Shareholders’ rejection of related party transactions could jeopardize Kalyani group of companies

Products supplied to MHVSIL account for about 80% of sales of AAL, which manufactures axles, suspension and brake components. MHVSIL then distributes these components to automobile companies.

Rejection of the proposal could disrupt AAL’s operations and impact its future growth. The company now needs to explore alternative arrangements to ensure smooth supply of parts to customers.

Proxy adviser Institutional Investor Advisory Services India Ltd (liAS) said keeping the distribution in a separate company would deprive AAL’s minority shareholders of the profits earned from the sale of the components. The Stakeholder Empowerment Service (SES) said in its report that there was also a lack of transparency on pricing and a lack of information on the benefits that the two partners derived from the arrangement.

Kalyani Group did not respond MintAn email seeking comment was sent Tuesday evening.

The crux of the matter

AAL is a listed company jointly owned by the American Cummins Company and the Indian Kalyani Group, with each party holding 35.52% of the shares. The company’s public shareholders include Nippon Life India Mutual Fund (8.81%) and SBI Contra Fund (2.38%).

Meanwhile, MHVSIL is an unlisted joint venture formed by the same two partners in a 51:49 ratio, with the US company holding a higher stake.

AAL manufactures these auto parts and MHVSIL distributes them to customers as part of an arrangement between the two companies.

AAL seeks shareholder approval for related party transactions $MHVSIL’s investment in FY26 is Rs 2,500 crore. By comparison, the company’s fiscal 2024 revenue was $2,245 crore with a profit of Rs. $1.7 billion rupees.

More than 79% of minority shareholders voted against the resolution, according to the company’s regulatory disclosure late Monday night. As per Indian regulations, promoters are not allowed to vote on resolutions related to related party transactions.

This arrangement between the two companies is not new. In December 2023, minority shareholders approved a similar proposal to approve related party transactions $4,000 crore in FY25. Shareholders have previously agreed to this arrangement.

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“This collaboration has played a critical role in the significant growth of AAL’s business in India over the past 21 years,” the company said in a regulatory filing on December 4.

What did the agency advisor say?

“We do not support this arrangement as there is no clear rationale for housing the distribution network in a separate promoter-controlled entity,” IiAS said in a Nov. 28 report.

“We believe distributions must be made directly through AAL so that all shareholders of the listed entity benefit from the profits earned on sales to end customers,” it said.

SES said since MHVSIL is a private company and its financial data is not public, shareholders cannot compare its financial performance with AAL.

“Comparing the performance and growth of the two companies will allow shareholders to understand that neither party will benefit at the expense of the other,” the proxy adviser said in the report.

Replying to a question raised by the acting consultant, AAL said that MHVSIL’s main objective is to design and develop new products suitable for Indian road conditions. The privately held company owns all intellectual property rights and AAL’s expertise is to “manufacture to design and supply only”.

AAL said in a regulatory filing on December 9: “We would like to assure you that we have made every effort to ensure transparency, fairness and consistent with good governance practices to achieve the best interests of AAL and its shareholders in this proposed transaction. Good interests.”

potential impact

Earlier, AAL said in a stock exchange filing that rejecting the deal could disrupt seamless services to the company’s customers in the short term. The company said it would have to significantly restructure its processes and operations.

“Any proposed changes to the current structure will disrupt the trust we have built with all end customers and may impact AAL’s future business growth in India,” the company said.

Shares of Automotive Axles Ltd fell 0.9% on Tuesday on the Bombay Stock Exchange to close at $1,807.85. The Sensex fell 1.3% during the session as investors sold off.