On June 3, 2012, a day when Maruti Suzuki India Ltd (MSIL) signed a pact with the Gujarat government for the purchase of land near Mehsana to set up its third plant, Shinzo Nakanishi, MSIL’s then managing director and CEO, was quoted as saying that the step marked “a new phase of business life” for the country’s largest car maker.
The uproar by minority shareholders against MSIL’s subsequent decision in January this year to review its plan and, instead, entrust the setting up of the new plant to an unlisted subsidiary of parent Suzuki Motor Corp has been construed as a move that short-changes the listed entity — MSIL — from leveraging the gains from this “new phase”. Worries that MSIL would eventually end up as a “shell” company have precipitated the protests.
There are two other reasons for the evident distrust among minority institutional shareholders such as mutual funds and insurers. One, this is not the first time that Suzuki has tried such a move. Way back in 2004, the company tried a similar step to hive off a powertrain unit that eventually had to be shelved under pressure from the board.
The other, more Suzuki-specific reason, seems to be the belief among institutional investors that when it comes to balancing the interests of minority shareholders and promoters, MSIL’s track record overwhelmingly weighs in favour of the latter.
A clear evidence of this is royalty. Maruti Suzuki tops the charts among MNCs in India when it comes to royalty rates, followed by Colgate-Palmolive. MSIL also has the biggest royalty bill, followed by Hindustan Unilever Ltd (HUL), Nestle, Bosch and ABB India. MSIL currently pays royalty to Suzuki Motor at 5.7 per cent of its revenues (five per cent of domestic sales and eight per cent of its export revenue).
While it’s a fact that most MNCs have ramped up their royalty rates after the government decided to abolish caps on such payments in 2009, MSIL chose to actually double its royalty rates after the cap was removed.
As against MSIL’s 5.7 per cent royalty outgo, HUL, the country’s largest consumer goods maker, pays 1.4 per cent of sales to its Anglo-Dutch parent Unilever, and plans to gradually ramp it up to 3.15 per cent. Because royalty is calculated on revenues, while dividend income depends the profitability of local subsidiaries, a higher royalty payout — as in the case of MSIL — is seen as being loaded against minority shareholders.
Then there are also question marks over the timing of the MSIL decision, coming just ahead of the new Companies Act being rolled out and before the Sebi guidelines on corporate governance come into force, following which MSIL would have been required to take approval of most of its minority shareholders before it went ahead with this transaction. From all counts, the pressure on MSIL is unlikely to ebb anytime soon.
Anil is a senior editor based in New Delhi.