Financial Management

CASE 2:

Modi Rubber Vs. Financial Institutions

Index

• Power Struggle Bhuv• Background Note Samta• The Modi Rubber Story Sahil• The Open Offer Hrisi• Companies & Financial Institutions – The

Issue of Corporate Governance Nishant• What Lies Ahead ? Gagan

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 board’s 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.

• Majority of the FI’s holding were with LIC and UTI

24%

32%

45%

MRL Equity

Modi Brothers PublicFinancial Institutions

• FI’s acquired stake in MRL by conversion of unpaid loans into equity and market purchases.

• The company’s business comprised manufacturing and marketing of automobile tyres/tubes/flaps and retreading materials.

• MRL technical collaboration with Continental AG of Germany for manufacturing tyres.

• MRL’s 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

• About 87% sold locally, rest exported.• MRL hence, had built a strong base for itself in

the market.

Tyres Tubes2000000

2100000

2200000

2300000

2400000

2500000

CapacityProductionSales

The Modi Rubber Story

• Rivalry between the brothers.• Defaulting of the loans since 1980’s.

1989 split in family Modis refused to repay money to FI’s Solution by arbitrator rejected by Modis

• Continental suggested the restructioning of the company in 1930.

• FI’s sanctioned a Rs.900 million loan for restructuring.

Modistone Fiasco

80 mn by B.K.Modi &

V.K.Modi each.

200 mn underwritten

by UTI

160 mn by MRL

Rights Issue 360

mn

Modistone

Issue Failed

Merger Accepted Merger FailedIF

• B.K.Modi planned to sabotage his brother.• In Feb.1995 approval of merger proposal,

failed B.K Modi’s plan.• In July 1996, the FI’s announced their decision

to sell their MRL stake in the open market.• FI’s decision was the result of B.K Modi’s

misbehavior with FI’s representatives.• In 1997, FIs initiatives to change MRL’s

management resulted in the resignation of five directors.

• According to the report submitted by UTI’s 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.

• Modi’s argued that FI’s couldnot 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 turaround program with the focus on raising companies productivity levels. Turnaround program aimed at: Improving worker efficiency. Outsourcing tyres in those sectors where

MRL didn’t 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

0

50

100

150

26.9 58 70123

Share Prices

Share Prices

• 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.

Sales (Billion $)1.85

1.91.95

22.05

2.12.15

2.2

1st Quarter 19971st Quarter 1998

Share price offered by Modis

1998 36951 37043 370730

102030405060708090

100Share Price

share Price

• In July 01, the company acquired another 12% additional stake.

• By July 01 end Modis received 36% of MRL’s 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 couldnot 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 didn’t 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.eLending bodies.Investors.

• FIs could sell shares or target companies which were defaulting on their loans, when it was facing a problem with NPAs.

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

Categories of FIs

• FI’s 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.

• Company’s 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 ?