Regular Features April'03

View Demo

Editorial To Our Readers

Data Bank Book Summary

Articles
Case study Modi Rubber vs. Financial Institutions - A Mukund The case gives a detailed insight into the events during a decade long dispute between Modi Rubber and its lender owners !inancial institutions" The case e#amines how the $% threat to sell their stake in the company& in the open market& led to a ma'or debate regarding the role o! $%s in the companies in which they had an e(uity stake" The case is so structured as to help the readers understand how and why the $%s decided to sell their MR) stake and the controversy this decision led to" They should be able to look at the controversy !rom the company*s as well as the $%s* point o! view" How can they not offer us the right of first refusal to the shares? Can anyone question our commitment to the company? BK Modi, commenting on the FIs selling their stake in Modi Rubber in the open market, in August 1 The Po er !truggle On +une ,-& .--/& a statement issued by 0anduranga Rao/& 1hairman o! Modi Rubber )td"& 2MR)3 came as a big surprise to %ndian corporate watchers" The statement revealed that the MR) board had& a!ter a special meeting decided to strip Managing Director B4 Modi o! his !unctionary powers" Rao said& 56e have been compelled to trans!er all areas hitherto looked a!ter by Dr" B4 Modi to the second MD 2V4 Modi 7 B4 Modi*s brother3 !or he is not giving enough attention to the a!!airs o! the company"5 The board also suspended three other directors& B4 8upta& R) 9hu'a and 9tul 0rakashall reported to be close aides o! B4 Modi" 6hat was more intriguing was the !act that B4 Modi was absent !rom the meeting though a notice had been duly served to him" Rao commented& 5The notice was served and the agenda was circulated" :e cannot make us wait"5 $urther& the move was reported to have the backing o! V4 Modi as well" Though the two brothers were not known to be the best o! !riends& this move was rather une#pected" The very ne#t day& B4 Modi held a press con!erence where he announced his re'ection o! the board*s decision" :e asserted that he was still the MD o! the company and that the board was not empowered to remove him !rom the post" :e claimed that the constitution o! the board itsel! was doubt!ul since the previous chairman Bodhishwar Rai 2an independent director3 was ;unceremoniously* thrown out and replaced by a <T% nominee" This was against the guidelines o! the capital markets regulator Securities and E#change Board o! %ndia 2SEB%3& according to which the chairman should be an independent director and not a nominee director" :e also said that there were no disputes between him and V4 Modi" 9nalysts& however& took this with a pinch o! salt as V4 Modi was absent !rom the press con!erence" On +uly =& B4 Modi sent a notice to V4 Modi& charging him o! breach o! a shareholder*s agreement between them" 2The agreement mentioned that while he !"

would look a!ter the production side o! MR)& V4 Modi would look a!ter sales and marketing" Moreover& it had been agreed that any change in this arrangement would re(uire the mutual consent o! the two brothers"3 MR)*s move against B4 Modi eventually came to be seen as a ma'or victory !or !inancial institutions 2$%s3 in the decade long MR) $% battle !or control o! the company" "ac#ground $ote MR)& established in />?/& was a part o! the Modi 8roup o! companies" 6hile B4 and V4 Modi held .,"@?A o! MR)*s e(uity& the $%s held BB"=A and the public held ,/"C,A." 9 ma'or part o! the $% stake in MR) was with )i!e %nsurance 1orporation 2)%13 and <T%" The other $%s involved were the %ndustrial $inance 1orporation o! %ndia 2%$1%3 and the %ndustrial 1redit and %nvestment 1orporation o! %ndia 2%1%1%3" The $%s had ac(uired their stake in MR) over the years& both through conversion o! unpaid loans into e(uity and market purchases" The company*s business comprised the manu!acturing and marketing o! automobile tyres tubes !laps and retreading materials" 9 small portion o! the revenue came !rom trading in tyres& tubes& !laps& garments and other articles" The company had a technical collaboration with 1ontinental 98 o! 8ermany !or manu!acturing tyres" MR)*s ma'or customers included Telco& 9shok )eyland& Maruti <dyog& 0un'ab Tractors and Escorts" The company was present in almost all segments o! the tyre industrytruck& bus& car& 'eep& tractor 2!ront& rear and trailer3& scooter and motorcycle tyres" The company had an overall market share o! /B"@A in +une />>> and its sales were concentrated in the Truck and Bus 2TDB3 tyres segment 2around B=A in />>@7>>3" 9bout >"?A o! the total production catered to the passenger car segment" 9lmost /-A o! the total industry production o! tractor tyres came !rom MR)" The company had two plants in Meerut district and one in 8haEiabad district in <ttar 0radesh" %n />>@7>>& on an installed capacity o! ."B. million tyres and tubes each& MR) produced .",/ million tyres and ."/BB million tubes" The company sold around .".?> million tyres and ."/B. million tubes" Tyre sales contributed >-">A to the gross sales turnover while sales o! tubes !ormed ?A" 9bout @?A o! its production was sold locally with the rest catering to the e#port market" MR) was (uite success!ul in building a strong base !or itsel! in the e#port market" The Modi Rubber !tory Since the early days o! MR)& B4 Modi and V4 Modi were reported to have ;rarely seen eye to eye*" Even a!ter they signed a shareholder*s agreement& their relationship never really improved" One o! the main reasons !or their di!!erences was B4 Modi*s desire to get a higher share in MR)" The Modis had been de!aulting on $% loans since the />@-s" 9!ter a !ormal split in the !amily in />@>& the Modis re!used to repay the money they owed the $%s on the grounds that the crossholdings o! the various !amily !actions in Modi companies were so comple# that the liability o! each o! the brothers could not be !i#ed till the division o! property was e!!ected" Since the Modi brothers could not arrive at an e(uitable division o! assets& the 8overnment appointed an arbitrator !rom %$1%" The arbitrator came up with a solution& which was summarily re'ected by the Modis" <nhappy with the constant !ights between the Modis and the way MR) was being run& 1ontinental suggested an operational restructuring !or the company in />>,& making it a pre7re(uisite !or a 'oint venture to manu!acture radial tyres& which was then under consideration" The $%s sanctioned a Rs" >-- mn loan and the restructuring e#ercise was initiated" Exhibit I: Modi Rubber Financial Performance Period ended 1996 1997 1998 1999

