Investor Issues
Maruti Suzuki: InGovern recommends voting against proposed arrangement with Suzuki

Maruti Suzuki appears to have done a grave injustice to its minority shareholders by agreeing to enter into a deal with a 100% subsidiary of Suzuki Motor Corp, the dominant shareholder of carmaker, says InGovern

Bengaluru-based InGovern Research Services has advised shareholders of Maruti Suzuki India Ltd (MSIL), to vote against the country’s largest carmaker's proposal to enter into contractual arrangements for expansion with a 100% subsidiary of Suzuki Motor Corp (SMC), the dominant shareholder in the company. Japanese-based SMC 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.


Image Source: InGovern


InGovern says, "Various contractual arrangements that give scope for conflicts of interest are:

(a) Transfer pricing of vehicles from 100% subsidiary to MSIL. The cost of production and adequate cash to recover the capital expenditure would be returned to the 100% subsidiary;

               (b) Lease rental on land, as land continues to be on the books of MSIL;

              (c) All assistance in executing the project to be provided by MSIL;

              (d) Ownership and development of newer products and brands;

              (e) Vehicular offtake."


According to the proxy voting advisory firm, the positives stated by Maruti Suzuki that the company benefits from the interest expense of not investing is not tenable as the carmaker is a net cash flow unit and incremental cash generated would be better utilised for capital investment for this expansion.


"There is no compelling business logic for such an arrangement when MSIL has the necessary capital raising ability to make investments. It looks like the SMC subsidiary will enjoy the benefits of no business risk with assured vehicle offtake by MSIL and assured return on investments, while MSIL will bear the business risk of cyclical vehicle sales, competitive pressures, pricing and cost pressures. Inventory levels, car pricing and discounts, cost increases, dealer network management, post-sale servicing, brand management  would all be risks  that will continue to be  borne by MSIL, while the 100% SMC subsidiary enjoys an assured vehicular offtake at pre-determined prices," InGovern said in its advisory.


Minority shareholders hold 43.79% of shares of Maruti Suzuki. Some of the prominent shareholders holding more than 1% of the shares as of 31 December 2013 are:

Image Source: InGovern


InGovern says minority shareholders of Maruti Suzuki should oppose this move, and register a compliant with SEBI. "They (minority shareholders) will have to be given a chance to vote on the contractual arrangements with the 100% subsidiary as the contracts are related party transactions. Suzuki as the promoter would not get to vote on such related party transaction. Shareholders should oppose and vote against such contracts.  Shareholders should also write to the Foreign Investment Promotion Board (FIPB) opposing any approval for setting up the   100% subsidiary," the proxy voting advisory firm said.


A Pliable Board


The Board of directors and independent directors, in particular, are accountable for approving such a transaction, and not safeguarding the interests of minority shareholders. According to InGovern, minority shareholders of Maruti Suzuki should be aggrieved as they continue to get short-changed by the company. It says, "The company lacks an independent chairman. Also, independent directors constitute only 33% of the Board. Although the composition satisfies the requirements of Clause 49 of the listing agreement, the outnumbering of independent directors by non-independent directors may be one of the reasons for the Board to lack true independence in thinking."


Image Source: InGovern


History of shortchanging minority shareholders


On 5 May 2010, the government of India amended the Foreign Exchange Management (Current Account Transactions) Rules, 2000, omitting the requirement for prior approval from Ministry of Commerce and Industry for royalty payments to technical collaborators exceeding 5% of domestic sales and 8% of export sales. On 13 May 2010, the Reserve Bank of India (RBI) correspondingly issued a notification permitting banks to release foreign exchange for making such royalty payments. Thus, regulatory requirements that capped royalty payments to foreign collaborators had been removed.


In July 2010, MSIL was the first multinational company that made use of this relaxation and disclosed that it had paid 5.1% of its sales for the quarter ended 30 June 2010 as royalty to its parent Suzuki Motor Corp of Japan. Thus, while sales increased by 27% year-on-year for the quarter, it was accompanied by a 20% fall in net profit year-on-year. To put the quantum of royalty payments into perspective, the royalty amounted to almost 64% of Maruti Suzuki’s pre-tax profit or 88% of its post-tax profit.


