MapmyIndia’s process to spin-off its B2C operations raise a host governance issues

There is lack of clarity surrounding the deal, particularly regarding immediate royalty agreements for the use of MapmyIndia's technology and brand assets. The absence of these agreements has led to fears that the company’s core value could be compromised in favour of the new venture. Without proper safeguards, the spin-off could dilute their investments and undermine the long-term viability of MapmyIndia.

Financial implications 

The management team at MapmyIndia has justified the spin-off by citing ongoing financial pressures, including a 15 percent decline in profit after tax in recent quarters. This decline has been attributed to high marketing expenses and infrastructure costs associated with the B2C segment.

However, transferring this segment may lead to cash burn and negatively impact MapmyIndia’s overall profitability. Retaining the B2C operations as a subsidiary would have ensured greater accountability and potential returns for shareholders. By moving these operations away from MapmyIndia’s direct oversight, the company may lose out on future growth opportunities in a rapidly evolving market. The decision to segregate these operations could limit MapmyIndia's ability to capitalize on synergies between its B2B and B2C segments.

Stakeholder reactions 

The decision has resulted in a notable decline in MapmyIndia's stock price, reflecting widespread investor dissatisfaction and apprehension about diminished growth potential.

Keeping the B2C business within MapmyIndia could have ensured greater returns and accountability. There is need for governance that aligns with both the letter and spirit of fairness. It needs to be seen how the new structure would benefit the investors of MapmyIndia in light of their previous investments in the B2C segment.

Potential conflicts of interest

Rohan Verma's dual role as both the leader of the new venture and a Non-Executive Director at MapmyIndia raises significant concerns about potential conflicts of interest. This arrangement could dilute the current shareholders investments' value if decisions favour the new venture over MapmyIndia's core business operations.

Despite management’s assurances that no corporate funds will support the new venture, stakeholders remain sceptical about its sustainability without adequate backing. Allowing Verma to retain such significant control over the new venture while simultaneously holding a position at MapmyIndia creates an inherent conflict that could jeopardize shareholder interests.

Ideal approach for spinning off the B2C business 

In light of these concerns, we suggest that an ideal approach for spinning off the B2C business would have included several key strategies:

# Transparent Communication: MapmyIndia should have provided clear communication to shareholders about the rationale behind the spin-off, outlining how it would enhance operational focus and ultimately benefit shareholders.

# Fair Valuation: Conducting an independent valuation of the B2C business prior to the spin-off would have helped establish a fair market price for the new entity, ensuring shareholders understand what they are retaining versus what they are giving up.

# Spin off as a subsidiary: Instead of retaining only a 10 percent stake, MapmyIndia could have considered spinning off the B2C business as a 100 percent subsidiary and raise external capital in that subsidiary.

# Royalty Agreements: Implementing royalty agreements for using MapmyIndia's technology and brand in the new entity would create revenue streams while protecting intellectual property.

# Independent Oversight: Establishing an independent committee to oversee the spin-off process could help address governance concerns and ensure decisions prioritize shareholder interests.

# Performance Metrics: Setting clear performance metrics for both MapmyIndia and its new B2C venture would allow shareholders to track progress post-spin-off, providing transparency and accountability.

Role of Independent Directors and Audit Committee

The involvement of Independent Directors and Audit Committees is crucial in transactions like this one to uphold corporate governance standards:

# Independent Directors: They should act as watchdogs to ensure related-party transactions are conducted fairly and transparently. Their role is essential in evaluating whether the spin-off serves all shareholders' best interests.

# Audit Committee: This committee should review all financial implications of the spin-off, including potential conflicts of interest, ensuring proper accounting practices are followed throughout this transition.

Recent developments: Withdrawal of Rs 35 crore investment 

Adding further complexity to this situation is MapmyIndia's recent decision (made on 3rd December i.e. 2 days after the initial announcement) to withdraw its planned investment of Rs 35 crore in Rohan Verma's new B2C venture. This withdrawal was primarily driven by feedback from minority shareholders who expressed worries about fairness in light of their previous investments in this segment.

The promoters have misunderstood that Rs 35 crore investment to support the B2C business is not the concern for minority shareholders. On the contrary, it is the 90 percent promoter ownership of a business that was incubated and will derive all resources from the listed company that is the concern.

MapmyIndia’s failure to make an official exchange announcement regarding this withdrawal (which has only been announced to media as yet), raises concerns about compliance with SEBI regulations. Timely communication regarding such significant changes is essential for maintaining trust and transparency within publicly listed companies.

Conclusion 

In summary, while MapmyIndia's restructuring aims to enhance operational focus and protect margins, it has sparked significant apprehension regarding governance practices, financial risks, and potential conflicts of interest that could ultimately affect shareholder value. As investors continue to scrutinize this bold move, it remains to be seen how it will impact both MapmyIndia’s future prospects and its relationship with shareholders.

The unfolding situation serves as a reminder of the complexities involved in corporate restructuring and underscores the critical importance of maintaining transparency and alignment with stakeholder interests. Moving forward, it is imperative for MapmyIndia's management to address these concerns proactively to rebuild investor confidence and ensure long-term value creation for all stakeholders involved.  

(The authors are with InGovern Research Services Private Limited.)

Views are personal, and do not represent the stand of this publication.