Gross sales Excise duty Net sales Ot er i!co"e Total income #a$ "aterials %toc& ad'ust"e!t ()!c*+ ,ec -urc ase o. .i!is ed /oods 0ost o. "aterial E"1loyee cost -o$er a!d .uel 2d3ertisi!/+1ro"otio!+1u4lic 5rei/ t a!d .or$ardi!/ Ot er ex1e!ses o!t of !ale! -6),7 )!terest a!d .i!a!ce c ar/es -6,7 ,e1reciatio! -67 -ro3isio! .or taxatio! Extraordi!ary ite"s+-rior year "d#u!ted P"T %ource8 $$$.i!diai!.oli!e.co" -

10,562.40 -2,236.40 8,326.00 89.3 8,415.20 5,020.10 -6 223.1 5,237.20 510.8 374.5 966.1

11,259.40 -2,428.90 8,830.50 42 8,872.50 5,748.30 -64.1 113.3 5,797.60 631.2 499.7 75.6 249.1

8,293.60 -1,637.10 6,656.50 127.5 6,784.10 3,839.00 73.3 105.8 4,018.00 537.3 471.2 60.3 220.3 933.8 6,241.00 543.1 477 66.1 94.1 -28 0.6

9,329.40 -1,916.20 7,413.20 93.3 7,506.40 4,307.90 5.3 58.7 4,371.90 653.6 518.7 97.2 239.5 1,027.90 6,908.80 597.7 404.1 193.5 98.2 95.3 0.6 -6.5

623.4 7,712.00 703.2 458 245.2 94.5 150.7 0.7 6.7 156.7

1,112.20 8,365.50 507 648.4 -141.4 122.1 -263.5 0.7 15.1-249.1

-28.6

88.3

9t this point& Modistonea Modi group company slated to be merged with MR)!loated a Rs" ,C- mn rights issue" This issue was heavily undersubscribed and <T% purchased Rs" .-- mn worth o! shares it had underwritten" 9ccording to the terms o! the merger& i! the merger was approved& the remaining Rs" /C- mn had to be accounted !or by MR)" :owever& i! the merger was not approved& the Modis would have to bring in Rs" @- mn each because o! the personal guarantees they had provided" MR) sources revealed that B4 Modi saw this as an opportunity to ac(uire a bigger stake in Modistoneand conse(uently in MR)" :e came up with the plan o! opposing the merger proposalwhich meant that the brothers would have to pay up Rs" @- mn each" B4 Modi was working on the premise that V4 Modi would not be able to arrange this amount" %n $ebruary />>=& B4 Modi even stormed out o! the meeting held !or approving the merger proposal& hoping that it would be ad'ourned" :owever& the meeting continued and the merger was approved& dashing B4 Modi*s plans," Even as the company was negotiating the 'oint venture with 1ontinental in +uly />>C& the $%s announced their decision to sell their MR) stake in the open market" %n 9ugust />>C& B4 Modi*s re(uest to the $%s to reconsider their stance was turned down" This move was reported to be a result o! a meeting& where B4 Modi had misbehaved with 0R 4hanna& an independent director" This in!uriated the $%s who then began thinking o! ousting the Modis !rom the board" Media reports claimed that as a result o! B4 Modi*s letter to the then prime minister Farasimha Rao& the $%s decided not to oust the brothers and agreed on a stake sell7o!! instead" %n early />>?& the $%s initiated moves to change MR)*s management" This resulted in the resignation o! !ive directors" %n March />>?& a committee headed by <nit Trust o! %ndia*s 2<T%3 1hie! 8eneral Manager& Research and 0lanning& Basudev Sen& 2set up in />>C to draw up guidelines on good corporate governance3 submitted its report to the 8overnment" %n accordance with the report*s recommendations& in 9ugust />>?& the $%s decided to recall their loans to the Modi group and o!!ered their holding to the Modi !amily& provided the deal was struck at an acceptable price" This announcement was a ma'or climb down !rom their earlier stand that they would sell their holdings in the market" :owever& the recall o! the loans to the Modi group clearly indicated that the intense lobbying by the Modis to pressure the $%s to abandon the use o! the group approach policyB 2on !resh loans3 against them had !ailed" The $%s threatened that i! the Modis !ailed to raise the re(uisite !unds& the open market sale option could be utiliEed" The $%s also re!used to stand guarantee !or loans raised by the Modis !rom other sources" The Modis continued to argue that the $%s would be playing a partisan role i! they o!!ered the shares to any other party without !irst o!!ering it to them" $or the year ending +une ,-& />>?& MR) posted a loss o! Rs" /=- mn& against a pro!it o! Rs" /@. mn in the previous year" 2Re!er E#hibit % !or a summary o! MR)*s !inancial per!ormance3" This prompted MR) to appoint consultants Mc4insey D 1o"& who designed a B.7point turnaround program !or the company with a !ocus on raising productivity levels" 9round .> o! these action points were to be implemented at the plant level and were aimed at improving worker e!!iciency" The turnaround plan also involved outsourcing tyres in those categories& where MR) did not make a good margin" %n December />>?& the $%s and Modis agreed to negotiate the purchase price o! shares within a period o! three months and ac(uire the stake in another three months" The $%s also agreed to withdraw a proposal o! coming out with a rights issue and on clearing o!! loan de!aults by MR) without linking the ac(uisition o! shareholding by the Modis" Though the $%s held a series o! meetings with the Modis& the issue remained deadlocked due to di!!erences regarding the loan repayments" The $%s did not want to have any e#posure in the company a!ter disinvestment o! their holding" On the other hand& the Modis argued that the sale o! stake and the issue o! loans should not be clubbed together" The stalemate continued over the ne#t !ew months with neither o! the parties willing to budge !rom their positions"

