The decision of TIL (formerly Tractors India Ltd) to hive off its Caterpillar dealership business, which is spread over India, Nepal and Singapore, to Delhi-based Goodearth Minetech Pvt Ltd (GMPL) for Rs350 crore is not in the interest of shareholders, as there is a conflict of interest. A managing director of TIL's unit is also director on the buyer company, a clear conflict of interest and should have been questioned by the regulators and exchanges. Shockingly, this example of poor corporate governance is being set by Sumit Mazumder, managing director of TIL who is the immediate past President of industry body Confederation of Indian Industry (CII).
Mumbai-based Stakeholders Empowerment Services (SES), the proxy advisory firm, said, the main reason for its advice to shareholders for voting against TIL's proposal was lack of disclosure about performance and financials of companies to be sold as well as details of buyer and inherent conflict of interest.
The transaction involves sale of Tractors India Private Ltd (TIPL), which housed Caterpillar's dealership of earthmoving and road construction equipment, along with two overseas ventures. The company expects to earn additional revenues from the sale of its Nepal and Singapore businesses.
However, according to SES, the conflict of interest is very wide and open and thus must be questioned by shareholders. Sunil Chaturvedi, the managing director and chief executive of TIPL is also one of the directors of GMPL, the buyer of the company's Caterpillar dealership business.
SES says, "A managing director of a subsidiary is allowed to set up a private firm, GMPL (incorporated 1 March 2011) and then manages to convince the company (TIL) to sell the subsidiary to his own firm... reflects absolute failure of governance. How come GMPL with a paid-up capital of Rs1 lakh is going to support a business, which is being sold at a price of Rs350 crore plus. And if it is being supported by the current managing director, shareholders would certainly like to know his source of funds."
According to a report from the Business Standard
, Life Insurance Corp of India (LIC) is the largest public shareholder with 10.38% stake in TIL. State-owned general insurers General Insurance Corp of India (1.99%) and Oriental Insurance (1.2%) are among large minority shareholders. Some mutual funds and financial institutions together hold around 1%, the report says.
TIL has been carrying on the business of dealership of products of US-based Caterpillar Inc for the past six decades in North and East India, Nepal and Bhutan.
While TIL itself reported a net loss of Rs29 crore, TIPL is part of the business that earned the company a significant profit of Rs37 crore in FY15.
SES had recommended that shareholders reject the transaction and ask for forensic audit of subsidiaries, especially TIPL and ensure that business being conducted by TIPL under Chaturvedi was above Board in all respects.
The ballot closed on 23 May 2016. Sumit Mazumder, managing director of TIL told the newspaper that the Board of Directors recommended the sale of the dealership business, after much deliberation. “They firmly believe that TIL should focus on the manufacturing aspect and unlock all possible funds to invest in manufacturing” he was quoted in the report.
TIL closed Tuesday 1.85% up at Rs294 on the BSE, while the 30-share benchmark ended the day marginally up at 25,305.