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A file photo of Maruti Suzukis factory in Manesar, Haryana. Photo: Ramesh Pathania/Mint
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Corporate governance has become an increasingly important parameter by which the managements of companies are judged these days. New corporate laws being enacted in India empower minority shareholders,
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including institutional ones, to directly throw a spanner in management decisions that are not perceived to be in their best interest. As a result, even before these laws actually come into force, the voices of minority shareholders are gathering greater power and promoters of Indian companies cannot afford to ignore them any more. This is clearly brought out by the recent opposition put forth by the minority
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shareholders of Maruti Suzuki India Ltd to the firms plan to become a distributor of cars manufactured directly by the Japanese joint venture partner Suzuki Motor Corp. in India. The question institutional shareholders of the firm ask is that when the Indian firm has the expertise and cash to build and operate a proposed factory in Gujarat, and the marketing network to sell the cars, why does Suzuki need to throw its hat in the ring in India? The developments of the last few weeks at Maruti Suzuki have had an
impact on the firms stock price and forced the capital market regulator to look into the matter at the behest of aggrieved shareholders. The company eventually decided to put the matter to vote, needing majority approval from
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Another recent example of minority shareholders challenging the Indian leadership of a firm is the opposition faced by the promoters of Essar
Energy Plc, the London-listed energy arm of the Essar group. The Indian
conglomerate, promoted by brothers Shashi Ruia and Ravi Ruia, intends to take Essar Energy private and made an offer of 70 pence per share to buy out the outstanding shares of the firm in the market. Though the minority shareholders and independent directors of the firm feel that the Ruias bid significantly undervalues the company, the latter have decided to go ahead
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with the offer. With minority shareholders getting a greater say in the important decisions taken by companies, it is essential for business leaders to ensure cordial relations with them. If these shareholders lose faith in the leadership of companies, it might become very difficult for them to execute important strategic plans, which in turn may hamper their firms growth. Here is what some experts think leaders of firms should do to efficiently deal
DRAWBRIDGE
with the minority shareholders of their companies and carry them along in the process of growth. Tackling shareholder activism Shriram Subramanian, founder, InGovern In the face of intense scrutiny from proxy advisory firms, institutional investors and the Securities and Exchange Board of India (Sebi), the management of Maruti Suzuki India Ltd (MSIL) yielded by announcing that the proposal to build a plant in Gujarat through a 100% subsidiary of
Suzuki Motor Corp. and source cars at cost will be put to vote by minority
shareholders. The management of MSIL had earlier said that they did not anticipate scepticism for the proposal from investors. MSIL could chose one of at least four ways in which a firm may respond to a situation when there is opposition from minority investors. Let minority shareholders decide the outcome of the proposal. This is the path chosen by MSIL. The proposal will only be passed if a majority of minority investors vote for the proposal. This would be truly democratic and fair as it lets shareholders decide the outcome. The onus is on the management and the promoter to make a compelling argument and convince shareholders and let them decide for themselves. This should be the case especially when the promoters have a stake in the proposal, and Sebi has made it mandatory for related party transactions to be put to vote
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SAT, MAR 22 2014. 12 12 AM
from 1 October 2014. Find a middle path which reassures investors that the proposal is fair. For example, MSIL could have said that the cost of the car sourced from Gujarat would be as competitive as its own cost or any other third-party costs, and the costs would be subject to audit by an independent auditor every year.
Go ahead with the proposal despite opposition. Essar Global Fund Ltd is going ahead with its offer to buy out minority shareholding in the Londonlisted Essar Energy Plc despite opposition by the companys independent committee and institutional investors. Many proposals in IndiaAmbuja
Cements Ltd-ACC Ltd restructuring, Sesa Sterlite Ltd amalgamation, etc.
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