Even as a section of market participants harped on the lack of transparency in the terms of the Hero Honda split, the corporate affairs ministry made it clear today it had no plans to scrutinise the deal. Experts say the company is under no obligation to disclose price details as it involves inter se transfer of shares between two promoter entities.
“We are only looking at scrutiny of mergers. We are not looking at scrutiny of demergers because demergers allow greater competition, while mergers may lead to less competition,” said Corporate Affairs Minister Salman Khurshid on the sidelines of the Corporate Governance Summit 2010 organised by the Confederation of Indian Industry (CII).
On Thursday, the Munjals-promoted Hero Group bought Honda Motor Corporation’s entire 26 per cent stake in Hero Honda for an undisclosed sum. While refusing to specify the price at which shares are changing hands, the Indian promoters said the company would raise debt to buy out the foreign partner. The deal will increase the Munjal family’s stake in the company to 52 per cent.
“When the transactions actually take place, the details will be out… Minority shareholders have to be protected, but they can’t overturn the decision of a majority,” commented Bajaj Group Chairman Rahul Bajaj on the Hero Honda deal.
Legal experts, meanwhile, say inter se transfer of shares among the promoters would not trigger an open offer and, hence, regulations do not call for price disclosure. “None of the listing regulations will be violated if the price is not disclosed,” said Sandeep Parekh, founder, Finsec Law Advisors. Parekh was earlier executive director (legal) with markets regulator Securities & Exchange Board of India.
Experts, however, add that the price would have to be disclosed to shareholders only if the deal impacts the company’s operations.
“The promoter has made it clear there will be no increase in royalty payments. However, if the equity share purchase agreement contains clauses that impact the operations of the company, then shareholder approval will be required,” said a person familiar with the matter, on condition of anonymity.
“Starting January 2011, our royalty payments will actually decline, because we will be paying only for three new models,” said Pawan Munjal, MD & CEO, Hero Honda, while addressing the media on Thursday.
Brokerages also seem to have taken the deal’s contours positively, with some even upgrading their recommendation. They expressed confidence the deal would not impact Hero Honda’s products or branding. “While the management did not share the exact details of the agreement, prima facie, serious concerns seem to have been allayed,” stated Edelweiss Securities in a note to its clients.
“The broad contours of the deal seem to indicate that with continuity in products, branding and royalty, the company’s operations are unlikely to be impacted in the medium term (until 2014),” it stated further, while maintaining a buy rating on the auto major. Emkay has upgraded Hero Honda to ‘hold’ from ‘reduce’.