The %pen %&&er %n March />>@& the Modis agreed to repay the entire outstanding $% loans i! the $%s sold their stake to MR) !or a price higher than the ruling market price o! Rs" .C">a share" This development was attributed to an agreement between the Modi brothers to put an end to their (uarrels" The Modis o!!ered to buyback <T%*s holding in MR) at Rs" =@ a share" :owever& <T% was asking !or Rs" ?- per share" The $%s had !ormed a committee to negotiate the price at which their holdings were to be sold" :owever& the negotiations reached a deadlock since the $%s were not willing to bring down the sale price !rom Rs" /., per share" Meanwhile& MR)*s sales declined to Rs" /">C bn in the !irst (uarter o! />>@ !rom Rs" ."/C bn in the same period the previous year" This was largely due to the shutting down o! one o! the company*s units" %n Fovember />>>& the Modis appointed :ong 4ong D Shanghai Banking 1orporation 2:SB13 to provide a blueprint !or increasing their stake in the company to =/A" The $%s responded by appointing SB% 1apital Markets to divest their MR) stake through an open o!!er" The issue dragged on into the new millennium when another controversy arose" %n $ebruary .---& some MR) shareholders !iled charges against the $%s with the Monopolies and Restrictive Trade 0ractices 1ommission 2MRT013" The shareholders alleged that the $%s were acting in connivance with other tyre manu!acturers" %n March .--/& the Modis again made an open o!!er to buy a ,=A stake in MR) at Rs" @- per share=" By +une .--/& the price was revised to Rs" @/"=-" %n a meeting o! the heads o! the $%s& it was decided that the price revision was not in line with the indicative o!!er made by the Modis earlier" They decided not to participate in the open o!!er and instead began planning their counter o!!er" By +uly /& the open o!!er price had been increased to Rs" >- per share& and within the ne#t week the Modis picked up around /.A additional stake in the company" They also claimed to have reached an agreement with the $%s !or buying out their stake at Rs" >- per share" :owever& the $%s denied this and con!irmed that they would not participate in the open o!!er as they were not willing to sell their stake on a piecemeal basisC" Reacting to this& B4 Modi said& 5% !ail to understand this new development" 6e have agreed to all the demands by $%s& whether it be buying out their entire stake& giving them a bank guarantee or whatever else it takes"5 By the end o! +uly .--/& the Modis had received about ,CA o! MR)*s shares through the open o!!er" O! this& around /-"@A had been sold by )%1" This came as a big surprise to all the parties concerned as it was directly against the stand taken by the insurance company as part o! the $% consortium earlier" The other $%s involved lashed out strongly against )%1*s move" Things soon took an interesting turn when )%1 sent a letter to MR) stating that it wanted to withdraw the shares it had tendered in the open o!!er" But the Modis accepted )%1*s shares a!ter consulting legal e#perts" These e#perts con!irmed that a company could not go back on an open o!!er" The matter was re!erred to the SEB%& which decided that )%1 could not withdraw the shares as it had itsel! tendered them in an open o!!er" SEB% argued that i! such about7turns were allowed& the whole process o! open o!!ers would be plunged into chaos and people would begin !inding di!!erent reasons !or withdrawing their shares !rom open o!!ers" )%1 then moved the Mumbai :igh 1ourt !or an in'unction against trans!er o! its holding in MR) to the Modis" )%1 sources revealed that the trans!er o! its /.A holding had happened ;inadvertently*" They said it happened without the approval o! its investment committee& whose clearance was mandatory" The trans!er documents allowing the Stock :olding 1orporation o! %ndia 2S:1%)3 to trans!er )%1*s shares to MR) were signed by two o!!icers ;by mistake*both o! whom were later suspended by )%1" The 1ourt granted a temporary in'unction on )%1*s participation in the MR) open o!!er" %n an interim order& the court said that )%1*s shares could not be considered !or the open o!!er" %n turn& )%1 was asked to submit an undertaking that it would not trans!er its shares until the !inal hearing and disposal o! the suit" Co'panies and Fis ( The Issue o& Corporate )overnance