In July 2010, Maruti made a post facto disclosure of the royalty payments and the stock price dropped sharply by 12% on the day after the Q1FY11 results.


InGovern says, "Now in January 2014, yet again the Board of MSIL has demonstrated subservience to the dominant shareholder Suzuki. In agreeing to a proposal by Suzuki Motor Corp to provide assistance and expansion at a 100% subsidiary, the Board of MSIL has not demonstrated independent thinking and doing what is right for the carmaker and its shareholders."



Vinay Joshi

3 years ago

On the face of it seems to be tax positive proposal, including excise. I've not analysed it in detail.


Delayed incentives for sugar export are useless

The government must dole out incentives at the earliest, else the farmer may be forced to reconsider if it is worthwhile for him to continue with producing sugarcane or go in for other crops

The Indian sugar industry has carried over a large stock of 85 lakh tonnes from the last season. With an estimated production of 245-250 lakh tonnes this season, coupled with a consumption of about 230 lakh tonnes in the domestic market, there is too much sugar around in the country. This needs to find a way to be exported!


In fact, not long ago, Rohit Shah, president of Bombay Sugar Merchants Association stated that the industry was heading towards a truly excessive glut situation, as the international market was also in similar shape. The sugar price has fallen down to a three year low of 15.13 US cents per pound! He is hoping that the government realise the seriousness of the situation and offer some subsidy for exports, to overcome the crisis.


The white refined sugar price was hovering around $450 a tonne, but has begun to fall and is currently trading within the range of $425 to $430 a tonne. Because of the increased production from Brazil, Thailand and India, sugar price may fall further.


It may be recalled that the government made a sensible move couple of years ago by making use of 5% ethanol for blending, so that the sugar mills can take this advantage and at the same time help reduce our oil bill. The ethanol requirement of Indian Oil (58.81 crore litres), Bharat Petroleum (38.19 crore litres) and Hindustan Petroleum (36.32 crore litres) for the year 2013-14 was covered when they called for a tender in July last year. Sadly, however, against this, bids were only received for 62 crore litres from the sugar mills, and these oil marketing companies carried four rounds of negotiations before arriving at a benchmark rate of Rs44 per litre! This looks like a cartel approach. Sugar mills, supplying ethanol, were probably helpless. Perhaps, it would be better if the regulator were to fix the price for ethanol which is fair to both sugar mills and OMCs.


Yet, these OMCs (oil marketing companies) have so far issued letter of intent (LoI) to procure only 24 crore litres of ethanol to cover the mandatory 5% blending programme. They are yet to place the orders, while the sugarcane crushing season had already begun in several states. Stocks are piling up all over the place!


It would be obvious that if timely procurement was planned and executed it could have helped the farmers just as it would have done to sugar mills, so that payments and settlement, easy movement of stocks could have been achieved. After all the representations made, food minister KV Thomas told the press that to promote raw sugar export, the government will give incentives for shipping out four million tonnes, covering two seasons, at the rate of Rs2,000 per tonne (though this has to be approved by the Cabinet). It appears that the mills had worked out an incentive need of Rs3,500 (based on the 3 year low price of 15.13 US cents per pound), while food ministry had arrived at Rs2,390. We do not know the basis for this. So, even this indication of Rs2,000 is not final and binding, and by the time, the rate is approved, chances are the international market may as well go down, instead of up, because of increased supplies from our other competitors!


The fact of the case is: against the production cost of Rs26,500 per tonne, export price of raw sugar ranges between Rs22,500 and Rs23,500, leading to the sugar industry asking for Rs3,500 as export subsidy. However, with the Indian rupee taking a beating in the international market, the foreign exchange realisation will vary. In the meantime, some of the mills have already exported both raw and while sugar to the tune of 5.7 lakh tonnes and one way for the government to come to the rescue of the industry is to seriously consider if they should raise the ethanol mix from 5% to 15% for blending.


