The Telegraph
Friday , March 14 , 2014
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Maruti tussle at Sebi door

New Delhi, March 13: The Securities & Exchange Board of India (Sebi) may probe Maruti Suzuki India’s decision to transfer a Gujarat project to its Japanese parent Suzuki under Clause 11 of the Sebi act.

Maruti’s institutional investors today approached the market regulator, seeking its intervention in the deal to lease out the company’s property in Gujarat to Suzuki to set up a captive car plant.

Sebi was approached days after the investors wrote to Maruti Suzuki chairman R.C. Bhargava and other board members, seeking quashing of the “oppressive transaction” to save the company from becoming a “shell” entity.

Sources said the regulator might look into the possibility of minority shareholders’ interests being hurt by the deal.

Financial institutions, who hold a 21 per cent stake in the country’s largest car maker, as well as the Maruti management have approached the regulator with their versions.

Under Clause 11, Sebi can issue orders to protect the interests of investors who may be adversely affected by a company’s decisions on securities or assets or because of lack of disclosures.

However, officials at the department of company affairs said the companies act was the right forum to seek remedy in such matters.

With clauses on related party transactions and protection of minority shareholders yet to be notified in the new companies act, financial institutions are banking on Sebi to shield them against any board decision that could erode their share value.

In their letter to the Maruti board, the institutional investors said they were concerned that the decision to let Suzuki Motor Corporation implement the Gujarat project to expand production facilities through a 100 per cent subsidiary would convert Maruti into a shell company over time.

They feared that the Suzuki plant in Gujarat, which would sell the cars to Maruti, could reduce the Indian car maker to a mere marketing arm with profits being transferred to the parent firm.

The investors said the deal might not be an arm’s length transaction between related parties but one where the parent company gains financially at the expense of the Indian arm. An arm’s length transaction ensures that both parties in a deal are acting in their own self interest and are not subject to any pressure from the other party.

The institutions have also raised concerns over plans that the Gujarat plant may be merged with Maruti Suzuki India at the end of 15 years. This would increase Suzuki’s stake in Maruti beyond the 56.21 per cent it currently holds, effectively reducing the value of stakes held by minority shareholders.

Maruti has argued the deal saves it the expenses and risks associated with the setting up of a new production line.

They further clarified that the value at which Suzuki will sell the cars to Maruti will be equal to the cost of production plus operating margins normally earned by the company — defined as the surplus.

Japanese market research firm Nomura has, however, pointed out that the clarifications given by Maruti and Suzuki “still does not specifically clarify the quantum of ‘surplus’ Suzuki Gujarat will charge Maruti”.

The institutional investors include ICICI Prudential MF, Reliance MF, L&T Mutual Fund, UTI Mutual Fund, SBI Mutual Fund, SBI Life Insurance, Reliance Life Insurance and Religare Invesco.