Corporate few sitting on board and actual

Corporate Governance is about the ways
the company affairs are to be conducted. On account of principal agent
structure, those who actually own the company are not the ones who actually
manage it, leaving the scope in the hands of management to take decisions which
are more conducive to management rather than for the owners. The world has seen
many scandals in the past on account of excessive powers in the hands of few
sitting on board and actual owners (shareholders) haplessly watching it without
much of the action on their part since the corporate governance code was in the
process of evolving during those times.However during last some years there has
been remarkable change, with the management and owners (shareholders) have
become aware of their responsibilities and both parties know the available



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            To apply principles of
Corporate Governance and fiduciary responsibilities to real life scenario the
conflict between

Managers and Shareholders

Majority and Minority Shareholders

Creditors and Shareholders

Shareholders vs Nonfinancial Stakeholders


and assesswhether there is scope for proactive action in the matter.




Suzuki Motor Gujarat Pvt Ltd was
established in March 2014 as Suzuki’s first 100% Suzuki investment automobile
production company in India. It was located close to Mundra Port to be utilized
as export hub for markets including Europe, Africa and Japan. Vehicles produced
at Gujarat plant will be supplied to Maruti Suzuki and the production lineup is
scheduled to increase according to the market situation. There were land acquisition
issues while starting of the plant which was eased by the Gujarat Government.With Gujarat plant 2
in its initial phase which is expected to start its operation in early 2019,
Suzuki’s production ability in India would be 2 million units to meet the
expanding needs of automobile market in India.


SMG Pvt Ltd – An


Company Name: Suzuki
Motor Gujarat Private Limited (Suzuki Motor Corporation, 100% investment)

Location of Head
Quarters: Ahmedabad, Gujarat

Location of Plant:
Hansalpur, Mehsana

Representative: Naoki Aizawa (former Director and Senior Managing Officer of

Plant site area: 640

Production line:

Production ability
(Plant 1): 2,50,000 units


It has also been announced that SMG –Gujarat would not be public listed
company and would only be a manufacturing unit. All the marketing and expansion
of the dealer network would be taken care of by MSI-India and profits will be
shared by MSI –India, SMC –Japan and SMG –Gujarat.  Logic for allowing SMC –Japan to fund and own
SMG-Gujarat was that SMC-Japan has funds to the extent of 25000 Cr in Japan on
which it (SMC –Japan) was earning less than 1% return. However there is another
view that MSI –India which also has cash reserves to the extent of 7500 Cr
which could have been utilized in setting up of SMG-Gujarat by MSI-India itself
rather than allowing SMCJapan to do it. 
Reaction to announcement by MSI India about setting up subsidiary in Gujarat.
After raising the red flag over a deal between MSI India and its Japanese
parent for the proposed Gujarat project, the car maker’s institutional
shareholders took up the matter and announced that they would be doing
everything in their strides to safeguard their interest. Investors have fear
that the deal would transform MSI India into a distribution company from a
manufacturing one. Investors are concerned about turning this critical and
highly profitable project into a 100 per cent subsidiary of SMC Japan instead
of MSI India. Investors are worrying about the fact that this move would lead
to significant erosion of value for the shareholders. The Stock market reacted
adversely as shares of MSI India lost some 8 odd percentages after announcement
of launch of the Gujarat plant.


of Maruti


Suzuki India Limited, previously known as Maruti Udyog
Limited, is an automobile manufacturer in India. It’s now a subsidiary
of Suzuki Motor Corporation by 56.21%.Company headquartered at New Delhi.Maruti
was established in February 1981 and actual production started in 1983. Its
first model was Maruti800 which was based on model of Suzuki Alto Kei car.At
first, company was started as a car importer company with a license to import
fully build 40,000 unit from Suzuki. Then Maruti started a local production
unit in Gurgaon which was its first production unit with a capacity of 240,000
unit annually. Then it started another unit in Manesar in Gurgaon itself. It
was started in Feb 2007 with a capacity of 550,000 units.


started its 3rd unit in Gujarat plant with a plan of production
capacity of 450,000 annually.The Gujarat plant had six separate assembly lines,
which was be set up in stages, with each having the capacity to produce 250,000
cars per annum. The labor issues in Manesar Plant led to the plan of
constructing the 3rd plant.


from their core automobile industry manufacturing, sales and service they also
diversified to other areas and have different businesses like:-


Maruti Insurance

2000-01 MarutiSuzuki after analyzing the market, found that 33% of customers
spending on their vehicles are on Insurance for repair and maintenance. So
Maruti started its own Insurance by 2002 and had nearly 4 crore customers by
2017. Maruti Insurance Broking Private Limited has alliance with 11 general
insurance companies in India to give most competitive rates exclusively for its
customers. They differentiates its company with additional facilities like
seamless honoring of policy commitments with cashless transactions and service
delivery across the country.


