual funds are opposing Suzuki’s move to make the proposed Gujarat unit its wholly-owned subsidiary as the deal would transform MSIL into a distribution company from a manufacturing one.
While SEBI is yet to hear officially from the fund houses, it is already looking into the matter on suo motu basis.
According to the new corporate governance norms, this deal can be construed as related party transaction requiring approval from public shareholders, but these new regulations are yet to come into force and would be effective from 1st October.
Last month, mutual fund houses had written a letter to Maruti Suzuki India chairman RC Bhargava highlighting investor concerns arising from the deal.
The fund houses in the letter had asked MSIL to again think over the decision as the same is clearly “neither fair nor in the interest of shareholders”.
Investors have shown concerns over turning this critical and highly profitable project into a 100 per cent subsidiary of Suzuki instead of MSIL.
They are of the view that the proposed deal is not in the interest of MSIL and its shareholders and would lead to significant erosion of value for the company.
Bengaluru-based InGovern Research Services also had advised shareholders of Maruti Suzuki, to vote against the country’s largest carmaker's proposal to enter into contractual arrangements for expansion with a 100% subsidiary of Suzuki, the dominant shareholder in the company. Japan-based Suzuki holds 56.2% stake in Maruti Suzuki.
Acting on a proposal sent by SMC, the board of Maruti Suzuki has agreed to an arrangement according to which expansion and production of the company branded cars will be undertaken by a 100% subsidiary of SMC on plots of land the carmaker had purchased in Gujarat in 2011. The subsidiary will produce vehicles in accordance with requirements of MSIL and will be sold only to the carmaker. The price of the vehicles to MSIL would include cost of production by the 100% subsidiary and adequate cash to cover incremental capital expenditure requirements. The return on this investment for SMC would be realised only through the growth and expansion of MSIL’s business. The subsidiary will always remain a 100% subsidiary of SMC.
According to InGovern, this is not a simple contract manufacturing arrangement, as the dominant shareholder of MSIL is 'the contract manufacturer' and can dictate the terms of any contractual arrangement.
The fund managers are also concerned over the royalty paid by Maruti to its Japanese parent. Besides, they have sought explanations on certain terms like incremental capex with respect to the deal.
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