Hyundai Motor India related-party transactions: Proxy advisor SES advises against six of 7 proposals, IiAS and InGovern clear all

The one proposal that SES has said voters can vote for involves Hyundai Motor Company (HMC).

Proxy advisors Stakeholders Empowerment Services (SES), Institutional Investor Advisory Services (IiAS) and InGovern have given two different views on related-party transactions (RPTs) proposed by Hyundai Motor India. While SES has asked shareholders to vote against six of the seven proposals, IiAS and InGovern Research Services has okayed all.

In October 2024, Hyundai Motor India made a splash with its Rs 27,870-crore initial public offer (IPO), the largest the Indian market had seen, eclipsing Life Insurance Corporation of India Ltd's IPO of Rs 21,000 crore.

One of Hyundai Motor India's RPT proposals with a transaction value of Rs 3,000 crore involves HEC India LLP, which has fixed assets of Rs 11 lakh, pointed out the SES report. Besides the ones with Kia India (a subsidiary of Hyundai) and HEC India, the four other proposals that SES has advised against are for transactions with Mobis India Limited, Hyundai Transys Lear Automotive India Private Limited (HTLAIPL), Hyundai Motor De Mexico S DE RL DE CV and PT Hyundai Motor Manufacturing Indonesia. The one proposal that SES has said voters can vote for involves Hyundai Motor Company (HMC), the Seoul, South Korea-based parent company. The voting deadline is March 13.

In response to Moneycontrol's queries, HMIL's spokesperson said, "We are aware of the Stakeholders Empowerment Services (SES) recommendations, and we are of the view that this is an isolated opinion. Another reputed proxy advisory firm Institutional Investor Advisory Services (IiAS) has shared a contrary opinion to recommendations of SES, favouring all the seven resolutions and giving a clear go ahead. Our commitment to highest standards of corporate governance remains uncompromising, and we shall continue to uphold the interest of all stakeholders."

What the advisories said

In its advisory report, SES said: "Related party transactions of such magnitudes as proposed must require careful scrutiny and as SES research shows that proper scrutiny has not been done nor proper disclosures made to enable shareholders to take an informed decision. SES opinion gets strengthened based on data in respect of HEC, an entity, which has fixed assets of ₹ 11 lakhs only and proposed transaction value is ₹ 3000 Crore. In opinion of SES, HEC is not having financial wherewithal to execute such high value contract independently."

The advisory firm has questioned whether the company's audit committee and board had carried out their fiduciary duties in the spirit of the law.

The report said, "For such high value Related party Transactions investors and law makers not only require but expect as well that the Audit Committee (“AC”) and the Board must be extra careful and cautious in approving such high value transactions.

"Looking at the description of transactions, SES is forced to ask and examine, whether the AC and the Board carried out their fiduciary duty in accordance with law; complying not only in letter but in spirit as envisaged in Master Circular of SEBI dated 11th November, 2024 in relation to the LODR disclosure?"

On six of proposed RPTs, the IiAS report observed that they were being undertaken at arm's length pricing and in the ordinary course of business. On the transaction with HEC, the IiAS report said, "HEC India LLP is a subsidiary of an associate of the holding company of HMIL. The company has stated that HEC India LLP is specialised in automobile construction, with expertise in Global Standards with sound design concepts and engineering construction capabilities. In FY24, HMIL had purchased capital goods from HEC aggregating Rs. 2.9 bn. The company should have provided a detailed explanation for the proposed limit of Rs. 30.0 bn for FY26, which is significantly higher than the quantum of transaction in the last three years. The Draft Red Herring Prospectus states that in December 2023, HMIL had acquired a manufacturing plant in Talegaon, Maharashtra, to expand operations. The redevelopment of the Talegaon plant requires significant capital expenditure over a relatively short period. We assume that capital goods will be purchased from HEC for the redevelopment of the Talegaon facility. Hence, we support the resolution. We expect the company to provide granular details regarding the rationale for the proposed transaction with HEC."

On six of the proposed RPTs including that of HEC India, InGovern has pointed out that the company has not provided any valuation report from an independent valuer, and has recommended that shareholders raise this with the company. It has said, "We recommend shareholders raise the concern regarding lack of adequate disclosure regarding the competitive advantage that Hyundai Motors India gets in terms of pricing from sourcing the components from the related party so that the Company conducts a third-party assessment from Independent Valuer going forward."

InGovern added, "However, given that the Company is required to enter into the above transaction in Ordinary course of business, we recommend shareholders raise the above point of discussion while voting FOR the resolution."

For the transaction with Hyundai Motor Company (HMC) alone, InGovern has not raised this concern. It notes that the company has not provided any valuation report from an independent valuer. "However", the report added, "in this case, since the value of approval being sought is not significant (6.60% of Company’s audited consolidated annual turnover for the financial year 2023-24) and given that the Company is required to enter into the above transaction in Ordinary course of business and the RPT is with the direct holding company, we recommend shareholders vote FOR the resolution.