No threat to Marutis plans since Section 188 not in place

Written by fe Bureau | New Delhi | Updated: Mar 15 2014, 06:54am hrs
MSection 188 of the Companies Act says no company shall enter into any contract or arrangement...PTI
Had Section 188 of the Companies Act, 2013, which deals with related-party transactions, been notified, minority shareholders in Maruti Suzuki India (MSIL) might have felt less helpless than they do now. However, experts point out that in the interests of corporate governance MSIL should nevertheless run the proposal to house the new plant in Gujarat in Suzuki Motor Corporations (SMC) wholly-owned subsidiary rather than in MSIL past small shareholders. While the Companies Act, 2013, is in place, so far less than 100 sections 98 to be precise have been notified. Marutis board meets on Saturday and shareholders are hoping the management will respond to clarifications sought by the four independent directors.

Said Sai Venkateshwaran, partner and head, accounting advisory services, KPMG, Sebis (Securities and Exchange Board of India) recent amendment to Clause 49 of the listing agreement requiring all material related-party transactions to be approved by a special resolution of minority shareholders will be effective only from October this year. Moreover, the related provisions in Section 188 of the Companies Act, 2013, requiring approval of related-party transactions that are not in the ordinary course of business or not at arms length by a special resolution of minority shareholders are likely to be notified shortly. As such, companies that seek to uphold the highest levels of corporate governance should go by the spirit of these legislations and seek minority shareholder approval and protect their interests.

Diljeet Titus, managing partner of the law firm Titus & Co, believes MSIL is supposed to follow the letter as well as the spirit of the law. The move to ratify the proposal, without putting it through a special resolution, is not compliant with good corporate governance practice and if challenged in a court of law, the proposal can be struck down, Titus observed.

He feels independent directors should abstain from voting on it and should insist the matter be examined by an external, independent body. Since Suzuki has derived so much benefit out of the Indian market, it owes this much to the country, Titus added.

Institutional shareholders have been agitated ever since MSILs announcement in late January since they believe such a move would be be detrimental to the latters financial prospects given theres not enough clarity how much of a mark up SMCs subsidiary would retain before selling the vehicles to Maruti. They also apprehend that, over time, MSIL might be turned into a marketing company.

Despite assurances from the MSIL management that SMCs subsidiary would not accumulate any profits, funds remain unconvinced.

Sandeep Parekh, founder, FinSec Law Advisors, points out that Maruti is not breaking the law. However, if the minority shareholders are free to challenge it. Theoretically, Sebi can take action by resorting to general investor protection laws but it would be a tough call as it is unprecedented, Parekh told FE.

Section 188 of the Companies Act says no company shall enter into any contract or arrangement with a related party with respect to sale, purchase or supply of any goods or materials except with the prior approval of the company by a special resolution. It also says no member of the company shall vote on such a special resolution. The amended law has expanded the scope of related party to include all key managerial executives. Sebi announced in mid-February that provisions relating to related parties in Clause 49 of the Listing Agreement would be changed to be in alignment with the provisions of the Companies Act. However, these new rules will come into effect only in October this year. By Sebis definition a related party transaction is material if it exceeds 5% of the annual turnover or 20% of the net worth whichever is higher.

There's certainly a debate going on the rightness of the company's decision, but it is a subjective debate which is not quantifiable, said Prithvi Haldea, managing director of Prime Database. It is true that the rules relating to related party transactions have not been notified as yet and the company may sign the agreement before it is done. But according to current laws, Maruti is not doing anything illegal, he added.

In an interview with FE, the company's chairman RC Bhargava denied that the Gujarat proposal has been rushed through to avoid the new law and reiterated that it is beneficial for MSIL. According to Vijay Iyer, partner and national leader, transfer pricing, EY, the basic issue pertains to how the transaction has been priced. If the pricing is right, there's nothing wrong with the proposal. In business, a company cannot perform all the functions itself and has the right to outsource. If the outsourcing is done to a third party it is fine but since in this case it has been done to Suzuki, the pricing has to be right. Outsourcing does not mean that profits go out of the company, he said.