The Modis* predicament was not di!!icult to understand" The brothers claimed that on the one hand& the $%s re!used to sell their stakeG on the other& they were not allowing MR) to borrow !rom anyone else" The Modis also claimed that the interest rates being charged by the $%s 2nearly />A3 were very high" 9!ter repaying these loans& they wanted to look !or cheaper loans elsewhere" B4 Modi said& 56e want to return the entire loan taken !rom them& and look !or cheaper loans !rom other banks" 6hy should we service such a high cost debtH 9nd i! we return their loan& we would also get them out o! our board" $or a long time& they sat on our board and did not allow us to borrow !rom other banks" 6ith them out o! our board& we would be able to run the company in a productive manner"5 The MR) issue came to be seen as an e#ample o! the controversial role o! $% lenders in %ndian companies" The $% announcement to sell their stake in the open market in />>C sent shock waves through %ndia*s !amily7run businesses 2in which the $%s held large stakes?"3 $or decades& the promoters had management control despite having low stakes because the $%s neither voted against the management& nor sold any shares" But now& businessmen across the country !eared that i! the MR) stake sell7o!! succeeded& $%s would make it a norm to sell out i! any company de!aulted on any loan" Besides& companies operating in industries su!!ering !rom cyclical downturns could be unduly penaliEed this way" 40 Singh& 0resident& 9ssociated 1hambers o! 1ommerce and %ndustry 29SSO1:9M @3& said& 51ertain cyclical industries may su!!er a bad period& but this is no reason to punish an entrepreneur" This man has put in sweat !or his company and now suddenly by selling out& the institutions are punishing him"5 MR)*s predicament raised a heated debate in the chambers o! commerce as well" Statements !rom business houses& chambers o! companies and $% o!!icials regarding the MR) issue kept appearing !re(uently in the media" 9 $%11% > source said that i! the $%s decided to sell out& they should o!!er the !irst right o! re!usal to the promoter at the market price" Both $%11% and 9SSO1:9M appealed to the 8overnment to intervene and stop the $%s& while the 1on!ederation o! %ndian %ndustry 21%%3 /- supported the $%s" Though there were rumors o! some pressure !rom the 8overnment& eventually it decided to keep out o! the tussle" %n Fovember />>>& the 8overnment declined to take sides in the MR) $% tussle" $inance Minister Iashwant Sinha said& 56ould you like the government to intervene in the commercial decisions o! the !inancial institutionsH :ere& the (uestion is o! trust& and the $%s should not do anything to destroy this trust" They should work on mutual understanding& and transparency cannot be made a victim" %! the $%s !eel that they are getting a good deal by selling their stake& who am % to askH5 More than the !ear o! getting a bad price !or their stake& the companies !eared that no one could predict e#actly when the $%s would decide to sell their stake" The $%s played a dual role in the companies in which they held stakesthey were term lending bodies as well as investors" This made it di!!icult to predict their moves" $or instance& i! an $% was !acing a problem with Fon70er!orming 9ssets 2F09s3& // it could either start selling shares indiscriminately to raise money& or it could selectively target companies or groups which were de!aulting on their loans" The !act that di!!erent categories o! $%s had di!!erent motivations !or lending to companies !urther compounded the problem" Broadly& the $%s could be put in three categoriesdevelopment !inance institutions 2%DB%& %1%1%& %$1%3G insurance companies 2)%1& 8%13G and the <T%& an asset management company" The development !inance institutions were believed to be rather stable& long7term shareholders& who claimed not to be interested in destabiliEing e#isting managements" 9 senior %DB% o!!icial commented& 5By selling in Tata Steel or %T1 alone& we can provision !or most o! our F09s" But % don*t think this will ever happen" The whole country will be up in arms against us"5 9 senior %1%1% e#ecutive added& 59ny sale o! e(uity is bound to be controversial"5 :owever& it was a di!!erent story where the insurance companies and the <T% were concerned" These institutions were under increasing pressure to ma#imiEe returns on their investments& and they had to consider shi!ting their investments !rom traditional manu!acturing companies to the then sunrise sectors like %T and 0harmaceuticals" Moreover& unlike development !inance institutions& their investments were marked to markethence& they needed to constantly review their investments" <T% 8eneral Manager& Basudeb Sen said& 5%nstitutions like ours are

