Modi Rubber Vs

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Financial Management

CASE 2:

Modi Rubber Vs. Financial

Institutions


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Index

Power Struggle

Background Note

The Modi Rubber Story The Open Offer

Companies & Financial InstitutionsThe

Issue of Corporate Governance What Lies Ahead ?


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The Power Struggle

On 30th June,01 special meeting decided toremove the MDB.K.Modi and also other 3directors.

B.K.Modi absent in the meeting. Next day, B.K.Modi holds a press conference

and announced his rejection of boards

decision. On 5th July,01 B.K.Modi sends a notice to

V.K.Modi.


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Background Note

Est. 1971 MRL part of Modi Group of

Companies.

Majority of the FIs holding were with LIC and

UTI

24%

32%

45%

MRL Equity

Modi Brothers Public Financial Institutions


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FIs acquired stake in MRL by conversion of

unpaid loans into equity and market purchases. The companys business comprised

manufacturing and marketing of automobile

tyres/tubes/flaps and retreading materials. MRL technical collaboration with Continental

AG of Germany for manufacturing tyres.

MRLs major customers included Telco, AshokLeyland, Maruti Udyog, Punjab Tractors &

Escorts


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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 fromMRL.

Company had 2 plants; Meerut and Ghaziabad.


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In 98-99

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

the market.

2

2.1

2.2

2.3

2.4

2.5

Tyres Tubes

Millions

Capacity

Production

Sales


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The Modi Rubber Story

Rivalry between the brothers.

Defaulting of the loans since 1980s.

1989 split in family

Modis refused to repay money to FIs

Solution by arbitrator rejected by Modis

Continental suggested the restructuring of thecompany in 1930.

FIs sanctioned a Rs.900 million loan for

restructuring.


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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

IssueFailed

Merger Accepted Merger Failed

IF


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B.K.Modi planned to sabotage his brother.

In Feb.1995 approval of merger proposal,failed B.K Modis plan.

In July 1996, the FIs announced their decision

to sell their MRL stake in the open market. FIs decision was the result of B.K Modis

misbehavior with FIs representatives.

In 1997, FIs initiatives to change MRLsmanagement resulted in the resignation of five

directors.


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According to the report submitted by UTIs

head Basudev Sen, FIs decided to recall theirloans 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.


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Modisargued that FIs could not offer shares

to any other party without offering them first.

June 30,1997 MRL posted a loss of Rs.150million against a profit of Rs.182 million in the

previous year.

Appointed consultants McKinsey&Co., whodesigned 42-point turnaround program with

the focus on raising companies productivity

levels. Turnaround program aimed at:

Improving worker efficiency.

Outsourcing tyres in those sectors where

MRL didnt make good margins.


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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.


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The Open Offer

In March 1998,the Modis agreed to repay the

entire outstanding FI loans

0

50

100

150

Market

Price

MRL

offer for

UTI

share

UTI

demand

FI

demand

26.958 70

123

Share Prices

Share Prices


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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.

1.85

1.9

1.95

2

2.05

2.1

2.15

2.2

Sales (Billion $)

1st Quarter 1997

1st Quarter 1998


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Share price offered by Modis

0

1020

30

40

50

6070

80

90

100

1998 Mar-01 Jun-01 1-Jul

Share Price

share Price


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In July 01, the company acquired another 12%

additional stake.

By July 01 end Modis received 36% of MRLsshares 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.


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But legal experts confirmed a company cannot

go back on an open offer.

Matter was referred to SEBI, which declared

LIC could not 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

hearin .


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Companies & FIs

FIs didnt allow MRL to sell or borrow sharesfrom 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.


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MRL issue: example of the controversial role

of FI lenders in Indian Co.

In 1996 FI announcement to sell their stake inthe open market shocked Indian market.

MRL controversy made businessmen fear that

the FIs would make it a norm of sell out if anyCo. 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.


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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 FIsmoves as they played dual role i.e

Lending bodies.

Investors. FIs could sell shares or target companies

which were defaulting on their loans, when it

was facing a problem with NPAs.


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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

DFI is not interested in destablising the

management


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Insurance Companies and asset management

companies 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.


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Core Issues Involved In MRL

Accountability of the management to itsshareholders.

Bad performance of MRL over the years

reflected badly on its commitment to enhanceshareholder wealth.

Companys defaults on repayments were

responsible for acquiring 44% of its equity byFIs.

A report claimed that stake should be taken up

by those who think they can run them better.


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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.


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Tried to get FI loan freeze removed.

B.K Modi withdrawn the notice sent to V.KModi and started working together to get the

plant operational again.


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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 ?


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Credits

Bhuvan Duggal

Gagan Dhawan

Hrisikesh Rao Nishant Vora

Sahil Saleem

Samta Wadhera

Modi Rubber Vs

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