Professional Documents
Culture Documents
Index
Power Struggle Bhuv Background Note Samta The Modi Rubber Story Sahil The Open Offer Hrisi Companies & Financial Institutions The Issue of Corporate Governance Nishant What Lies Ahead ? Gagan
Background Note
Est. 1971 MRL part of Modi Group of Companies. MRL Equity
24%
45% 32%
Modi Brothers
Public
Financial Institutions
FIs acquired stake in MRL by conversion of unpaid loans into equity and market purchases. The companys business comprised manufacturing and marketing of automobile tyres/tubes/flaps and retreading materials. MRL technical collaboration with Continental AG of Germany for manufacturing tyres. MRLs major customers included Telco, Ashok Leyland, Maruti Udyog, Punjab Tractors & Escorts
Company present in all segments of tyre industry. Overall market share of 14.8% in June 99. Sales concentrated in the truck and bus tyre segment. 9.7% total production catered the passenger car segment 10% of tractor tyres in industry came from MRL. Company had 2 plants; Meerut and Ghaziabad.
In 98-99
Millions
2.5 2.4 2.3 2.2 2.1 2 Capacity Production Sales
About 87% sold locally, rest exported. MRL hence, had built a strong base for itself in the market.
Tyres
Tubes
Modistone Fiasco
Modistone
160 mn by MRL
B.K.Modi planned to sabotage his brother. In Feb.1995 approval of merger proposal, failed B.K Modis plan. In July 1996, the FIs announced their decision to sell their MRL stake in the open market. FIs decision was the result of B.K Modis misbehavior with FIs representatives. In 1997, FIs initiatives to change MRLs management resulted in the resignation of five directors.
According to the report submitted by UTIs head Basudev Sen, FIs decided to recall their loans and offered their holdings to Modi family. The deal would struck at an acceptable price. FIs mentioned that if Modis failed to raised the requisite funds, the open market sale option could be utilized. FIs also refused to stand guarantee for loans raised by the Modis from other sources.
Modis argued that FIs couldnot offer shares to any other party without offering them first. June 30,1997 MRL posted a loss of Rs.150 million against a profit of Rs.182 million in the previous year. Appointed consultants McKinsey&Co.,who designed 42-point turaround program with the focus on raising companies productivity levels. Turnaround program aimed at: Improving worker efficiency. Outsourcing tyres in those sectors where MRL didnt make good margins.
In dec.1997,the FIs and Modis agreed to negotiate the purchase price of share. The FIs also agreed : To withdraw a proposal of coming out with a rights issues. On clearing off loan defaults by MRL. Besides all the issue remained the same due to the differences regarding the loan repayments. Dead lock continued.
70
Share Prices
Market MRL UTI FI Price offer for demand demand UTI share
Major reason for the fall in the sales was because of closure of one of their companies. MRL hired HSBC to increase stake to 51 %. In February 2000, shareholders filed charges against FIs with the MRTPC.
share Price
In July 01, the company acquired another 12% additional stake. By July 01 end Modis received 36% of MRLs shares through open offer. Of this 10.8% share was brought from LIC. This was a major turnaround, as it came as a surprise to the FIs. FIs criticised this move from LIC. LIC sent a letter to MRL stating it wanted to withdraw its shares it had tendered in the open offer.
But legal experts confirmed a company cannot go back on an open offer. Matter was referred to SEBI, which declared LIC couldnot withdraw the shares. LIC moved the Mumbai High Court for an injunction against the transfer holding that it happened inadvertently. LIC stated that 2 officers mistakenly signed and were suspended. The Court granted a temporary injunction. LIC was asked to submit an undertaking that it would not transfer the shares until final hearing.
MRL issue: example of the controversial role of FI lenders in Indian Co. In 1996 FI announcement to sell their stake in the open market shocked Indian market. MRL controversy made businessmen fear that the FIs would make it a norm of sell out if any Co. defaulted on any loan. FICCI and ASSOCHAM both were against the FI. According to them : If FIs decided to sell out, they should offer the first right of refusal to promoters at market price.
government should stop FIs. CII supported the FIs. In Nov 99, Government decided not to get into the MRL/FI tussle. For companies it was difficult to predict FIs moves as they played dual role i.e Lending bodies. Investors. FIs could sell shares or target companies which were defaulting on their loans, when it was facing a problem with NPAs.
Categories of FIs
FIs were under tremendous stress to maximise the returns on investments. They had to consider shifting from traditionally manufacturing units to booming IT services and pharmaceuticals units. One of the reasons that UTI sold its 7% stake in MRL in 97 was because of this reason.
Accountability of the management to its shareholders. Bad performance of MRL over the years reflected badly on its commitment to enhance shareholder wealth. Companys defaults on repayments were responsible for acquiring 44% of its equity by FIs. A report claimed that stake should be taken up by those who think they can run them better.
Tried to get FI loan freeze removed. B.K Modi withdrawn the notice sent to V.K Modi and started working together to get the plant operational again.
Questions
Was the MRL right board right in stripping B.K.Modi of his powers ? Does the fact that the company had been performing poorly justify the FI decision to sell their stake in the open market ? Is it the responsibility of the FIs to seek good corporate governance being adopted by the companies ?