asset managers& now we have a responsibility towards our shareholders" Fow& decisions have to be made looking at the market" 1onditions o! /- years ago don*t have any meaning today"5 This was why <T% sold ?A o! its stake in MR) in />>?" Though <T%& )%1 and 8%1 sources said that they would never resort to selling shares o! any company arbitrarily& they maintained that MR) was a special case" The core issue involved in the MR) a!!air seemed to be the accountability o! the management to its shareholders" The !act that MR) had been per!orming badly over the years re!lected badly on its commitment to enhance shareholder wealth" The company*s de!aults on loan repayments were largely responsible !or $%s ac(uiring almost BBA o! its e(uity" 9 report claimed& 5Sound corporate governance can be e!!ected only through an e!!icient market !or corporate control" 1ompanies should be allowed to be taken over by those who think that they can run them better" 6hen a company is run suboptimally& it makes sense to buy up a controlling stake in it by making an outlay 'usti!ied by !uture income streams !rom the company bought over& and to run that company"5 *hat +ies Ahead, %n mid7.--/& MR) was reported to have begun work on a comprehensive turnaround strategy" %t in!used Rs" =-- mn to moderniEe its operations and implemented stringent cost7cutting measures" The Modis also began negotiations !or selling the non7tyre assets o! the company to raise the money !or augmenting the working capital base" This was deemed necessary to make the company pro!itable once again" The Modis had begun negotiations to get the $% loan !reeEe removed" The total capacity utiliEation o! MR)*s !acilities was under C-7C=A& which was proposed to be raised a!ter the restructuring" Substantial salary cuts !or senior e#ecutives o! the company and the !ormation o! a management team with well7de!ined work targets and instructions to report to the Modis were also on the anvil" Even as legal battles over the dispute with )%1*s open o!!er issue continued& MR) suspended the manu!acturing activities at its Modipuram plant in 9ugust .--/" Though the e#act reasons were not revealed& sources cited certain administrative reasons& beyond the control o! the management& !or the decision" B4 Modi meanwhile had unconditionally withdrawn the notice sent to V4 Modi and the two brothers were reported to be working !rantically to get the plant operational again" There appeared to be a lull in the battle between the $%s and the Modisat least until one o! them made a move"

References 1" #hosh $ndranil, Will the Modi Brothers Lose MRL?, Businessworld& August %, 1 &" Move to A , August &!, 1 !" oint !"ecutive #hairman at Modi Ru$$er, Business Standard !"

'" $yengar (ayanthi, FI %anel Ma& First !nforce #ode of !thics in Modi 'rou , Business Standard& March &&, 1 %"

)" *homas Cherian, Modi Ru$$er (uffers Rs) *+ cr ,et Loss, Business

Standard& (uly &1, 1 %"

+" ,abke -., 'etting the Right Men on Board, E#press %ndia& August 1&, 1 %"

!" $yengar (ayanthi, FIs Recall Loans to Modi 'rou , Business Standard& August '/, 1 %"

%" FM -rged to (tall Modi Ru$$er (take (ell-off $& FIs, Business Standard& 0eptember ', 1 %"

1" Roy Choudhury 0aibal and .akshi 2eeshal, Financial Institutions %lan to Fi" .eadline for (elling (take to Modis, $inancial E#press& (anuary &', 1 1"

" 3admanabhan Anil and *homas Cherian, Modis (et to Regain Ma/orit& in MRL, Business Standard& March ', 1 1"

1/" Chaudhuri ,ebashis, -nit 0rust Ma& Wash 1ands 2ff Modi Ru$$er 1olding, $inancial E#press& 4ctober &%, 1 1"

11" #ham$ers Lo$$&ing for Modis, E#press %ndia& 5o6ember +, 1 " "

1&" Market for #or orate #ontrol, www"epw"org"in, 5o6ember !, 1

1'" Mandal -ohinoor, Institutions Free to .ecide on (take (ale, (a&s (inha, $inancial E#press& 5o6ember !, 1 "

1)" 3rasad 0wati and ,as #upta 0ura7eet, Modis to Increase (take in Modi Ru$$er to +*3, Business Standard& 5o6ember 1/, 1 "

1+" .handari .hupesh and ,as #upta 0ura7eet, Modis to Bu&out 44)53 FI (take in Modi Ru$$er, Business Standard& 5o6ember 11, 1 "

1!" (oseph 0andeep and .handari .hupesh, 26ners -nder Fire, Businessworld& 5o6ember &&, 1 "

