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Financial Management CASE 2:

Modi Rubber Vs. Financial Institutions

Index
Power Struggle Background Note The Modi Rubber Story The Open Offer Companies & Financial Institutions The Issue of Corporate Governance What Lies Ahead ?

The Power Struggle


On 30th June,01 special meeting decided to remove the MD B.K.Modi and also other 3 directors. B.K.Modi absent in the meeting. Next day, B.K.Modi holds a press conference and announced his rejection of boards decision. On 5th July,01 B.K.Modi sends a notice to V.K.Modi.

Background Note
Est. 1971 MRL part of Modi Group of Companies. MRL Equity
24%

45% 32%

Modi Brothers

Public

Financial Institutions

Majority of the FIs holding were with LIC and UTI

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

The Modi Rubber Story


Rivalry between the brothers. Defaulting of the loans since 1980s. 1989 split in family Modis refused to repay money to FIs Solution by arbitrator rejected by Modis Continental suggested the restructuring of the company in 1930. FIs sanctioned a Rs.900 million loan for restructuring.

Modistone Fiasco
Modistone

Rights Issue 360 mn


Issue Failed

200 mn underwritten by UTI


Merger Accepted IF Merger Failed 80 mn by B.K.Modi & V.K.Modi each.

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 could not 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 turnaround 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.

The Open Offer


In March 1998,the Modis agreed to repay the entire outstanding FI loans
Share Prices
150 100 50 0 26.9 123 58

70

Share Prices

Market MRL UTI FI Price offer for demand demand UTI share

2.2 2.15 2.1 2.05 2 1.95 1.9 1.85 Sales (Billion $)

1st Quarter 1997 1st Quarter 1998

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 offered by Modis


Share Price
100 90 80 70 60 50 40 30 20 10 0 1998 Mar-01 Jun-01 1-Jul

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 could not 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.

Companies & FIs


FIs didnt allow MRL to sell or borrow shares from anyone else. Interest rates charged by FIs were very high (nearly 19% ) After the repayment of loans Modis wanted: To look for cheaper loans from some other bank. To get FIs out of their board.

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

Development finance institution (IDBI,ICICI,IFCI)

Insurance companies (LIC,GIC)

Asset management company (UTI)

Stable Long term shareholders

Unstable Shift their price market to market

Unstable Long term shareholders

DFI is not interested in destablising the management

Insurance Companies and asset management companies 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.

Core Issues Involved In MRL

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.

What lies ahead?


In mid-2001:begun work on a comprehensive turnaround strategy. Invested Rs.500 million to modernize its operations. Implemented stringent cost-cutting measures. Sold non-tyre assets to raise the money. Substantial cuts in salary for senior executives.

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 ?

Credits
Bhuvan Duggal Gagan Dhawan Hrisikesh Rao Nishant Vora Sahil Saleem Samta Wadhera