Maruti Suzuki’s Gujarat plant deal with its parent, Suzuki Motor Corporation (SMC), is likely to escape investor scrutiny, as the move has come just ahead of the implementation of fresh corporate governance norms, which will allow public shareholders to have a greater say on such transactions.
Earlier this week, Maruti Suzuki said its new flagship plant, to come up in Gujarat, would be constructed and operated by a newly-formed 100 per cent subsidiary of SMC. The plan irked minority shareholders and drew flak from some analysts who feared the listed entity might end up being just a marketing entity. But shareholders might not be able to block the move, as Maruti’s proposal has come ahead of the implementation of the new corporate governance rules.
The new Companies Act and Sebi’s proposed corporate governance code require approvals from a majority of minority shareholders for any kind of related-party transactions (RPTs), or deals involving promoter group entities.
“The Maruti proposal is a related-party transaction. But, legally, it is not binding on the company to get shareholders’ approval, as the new rules are not yet applicable,” said J N Gupta, former executive director at Sebi and founder of proxy advisory firm SES.
Sebi is expected to approve the new corporate governance framework for listed companies at its board meeting scheduled in the second week of February. Parliament has passed the new Companies Bill but provisions related to corporate governance have not yet been notified. Under the provisions of the Companies Act, 1956, in force at present, a listed entity doesn’t have to seek approval from its shareholders for RPTs. It merely has to make adequate disclosures and get the transaction approved from an audit committee.
Lawyers said whether or not Maruti’s plan was an RPT under the Companies Act, 1956, would depend on whether the listed company and the newly-created company had common directors.
“The transaction does not appear to be one among related parties under the Companies Act, 1956, unless there are common directors between Maruti Suzuki India and Maruti Suzuki Gujarat Pvt Ltd. Even if it were a related-party transaction, shareholders’ approval would not be necessary as the relevant provisions under the Companies Act, 2013, and Sebi’s new corporate governance code have not kicked in yet,” said Jay Parikh, partner at law firm Verus.
The new code on corporate governance prohibits interested shareholders from voting in RPT approvals. This means, for an RPT to go through, it has to be passed by a majority of the minority shareholders. SMC, the Japanese promoter, owns a 56.12 per cent stake in Maruti Suzuki India Ltd.
Gupta believes, as a good governance measure, Maruti should voluntarily seek shareholders’ approval for its proposal to transfer the plant. “Prima facie, the deal isn’t bad for shareholders but the devil may be in the details. It’s better if Maruti voluntarily asks for shareholders’ opinion on the transaction,” he said.
Parikh said the minority shareholders of Maruti might consider taking recourse under the oppression and mismanagement and winding-up provisions in the Companies Act.