Why investors should say no to United Spirits and Maruti Suzuki

By Sriram Ramakrishna

A few weeks from now, two companies, as different from each other as chalk and cheese, will hold shareholder meetings in order to take crucial decisions.

United Spirits, London-based Diageo’s Indian outfit, has called shareholders on September 30 to approve annual accounts, while Maruti’s meet will be all about getting minority shareholder okay for related-party transactions involving parent Suzuki.

The second is an old dispute which first reared its head in January when Maruti made a shock announcement that its forthcoming Gujarat factory will be built by Suzuki and not by the company.

The move triggered protests from institutional investors who questioned why Maruti, the listed entity, is not capable of handling the investment and expressed fears of higher royalty and lower transfer pricing of cars which would affect the Indian listed company’s revenues.

The first is a recent development and comes from the decision of United Bank of India to declare Vijay Mallya, the chairman of the UB Group, as wilful defaulter. Mallya is also chairman of United Spirits.

RBI rules say that any company whose promoter or director is a wilful defaulter cannot get bank funding. Sebi is expected to soon issue guidelines saying that a wilful defaulter cannot be allowed to raise equity.

But Mallya has offered himself for reappointment as director, according to the USL notice, putting Diageo and USL shareholders in a delicate situation. USL shareholders trooping into Bangalore on September 30 need to keep one crucial issue in their minds. Mallya may have built USL into a world beater in the alcohol business and delivered stellar returns for long-time investors by selling to Diageo.

In normal circumstances, shareholders would have given him a standing ovation. But these are not normal circumstances and the wilful defaulter tag now carries with it reputational and business risk. If banks cannot lend money and capital markets shut the firm out, how will USL grow? If more banks follow UBI’s lead, what will be the damage to USL’s reputation?

Mallya is chairman of USL but holds very little stake in the firm. Ideally, he should have resigned and since that has not happened, shareholders should bite the bullet and send a strong message. They may not be able to vote him out if Diageo, the main shareholder, supports him. But they should vote in bulk and tell the world they care about the issue.

Maruti is more a complex issue. But nine months after they first proposed the move, the Maruti management has still not fully convinced investors about the correctness of its move. The explanation that Maruti will be able to conserve cash and insulate itself against risk does not wash.

Maruti is not a babe in the woods. It is a high quality car manufacturer which has time and again showed itself capable to besting competition and emerging on top.

Why does it need to conserve cash? Why does it need to play safe? Unless shareholders get a clear, satisfactory answer, they should say no to Maruti.