Our PGPX Group Analysis of the TVS-Suzuki JV Split and issues related to corporate 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
• Dispersed lot, 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 Company Directors
• 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 – Suzuki Case : 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 – Suzuki Case - 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 offer by 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 Independent Directors
• 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

13. QUESTIONS?