1%" Modi Ru$$er (hareholders .rag FIs to MR0%# 2ver (take (ale, www"indiainfoline"com, 8ebruary &&, &///" 11" MRL Board (us ends 5 .irectors of BK Modi Faction, Deccan :erald& (uly &, &//1" 1 " $yengar (ayanthi, BK Modi Ma& 1ave Walked into 0ra , The Economic Times& (uly ', &//1" &/" Modis Make 2 en 2ffer for Rs) 78 a (hare for MRL, Business Standard& March &//1" &1" Modi Ru$$er 9um s :53 in 5 .a&s %rior to 2 en 2ffer, $inancial E#press& March '/, &//1" &&" Institutions Ma& Make #ounter 2ffer for Modi Ru$$er, www"indiainfoline"com, (une 1, &//1" &'" MRL Board to ;(tri < BK Modi of %o6ers, Business )ine& (une '/, &//1" &)" BK Modi Lashes 2ut at Financial Institutions, :industan Times& (uly 1, &//1" &+" Modis #laim *:3 More (take -nder 2 en 2ffer, Deccan :erald& (uly , &//1" &!" FIs to (ta& A6a& from Modi Ru$$er 2 en 2ffer, The Economic Times& (uly 1), &//1" &%" ( eculation 2ver 2ffer $& Modi Ru$$er, Business )ine , (uly &/, &//1" &1" 0ri6ats -R, Modi Ru$$er 2 en 2ffer 'ets 5=3 Res onse, Business )ine& (uly &), &//1" & " LI# Files for In/unction Against 0ransfer of Modi Ru$$er (hares, Business )ine& (uly &), &//1" '/" 0harma 0an7ee6, (e$i Won<t Let LI# Reverse MRL (ale, The Economic Times&

(uly &%, &//1" '1" ,ubey Ra7ee6, >es, the FIs 1ave Agreed to (ell, Businessworld& (uly '/, &//1" '&" Modi Ru$$er (us ends Manufacturing Activities at Modi uram %lant, www"capitalmarket"com, August '/, &//1" 9 nominee o! the $% <nit Trust o! %ndia 2<T%3 on the MR) board& appointed as the 1hairman on 9pril ,-& .--/"
/ .

/>>? !igures"

Modistone later turned sick and was re!erred to the Board o! %ndustrial and $inancial Restructuring 2B%$R3"
,

<nder the group approach !ormula& the !inancial institutions stop advances to companies belonging to an industrial group i! other sister companies have de!aulted on loans"
B

9t this point& MR) was involved in an insider7trading case as well& as in the three days prior to the open o!!er& the company*s scrip gained .,A in three trading sessions" The stock rose !rom Rs" B>"== on March ., to Rs" C/"-= on March .@ and to Rs" C=">- immediately a!ter the open o!!er announcement"
=

MR) had received a /,A stake !rom the public in response to the open o!!er" The Modis could have bought only ..A !rom the $%s& but the $%s wanted to sell their entire BBA stake at one go" The $%s were not willing to sell on a piecemeal basis because that they were not sure o! the Modis buying the remaining ..A stake later at the same price" Moreover& i! the remaining ..A was purchased at this point itsel!& it was not clear whether the Modis would have to make another open o!!er" 2<nder SEB%*s creeping ac(uisition guidelines& promoters holding .=7=-A e(uity could ac(uire a ma#imum =A stake in a year through the creeping ac(uisition route"3
C

$%s owned high stakes in these companies because most o! them had borrowed heavily !rom $%s" )ater& these loans were converted into e(uity"
?

The 9ssociated 1hambers o! 1ommerce and %ndustry o! %ndia 29SSO1:9M3 was a representative body o! %ndian companies aiming to impact the policy and legislative environment !or balanced economic& social and industrial development"
@

The $ederation o! %ndian 1hambers o! 1ommerce and %ndustry 2$%11%3 was a representative body o! %ndian companies that sought to look a!ter the interests o! corporates and to integrate the %ndian economy with the global mainstream"
>

The 1on!ederation o! %ndian %ndustries 21%%3 was a non7government& not7!or7 pro!it& industry led and industry managed organiEation& partnering industry and government alike through advisory and consultative services"
/-

F09s are loans on which interest payments have been due !or more than one (uarter and or monthly installments have been due !or more than three installments"
//

*he author is a 8aculty Member at $CMR and Consulting 9ditor, 1ase $olio" Case A$A+-!I!