They must also direct the OMCs to ensure that they must lift the quantity required from the sugar mills without delay (or have them delivered). Lifting should also be made obligatory, so that both the parties are bound to keep their side of the bargain!


If such moves are not taken quickly, the farmer may be forced to reconsider if it is worthwhile for him to continue with sugarcane or go in for other crops. Either way, it will affect the country and it is the responsibility of Ministry of Agriculture to act more efficiently and speedily on such matters.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


FAQ about NSA’s interest in Angry Birds and other ‘leaky apps’

ProPublica lay out more from its story about how the NSA and its British counterpart have been scouring smartphone apps

As we detailed on Monday, documents show the NSA and its British counterpart have been probing advertiser data on smartphone apps, which can include your gender, income, and even whether you’re a “swinger.”

Do you have questions? Post them in comments or tweet us.

What’s new here?

This article reveals how U.S. and British spy agencies have sought to intercept the information transmitted by the games and other apps that users download onto their smartphones. Previous stories have detailed how U.S. and British spies have been intercepting massive quantities of cellphone text messages and gathering the location of cellphones around the world.

How does it work?

Many people don’t realize that when they use a smartphone app – to play a game or listen to music – the app may transmit information back to the app maker and may contain tracking technology placed by advertisers.

The spy agencies call these “leaky apps.” The spies collect information from among others, Google Maps, Twitter, LinkedIn, Facebook, Yahoo's Flickr, which in turn can transmit location, buddy lists, browsing history and more, according to a 2010 NSA document.

A 2010 Wall Street Journal survey of 101 iPhone and Android apps showed that the majority of apps were transmitting the phone’s unique ID – a type of serial number assigned to the device – and the user’s location to advertisers.

Since then, advertisers have been building even more detailed profiles of app users.

By using the phone’s identifier, advertisers can often monitor the user’s behavior in multiple apps and when the user browses the Web from their smartphone. Advertisers can tie the information together in a dossier that can include a user’s location, income and preferences such as sexual orientation and political leanings.

How does the NSA get it?

The agencies can pick up much of this information as it travels through private cellphone networks around the world. And because the data includes a tag from your phone, the agencies may have the ability to know who you are.

Does this mean the NSA is watching me while I play Angry Birds?

It’s not clear. The documents show that spies have collected data from Google’s AdMob, which is largest mobile advertising network and is one of many advertisers whose ads have appeared in Angry Birds.

The agencies say that even if they collect the data, they don’t look at it unless it is relevant to an investigation.

The NSA also says that it “minimizes”– or throws away - the data it intercepts from people who live in the United States. However, its minimization rules allow it to keep information about U.S. residents if it is deemed suspicious or could be relevant to an investigation.

Do they really know if I’m a “swinger”?

Documents show that analysts at GCHQ in 2012 studied the possibility of collecting traffic from Millennial Media, which included advertising profiles that identified users by ‘sexual orientation’ including the category of swingers.

However, it is unclear whether the data has been used for intelligence purposes.

It is also not clear what type of app usage or Web browsing behavior would lead Millennial Media to characterize someone as a swinger. Millennial declined our request for comment.

Can I stop leaky apps from sending out data about me?

No, but you can make it harder for advertisers to track you on your phone.

Apple’s latest iPhone software, iOS 7, offers two options to limit ad tracking.

  • In privacy settings, users can turn on “limit ad tracking,” which prevents apps from using the phone’s unique ID – which Apple calls an “Advertising Identifier” – to deliver targeted ads within apps. But this setting does not prevent apps from collecting your information.
  • In privacy settings, users can also reset their Advertising Identifier, which can make it more difficult but not impossible for advertisers to correlate the user’s behavior to the advertising profile associated with the old identifier.

Google’s Android also offers users two options to limit ad tracking.




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