Vivek Kaul
The minority shareholders of Maruti Suzuki are not a happy lot these days.
They are protesting against the decision of Maruti Suzuki’s parent company Suzuki, to establish a car plant in Gujarat, under its wholly owned Indian subsidiary, Suzuki Gujarat. The cars produced by Suzuki Gujarat will be sold to Maruti Suzuki.
This has not gone down well with the minority investors. The Business Standard reports that seven mutual funds (HDFC MF, Reliance MF, UTI MF, DSP BlackRock MF, SBI MF, Axix MF and ICICI Prudential MF) have written to the company against this proposal of setting up a new car plant in Gujarat under the aegis of Suzuki Gujarat. The Life Insurance Corporation(LIC) of India, the big daddy of Indian stock markets, has also sought details on this from Maruti Suzuki.
There are various questions that are being raised on this decision. Analysts point out that that Maruti Suzuki currently has around Rs 7,000 crores of cash. Why is this cash not being utilized to make cars, rather than just buy them from a subsidiary and then sell them? Also, the depreciation benefits on setting up a new plant would help the company bring down its effective rate of tax, the analysts point out. In short, it makes immense sense for the company to set up a new car plant, instead of buying cars from a subsidiary of its parent company.
The analysts further point out that with this move, Maruti Suzuki might be in considerable danger of being regarded just as a trading company, which buys cars and then sells them, rather than a manufacturing company. If this were to happen, the stock would be de-rated. As a fund manager told the Business Standard “Trading concerns (companies) trade at significantly lower PEs [price to earning ratios] than manufacturing ones.”
News reports suggest that the Securities and Exchange Board of India (Sebi) is looking into the issue, given that it is a related party transaction. Suzuki owns 56.21% of Maruti Suzuki and it owns 100% of Suzuki Gujarat. The Companies Act 2013, defines a material related party transaction as one which in aggregate exceeds the higher of 5% of the annual turnover of a company or 20% of its networth. A report in the Mint suggests that Maruti Suzuki will take approval from its minority shareholders on this.
Prima facie it seems correct that the minority shareholders are protesting. But the question is where are they when the government of India is ripping the public sector units? Take the case of Coal India, which on January 14, 2014, declared an interim dividend of Rs 29 per share. The government owns 90% of the company and as a result got a total dividend of Rs 16,485.71 crore.
The government also earned a dividend distribution tax of Rs 3,113.05 crore, thus netting a total of Rs 19,598.76 crore.
This dividend was essentially declared to help the government meet its fiscal deficit target. Fiscal deficit is the difference between what a government earns and what it spends. The money handed over to the government of India could have been used to produce more coal and thus help India become self sufficient when it came to the consumption of coal.
ICICI Prudential MF is one of the seven mutual funds which have written to Maruti Suzuki Ltd. Data from www.valueresearchonline.com shows that as on January 31, 2014, the mutual fund owned Rs 72.91 crore worth of Coal India shares through the ICICI Prudential Dynamic Fund. Why was there not a whiff of protest from ICICI Prudential MF, when the government decided to rip off Coal India? Like it owns shares in Maruti Suzuki, it also owns shares in Coal India. The same was the case with LIC, which owned 1.83% of Coal India’s shares as on December 31, 2013.
Or take the case of ONGC being forced to pick up 5% stake in the Indian Oil Corporation from the government of India. This is expected to cost ONGC around Rs 2,500 crore. This is nothing but a move by the government to strip the company of the cash it has on its books.
Data from www.valueresearchonline.com shows that HDFC Mutual Fund, as on January 31, 2014, owned shares of ONGC worth Rs 207.23 crore, through HDFC Top 200 fund. It also owned shares worth Rs 165.08 crore through HDFC Equity Fund. Why did HDFC MF not protest when the government was busy ripping off ONGC? LIC decided to keep quiet in this case as well. As on December 31, 2013, the insurance major held 7.82% of the total number of shares of the company. No mutual fund has protested against the government forcing public sector banks to pay interim dividends. As has been noted here on FirstBiz, the public sector banks are not in great shape. . As the latest RBI Financial Stability Report points out“Among the bank-groups, the public sector banks continue to have distinctly higher stressed advances at 12.3 per cent of total advances, of which restructured standard advances were around 7.4 percent.”
The stressed asset ratio is the sum of gross non performing assets plus restructured loans divided by the total assets held by the banks. In this scenario where the stressed assets of public sector banks are on the higher side, it makes sense that these banks not be forced to declare interim dividends. The money thus saved should be used to shore up their capital.
Given these reasons, the protest of mutual funds and LIC against Maruti Suzuki, basically stinks of hypocrisy.
The article originally appeared on www.FirstBiz.com on March 5, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)