Modi Rubber vs" $inancial %nstitutions - .' %rasuna Introduction The case o! Modi Rubber )td" 2MR)3 brings to the !ore a number o! systemic issues that have bogged %ndian businesses !or long& such as intricately interwoven corporate holdings& the role o! !inancial institutions and poor corporate governance practices to name a !ew" $amily7owned business houses are a very common phenomenon in %ndia and the biggest business groups 2including the Tatas and Birlas3 are managed by !amilies" 6hile it is undeniable that owners take a personal interest in the management o! the company& it should also be accepted that !amily !euds could play havoc with the business as well" The !act that B4 Modi and V4 Modi had been at loggerheads with each other !or the control o! MR)& diverted the attention o! the senior management and the board o! directors !rom business operations" Even while the company was de!aulting on loans and posting losses& the !ocus was on the power struggle between the brothers" )ittle wonder that MR)*s pro!its !ell drastically over the years" 6ith !inancial institutions busy !iguring out whom to support& the business itsel! was le!t to the winds" Minority shareholders su!!er the most in such a scenario as they do not e#ercise much control on the management" Even in the issue o! the merger o! Modistone& a Modi group company with MR)& the struggle !or power !orced B4 Modi to act in a manner wrongly assuming that his brother would not be able to gather the necessary resources" Moral .a/ard %n the working paper& ;E(uity 0attern& 1orporate 8overnance and 0er!ormanceJ 9 Study o! %ndia*s 1orporate Sector*& Murali 0atibandla arrives at the !ollowing conclusion based on his researchJ 59 large investor& who is protected by governments with ta#payers* money& tends to have higher degree o! moral haEard than privately7owned large investors" Secondly& managers o! !irms through collusion can capture the agents o! these large investors& which in turn results in diversion o! accumulated capital !or nonproductive personal goals o! the agents"5 The impacts can be observed in the case o! MR)" The collusion between managers o! the !irm and agents comes into play because most public !inancial institutions are represented on the board o! borrowing !irms" %n the case o! MR) too& nominees !rom <T%& )%1 etc"& were on the board" %t could not have been very di!!icult !or the management o! MR) to lead these nominees& to act in the interests o! the company rather than in the interests o! their employers" MR) is a per!ect e#ample o! how many %ndian companies are structured" %n %ndia& public !inancial institutions including banks& Developmental $inancial %nstitutions 2D$%s3& insurance companies and mutual !unds have traditionally been the ma'or providers o! !inances !or companies" Most o! them are in the public sector and have the implied guarantee o! support !rom the government" D$%s in particular had been established with the e#plicit aim o! !acilitating industrial development in the country" Their per!ormance has always been measured with the amount o! disbursement rather than with the (uality o! their assets" This created an inherent moral haEard& which was perpetuated by the license ra'" 0romoters in ne#us with politicians have abused these !inancial institutions" They took huge loans& which were rarely repaid" 9lso& !inancial institutions had little incentive or pressure to ensure that the loans were paid back" %n the case o! MR) too& it was the same story and neither did the management display any intentions o! paying back" %t is clearly mentioned that the Modis had been de!aulting on loan paybacks since the />@-s itsel!" 9s early as />@>& in the light o! a !ormal split& the Modis had re!used to pay back the loans& on the ground that& 5the crossholdings o! the various !amily !actions in Modi companies were so comple# that the liability o! each o! the brothers could not be !i#ed till the division

o! property was e!!ected"5 The Modi brothers could not 2or perhaps did not3 arrive at an e(uitable distribution and the loans were not repaid" The institutions did get an e(uity stake& which came with its own concerns" :owever& it was not until />>C that the !inancial institutions threatened to sell their stake in the company" This turn in events raises certain (uestionsJ $irstly& what use is an e(uity stake i! the company is not doing well and its stock price is saggingH Secondly& do !inancial institutions or their nominees who have become standard !i#tures at the board o! such de!aulting companies have any business thereH Their e#pertise or e#perience in managing companies is (uestionable and whether they help or hinder the business o! the company has to be considered" %n !act& the constant threat o! $%s to sell their stake could act like a Damocles sword !or the management" $%s owe their e(uity stake to de!aulting loans" Since they had never opposed the management*s right to run the business& most business houses were nonchalant to the nonpayment o! loans" But the threat o! the kind that $%s consortium posed to MR) merits in7depth analysis" The threat o! $%s to sell their stake in the open market is serious since it tends to reduce the stake o! the promoters" Moreover& it could be a welcome opportunity !or somebody who wants to take over the company" This could severely undermine the ability o! the company*s management" %n the case o! MR) too& the nominees !rom <T%& )%1 had dominated the board" %n addition& their role as lenders and owners were con!licting with each other& diluting their !ocus" There is a ma'or social cost o! this kind o! !unctioning" The money channeled via these !inancial institutions is the hard7earned savings o! millions o! people and such misuse o! !unds could hamper the economy in the long run" %n addition& the regulation !or dealing with de!aulters as well as their implementation is so weak that many companies get away with this kind o! behavior" %n !act& most F09s that trouble the %ndian !inancial system are accounted !or by corporate de!aults" This& in turn& a!!ects the health o! these !inancial institutions& which had lent !reely 2at times indiscriminately3 due to the government*s support" Most o! the D$%s today are struggling !or their own e#istence due to such loans" Even the concept o! government*s support cannot be relied upon completely today" %n the case o! <T%& a!ter repeated bailouts within a short span o! time& the government gave up and the investors took the brunt" 9nd all the while& money was !lowing in uninterrupted into unpro!itable companies" The insider trading allegations that could not be resolved indicate the ine!!icient stock markets o! %ndia" The issue is not whether insider trading took place or notG it is more to do with the !act that the case was not resolved" There is also the issue o! )%1*s sale o! its stake" Though the case went into the courts in .--/& no 'udgment has been passed even to this day" This proves the la# attitude o! the 'udiciary" %t also seems to be the motivation !or companies to act as and how they want" !o'e !uggestions 8iven the present socio7economic environment in %ndia& the case o! MR) throws up a !ew points worth pondering upon" To begin with& !inancial institutions should be very clear as to their purpose and should lend a!ter a thorough& rigorous screening o! the businesses they are lending to" Since they are dealing with public !unds& their responsibility should be erring on the side o! caution" 8iven the !act that venture capitalists are there to support riskier ventures& a strict stand taken by !inancial institutions would not seriously hamper the entrepreneurial culture" $inancial institutions& in their own interest& should not go hand in glove with the promoters& restructuring loans at every due date" They should act in a more proactive manner rather than wait till they get the stake and then threaten to dispose it in the open market" 9t the heart o! the problem is the lack o! proper corporate governance practices in the %ndian scenario" Rather than merely adopting corporate governance codes& SEB% as well as the stock e#changes should make the implementation stricter"

