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TVS Suzuki JV Split - Analysis on Corp Governance
This document discusses governance issues that can arise in corporate partnerships and separations. It uses the example of TVS-Suzuki partnership to illustrate some of these issues. The key points are: 1) When a dominant partner buys out the other partner at a steep discount, it can disadvantage minority shareholders by not offering them a similar opportunity. This is what happened when TVS bought Suzuki's stake in their joint venture at a heavy discount. 2) Independent directors are meant to represent all shareholders' interests, but in this case they failed to ensure minority shareholders were treated fairly during the partnership separation. 3) There were alternative options, like offering the shares to other shareholders first or surrendering the shares
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TVS Suzuki JV Split - Analysis on Corp Governance
- 1. TVS-SUZUKI: GOVERNANCE ISSUES IN CORPORATE PARTNERSHIPS AND SEPARATION Group K Vishal Jain Amitesh Tyagi Aniruddha Ray Gaurav Goel Dindi Keshava Rao Niten Lalpuria Pervinder Chawla
- 2. Dominant Ownership -Types • Category I : 100% Subsidiaries • Category II : Companies (Joint Venture) – Group II A : Exclusive Joint Venture – Group II B : Venture with Partners and Retail Investors • Category III : Companies (Ventures without Identified Partners
- 3. Group II B: Venture with Partners and Retail Investors • FDI Company residual equity is held in varying proportion, partly by JV partner and partly by retail investors • Popular in pre-liberalisation regime • Board of Directors usually comprised an equal number of nominees and also few outside directors • The directors, unwittingly or otherwise, might fail to represent and protect the interest of all shareholders
- 4. Retail Investors • Dispersedlot, either due to indifference or ignorance, hardly participate in members meetings • Might become vulnerable to possible discipline and excesses of dominant shareholders • Huge Corporate Governance problem, when decisions taken are not in interest in such minority shareholders
- 5. Press Note 18: Issues • Measure of protecting Indian Industry • Issued in 1998 Scrapped in 2005 • Compels all foreign companies and businesses to justify to the Indian Government acting through a committee of bureaucrats known as the FIPB that their newly intended foreign investment, whether by way of equity or other financial or technical collaboration, in even an allied field would not in any way jeopardize the interest of a previously existing Indian collaborator • Need to procure NOC from existing JV partner
- 6. Press Note18 :Issue • Failed to take a holistic approach towards the potentially affected parties • Assumes identified domestic JV partner alone as the aggrieved party • The regular absentee shareholders are likely to be impacted by such decision • Led to number of corporate governance and shareholder protection problems
- 7. Responsibility of CompanyDirectors • Fiduciary responsibilities apply to all the shareholders in a company • Act as moderators and protectors at the first interface level with the controlling owners and executive management • Responsible for the reasonable and appropriate exercise of these powers in the overall interest of the company, more specifically its absentee shareholders
- 8. TVS – SuzukiCase : Issues • Venu Srinivasan representing the partner, Sundaram Clayton Ltd, and acting as JV Executive – its MD • For best interest of overall company, Separate MD for the JV reporting to his or her venture
- 9. TVS – SuzukiCase - Issues • Distress Sale by Suzuki – 26% holding to TVS • Price - Rs 15 per share (Market price Rs 70) There should have been a premium for controlling stakes – But sold on Discount ??? No explanation was given to Japanese Shareholder of Suzuki Legal but not Appropriate from Absentee Shareholder
- 10. Options Available –Option 1 Surrender Suzuki shares to the company for extinguishing – Use company fund to buyback the share and cancel – The share capital would have come down – TVS holding would have gone up from 32 % to 43.85%
- 11. Option 2 Sale offerby Suzuki of its shares to residual shareholders • All shareholders have right not obligation to buy • Share Holding of TVS goes up to 43.85% Why TVS did not opt these option? Garner some additional market price based paper gain (~ Rs 400 to Rs 450 million)
- 12. Role of IndependentDirectors • 5 out of 9 Independent Directors (Officially) • Failed on Counseling Dimension: How they counsel the two partners to avoid the deteriorating partnership • Failed on Controlling Dimension: Did not ensured the appropriate wealth is passed to Absentee Shareholders • Failed on Communication Role : Did not communicate about the disengagement • Failed on Fiduciary Duty: Failed to protect the interest of non-management shareholders
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