Maruti Finance

Finance was launched my Maruti by 2002. Before that Maruti has a joint ventures
with many backs like HDFC, Citi, ICICI, Kotak etc. But later it’s had a
strategic venture in car financing with SBI and launched SBI-Maruti Finance
which is available in 166 cities across India.




Maruti True Value

Maruti True Value is one of the most
used online portal to buy, sell or exchange of used cars. The try to provide
best price for your second hand cars online. It has 1190 outlets across 936
cities in India.


N2N Fleet Management

started providing End to End fleet management service including Leasing,
Maintenance, Convenience services and Remarketing across the vehicle life.
Their main customer that have signed up for the process are Gas Authority of
India, DuPont, Reckitt
Benckiser, Doordarshan, Singer India, National Stock Exchange of India and Transworld.


Maruti Accessories

started offering the components and accessories that are compatible with Maruti
Car Models. It offered accessories like alloy wheels, body cover, carpets door
visors, fog lamp, stereo system, seat covers and other car care products.
Maruti Genuine Accessories was sold through Maruti car dealer center and
through Maruti service center across India.


Maruti Driving School

As part
of CSR activities, Maruti Suzuki launched its Maruti Driving School at New
Delhi which was later extended to other part of the country. Maruti Driving
School are of international standards were the students go through classroom
session alone with simulator training for driving before going to real road
driving. It followed international practices like road behavior and attitudes.


1.471 cities in India Maruti has 1820 sales outlets. It’s planning to increase
its outlets to 4000 units by 2020. It has nearly 3,145 service station in India
across 1,506 cities. It’s one of the largest dealership network in India. The
revenue generated from the service centers is a major share for Maruti’s revenue.
The service centers are managed on franchise basis with Maruti training local
employees for the service centers.In 2015, Maruti Suzuki launched its premium
car dealership unit in the name of NEXA, which is currently dealing with its
premium models like Baleno, S- Cross, Ciaz and Ignis.


of Suzuki Motor Corp.


Motor Corporation is a Japanese based multinational. Michio Suzuki a
businessman and inventor, founded a weaving company in 1909 by the name Suzuki
Loom works in a village of Hamamatsu, Japan. Suzuki Loom was manufacturing
weaving looms for the Japan giant silk industry at that time.By 1929, Michio
Suzuki started to export its produces to overseas. As part of diversification,
he started working on a car engine prototype in 1937 and build his first
prototype within two years. The prototype was powered by a liquid cooled, four
stroke, four cylinder engine with aluminum crankcase and gearbox. It was an 800
cc engine with 13 horsepower.By 1954, Suzuki had 72,000 unit production in year
and Suzuki Motor Corporation was formed and by 2014, Suzuki was the ninth
largest automobiles company in the world by production units. Suzuki had nearly
45,000 employees with 35 production units in 23 countries with 133 distributors
in 192 countries


In 1981
under India’s Provision of Indian Companies Act 1959, government of India
selected Suzuki Motors Corporation as the joint venture partner for Maruti. By
1983 Maruti 800, hatch back 796cc model car was sold by Maruti under Maruti
Suzuki badge. It was a subsidiary of Suzuki Motor Corporation Japan.


Issue in Gujarat plant


The Plant
was setup by Maruti subsidiary, Japanese parent Suzuki Motor Corp (SMC).It was
named Suzuki Motor Gujarat. SMC initially invested 3000 crore. All cars made at
the plant was planned to be sold to Maruti at a small profit. The profit from
the plant was planned to be used for the expansion of the plant itself.