:uge debts can undo the prosperity o! a company in more ways than one" The cost o! debt itsel! is !ormidable and the case o! MR) proves that there could be larger concerns that accompany loans" The loser at the end o! it all is the investor& and in developing markets like %ndia& the society at large" *he author is Assistant 9ditor, $C8A$ 3ress" K %1$9% 0ress" 9ll Rights Reserved" K %1$9% 1enter !or Management Research 2%1MR3& an a!!iliate o! %1$9%" 9ll Rights Reserved" $or accessing and procuring the case study log on to www"ecch"cran!ield"ac"uk" Case A$A+-!I! Modi Rubber vs" $inancial %nstitutions - Madhu ?i/ 9part !rom re!erring to the controversial role o! $inancial %nstitutions 2$%s3 in the management o! many %ndian companies& the case study addresses the impact o! the Modi !amily*s disputes on Modi Rubber )td" 2MR)3" The emphasis given by SEB% in the recent past& to the adoption o! !air and ethical business practices by all corporate entities is also highlighted" Since $%s holding stakes in companies act as owners as well as investors& it becomes di!!icult to anticipate their moves" $urther& the !act that MR) had been per!orming badly is also a cause o! concern" This re!lects poorly on the company*s commitment to enhance shareholders* wealth& which is directly linked to corporate governance" This issue is o! signi!icance& since during the last !ew years& corporate governance has become an indispensable re(uirement !or survival& growth and progress o! companies" 9n e!!ective corporate governance system is one& which allows the Board o! a company to provide leadership& strategic guidance and ob'ective 'udgment independent o! the management& while remaining accountable at all times to the shareholders" The importance o! good corporate governance has grown because o! the sheer siEe o! the companies and it is a priority on the SEB%*s agenda as well" The bene!its o! ;good* corporate governance areJ 1reating investor con!idence in the long run" 1reation and enhancement o! shareholders wealth" %mproving the long7term health o! the company" 0romoting sel!7regulation" Making the company attain sustainable and high growth levels" 9 higher level o! accountability and integrity is achieved" There is an increasing concern by the $%s about standards o! !inancial reporting and accountability& especially a!ter losses su!!ered by investors and lenders in the recent past& which could have been avoided with better and more transparent reporting practices" Millions o! investors have su!!ered on account o! the mismanagement o! companies" %n today*s !iercely competitive business environment& good corporate governance

practices are being looked upon as a benchmark !or corporate e#cellence" %t is not only !or the sake o! accountability alone that good corporate governance is necessary" Several studies have shown that there is a strong link between how a company is governed and how it per!orms" Most companies having higher governance standards are also the ones delivering substantial higher returns to shareholders" %n !act& good corporate governance practices ensure that companies enhance their wealth7generating capacity in a transparent and legal manner& meeting the e#pectations o! both shareholders and the society" The $%s were not totally 'usti!ied in adopting the group policy approach towards MR)" :owever& the company*s poor per!ormance over the years is also not because o! the role o! $%s in its management" The $%s threat to sell their stake in Modi Rubber& in the open market was to ensure that the Board o! Directors remained committed to managing the company in a transparent manner" The e!!orts by $%s here was also to make the company proactive and take immediate steps to adopt good corporate governance practices" Thus& the Modis need to seriously reevaluate their strategies and adopt a greater degree o! pro!essionalism in management o! MR)" 1onsidering sti!! competition in the industry it is operating in 2both !rom the domestic players and imports3& MR) is liable to !ace pressure on its pro!itability& in the !uture" Other top companies such as MR$& 9pollo Tyre D 8oodyear are also !eeling the pinch o! the competition" MR) thus needs to make e!!orts to survive the recession in the market" The company has already initiated steps to improve its position" 9 new range o! tyres related to the speci!ic market needs has been introduced& backed by an e!!ective marketing strategy" The other initiative includes a structural reorganiEation aimed at improving the pro!itability o! the organiEation" 8ood corporate governance practices should become a way o! li!e at MR)" The role o! the Board o! Directors needs to be revolutionary& always ensuring that the company moves towards higher levels o! creativity" $amily disputes leading to separation invariably result in a division o! the company& much to the detriment o! the individual shareholders" To remain competitive in a changing world& MR) needs to take care o! these issues so that it can grasp opportunities and meet the challenges o! the !uture" *he author is Reader, 8aculty of Management 0tudies :8M0;, 5ew ,elhi" Re!erence L /B7-,7-B7-. K %1$9% 0ress" 9ll Rights Reserved"