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Institutional EYE

Commentary on Corporate Governance Issues

Cummins India Limited: The Maruti Gujarat plant by stealth

A very egregious practice catches-on and the hollowing out of MNC’s listed in Indian begins.

Even as the Maruti management was completing its victory lap, having got shareholder approval for buying assembled cars from a 100% Suzuki to be set up in Gujarat, India, and in the process converting itself into a marketing extension of its Japanese parent, Cummins India Limited has embraced this business model. Suzuki no longer has a patent over this egregious idea.

While opposing the resolution allowing Suzuki to set-up the Gujarat facility, IiAS in its open letter to Maruti shareholders had said that implications that extend beyond commercial arrangements and ‘equally important are the implications of such transactions on other family-run and MNCs in India – they too may begin manufacturing in unlisted companies and allow the listed company to merely trade.’

Our worst fears are now being realized.

While Maruti was upfront about what it was planning to, Cummins India appears to be doing so by stealth, presented this idea as a rationalization of the various facilities owned directly by it and those owned by its parent. We have seen P&G and SKF India both going down this same path as Cummins India. But make no mistake, the final goal is that of Maruti Gujarat, shriveling the Indian listed entity to a marketing arm, catering primarily to the domestic market.

In a conference call with investors on 26 May, Anant Talaulicar, VP, chairman and managing director, Cummins India mentioned closure and sale of its Daman facility. As the company was also debating moving its K19 engine facility from Seymore in UK, to the Phaltan facilty, wholly owned by the parent, it just might envisage the possible closure of its facility at Korthrud, where the K19 engines also being manufactured, to rationalize the groups manufacturing.

"The rationale is simple, you know, the line at Kothrud is now an -- fairly old line, it does not have any more capacity. So you'd have to really substantially make an investment into Kothrud, which we don't believe is as cost effective as making an investment in Phaltan, right. So I think we even have to look at should we even consider moving the line out of Kothrud into Phaltan. I'm not saying that's the decision, but we will even look at that, and make sure that whatever we do leads to the best possible cost structure and best margin opportunities for CIL as well as CMI."

- Anant Talaulicar, VP, chairman and managing director. Source: Transcript, Y 2016 Earnings Call, 26 May 2016

It is hard to argue with management when they say “CIL will always be Cummins' single face to the domestic market. Where product is made is another issue.” But when asked that ‘(shareholders) had factored in a growth in exports which could have been catered through the listed arm and the shareholders could have benefited, that is clearly kind of missing out.’ And what was the answer?

‘Okay. I hear you. But again, the shareholders, you know, had invested in CIL, you know, given CIL as a portfolio, our offerings and its growth potential, so we expect that now, you know, new opportunities that were not even in scope, should be -- I don't know if that's a fair expectation, really that's a matter of debate, I guess, we can continue to have it.’

This move violates several principles of corporate fairness:

  • The board is not acting on behalf of minority shareholders and protecting their interests; The board needs to look at rationalizing profits for the Indian entity, not the Cummins group.

  • The company is transferring businesses and profits from the listed Indian arm to the parent company in steps;

  • As the Indian manufacturing base expands, the benefits of this expansion will flow disproportionately to the parent and not the Indian arm.

The management has tried to apply balm on the investors assuring them that “CIL will always be Cummins single face to the domestic market.”

The management response is clearly underestimated the gravity of the concern and lacks any understanding of why investors may have invested in the company in the first place.

From a regulatory stand-point, the message has to be to stop playing around with the rights of minority shareholders. This can be if Indian shares are swapped into shares of the parent company – maybe through IDR’s, which will give this product a boost. Of course, I cannot think of many who will want to swap Maruti in India into Suzuki shares in Japan. To these, there must be a cash offer. Both these ensure that the MNC’s delist from the Indian exchanges. Till then, shareholders can always bring a class-action suit against the directors.

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