Maruti had seven large institutional investors that included HDFC AMC, Reliance
Capital, ICICI Prudential, SBI Funds Management and other have raised concern
over the nature of this transaction. A state run insurer Life Corp, which has
6.93 percent stake in Maruti, also sought clarifications. There was a stock
fall for Maruti when it’s tried to clarify the issue and made announcement over
it. Investors too was not happy with the clarification given.


The Gujarat plant is expected to reach a
production capacity of 250,000 units a year by 2017 funded entirely by SMC.
Subsequent investment in the plant, projected to reach a production capacity of
1.5 million units a year, will come from the net surplus of selling cars to
Maruti, fresh equity infusion by SMC and the depreciation amount available with
the subsidiary.According to Maruti, the price at which the call are sold at the
dealer wad greater than the price at which the car was sold from the Gujarat
plant to the company. So the plant will run at no profit no loss basis. But the
surplus that will be charged from the automaker had no clarity.There was also lack of clarity on the
amount of surplus that was to be charged from the automaker, which was
dependent on the market conditions that prevailed at the time.

Further issues sprang up when investors stated
their discomfort in using Maruti’s profits for Gujarat plant which is a company
100 per cent owned by SMC, and the change in Maruti’s profile from a
manufacturing company to, at least partially, a trading outfit. With annual
capacity of 1.5 million units at its two Haryana plants, Maruthi will be hugely
dependent on the Gujarat unit to meet its needs by the time it reaches its full

Analysts believed that Maruti can
command higher profit margins and better control over production if it remained
a manufacturing company. The company sourced nearly 70% of its components from
vendors, with only 30% as its own content which included interest, depreciation
and profits.

Typically, trading companies in the auto sector
command lower profit margins 2 to 5 per cent compared to 10 to 15 per cent by
manufacturing companies. Further, price earnings multiples of trading firms are
also lower than those of manufacturing companies. Shareholders came to the
conclusion that this could lead to an erosion of their wealth.


institutional investors are now planning to approach market watchdog SEBI,
while the management is meeting with investors and analysts. The investors are
not happy about Suzuki investing money in Gujarat when Maruti has some Rs.7,
500 crore of cash reserves under it. Suzuki on the other hand claims that its
funds in Japan are generating lower returns than Maruti’s in India and
therefore it’s better for Japanese funds to be invested in the Gujarat plant.
The Proxy advisory firm Institutional Investor Advisory services was of the
opinion that if Maruti is not investing in the Gujarat plant, it must return
the excess liquidity to shareholders in the form of higher dividend as Maruti’s
investment portfolio has generated returns of around seven to eight per cent
over the past three years, which is significantly lower than the company’s
return on capital employed which is 12-15 per cent.

At the same time, a senior Maruti
official commented that the decision by Suzuki, which owns a 56 per cent stake
in the Indian automaker, will help Maruti increase its profitability in the
long term as manufacturing is not going to give an edge over the competition. Competitive
advantages come from new product development, building new technologies and
creating marketing infrastructure and Maruti’s management is in need of fund
for the same.


The announcement was made in just two months
before the new Companies Act 2013 comes into force from April 1. As per the new
rules, such related-party transactions will require approval from a majority of
minority shareholders. Investors say by barring the Ambuja-Holcim deal where
approval from minority shareholders was sought, minority shareholders in India
are treated rather harshly.

There are analysts who agree to the decision.
They believe that Maruti will benefit from Suzuki’s investment as the whole
sector is under slump lately. Maruti’s sales volume growth has been flat for the
past two years and the company needs at least 15 to 20 per cent volume growth
on a CAGR basis fund and regulate the expenditure in Gujarat plant. A
1.5-million-units-a-year plant would require Rs. 25,000-30,000 crore. The
growth outlook is not expected to drastically improve going forward. Analysts
say that this might not be able to fund the Gujarat plant functioning in the
long run.

As of now, only two options are
there for the company: Put the proposal before minority shareholders also, or
return to the drawing board and put up a different proposal.


Case for
Corporate Governance and fiduciaries


As we are looking at this case from the role of the
fiduciary perspectiveand not suggesting the best solution that the company must
take from its perspective. The report reviewswhether corporate governance
issues are involved in this case or not. 
Corporate governance addresses the principle-agent structural issue,
found within large publicly quoted companies today. The ‘principals’ e.g.
thousands of company shareholders, hire ‘agents’ e.g. a board of directors, to
run the company and add value on their behalf e.g. maximize profit, dividends
and their share price.  Investors invest
in shares and own them both for dividend growth and capital growth. The Investors
(both majority and minority shareholders) do expect both dividends with growth
at regular intervals and also capital appreciation.  The essence of Corporate Governance
regulations emphasis the need for treating minority shareholders fairly. While
taking decisions which would obviously be backed up by majority shareholders in
their own interest, corporations are expected to cater to the aspirations and
concerns if any of shareholders and especially of minority shareholders. Thus
Corporate Governance Codes lay importance on being fair to all stakeholders
rather than to shareholders in more ethical and responsible manner.  Thus Corporate Governance Codes have
enlightened shareholders including minority shareholders to keep scrutiny of
decisions by board and assess their impacts on future growth of company and its
value.  The Corporate Governance Codes
emphasis on the transparency in managing the affairs of the company. It
emphasizes on the composition of board and necessity of having Non-Executive
Directors who would be keeping tab on the decision making in the interest of
shareholders. It also emphasizes on the existence of Audit Committee of
independent directors who would be monitoring internal controls and Safeguard
Company’s interest.  MSI- India has Board
having non-executive directors in terms of Corporate Governance Principles, to
keep tab on every decision of the Board whether it is being taken in the best
of interest of shareholders including minority shareholders. MSI –India also
has independent audit committee.  The
essence of Corporate Governance principles also stress the importance of
transparency in decision making and taking everybody on the board at least on
landmark decisions. Taking everybody on board does not necessarily mean that
every faction to be consulted and to be taken into account before taking any
decision which may not be practicable in real life scenarios.  However use of management tools such as Mend
low’s Matrix Analysis which spells out process of identifying stakeholders and
according them treatment in terms of power and interest these stakeholders have
holds well in real life scenarios such as this. This
would certainly obviate the negativity either in the form of protest or
displeasures by some factions after the decision is taken.  Now there are concerns expressed by
institutional investors about sustaining long term value of MSI – India’s
shares and they have got every right to get those concerns explained. The Board
of MSI-India might have considered all the pros and cons of the business
decision about setting up of subsidiary by SMC Japan rather by itself but from
the perspective of corporate governance principles either before taking such
landmark decisions all the stakeholders should have been taken on board by MSI
India.  Now since that stage has already
been crossed (as decision has already been taken), it requires on the part of
Board –MSI India to assuage the feelings of institutional investors and
minority shareholders and convince them merits of the decision.  Corporate Governance aims at enhancing
corporate image and thereby value. By the present episode, unfortunately
MSI-India trusted brand name in Indian Auto Industry is coming up in the news
for wrong reasons. There are certain statements in this regard issued by MSI-India
management to allay investors’ fears but much more concentrated and proactive
approach in coming up with more facts and assumptions on the basis of which the
business decision was taken needs to be followed and more importantly reaching
out to minority shareholders and convince them about decision would go long way
in MSI-India’s corporate journey. It would not only enhance its image among
investors and stakeholders but also exhibit its capabilities to come over such
delicate situations and coming out victorious and making win-win situation for
MSI India and also its shareholders including minority shareholders.




Generally every corporate organization faces this
challenge of balancing the trade-offs between focusing on the growth of the company
or working in the best interests of the shareholders. The Board of directors
are hence constantly entrusted with a very important responsibility to take the
best decision considering all aspects of the company. The shareholders on the
other side were able to demonstrate their power of right to vote and remind the
fiduciaries that they are always vigilant in ensuring that the company’s best
interests are always safeguarded.  In
this case the Board decided to go on with its plan and were able to convince a
majority of the shareholders after multiple rounds of arbitrations and
negotiations. It is very rare in reality that every decision would be unanimous
and welcome by all stakeholders but what lies in corporate strength of
Institution is to make sincere attempt in reaching out to all and putting the
facts and convince and if possible have safeguards to accommodate the fears and
apprehensions if there is headroom to do it. However MSI were successful in
their attempts and the current state of affairs shows that the company is doing
very well with the Gujrat plant and the bold and brave decision that they took
was indeed in the best interests if the shareholders.