Supply to MHVSIL constitutes approximately 80% of the sales of AAL, which manufactures axles, suspensions and brake assemblies. MHVSIL then distributes these components to automotive companies.
The rejection of the proposal could potentially disrupt AAL’s operations and impact its future growth. The company will now need to explore alternative arrangements to ensure a smooth supply of components to its customers.
Keeping distribution in a separate firm was depriving minority shareholders of AAL of the margins earned from the sale of these components, said proxy advisor Institutional Investor Advisory Services India Ltd (liAS). There was also a lack of transparency regarding pricing and a lack of information on the benefits accrued to the two partners from the arrangement, Stakeholders Empowerment Services (SES) said in its report.
The Kalyani Group did not respond to Mint’s emails seeking comment sent on Tuesday evening.
Crux of the issue
AAL is a listed joint venture company of US’ Cummins Inc and India’s Kalyani Group, with both partners controlling a 35.52% stake each. Public shareholders of the company include Nippon Life India mutual fund (8.81%) and SBI Contra Fund (2.38%).
Meanwhile, MHVSIL is an unlisted 51:49 joint venture of the same two partners, with the American company holding the higher stake.
While AAL manufactures these automotive components, they are then distributed to customers by MHVSIL, as part of the arrangement between the two firms.
AAL was seeking shareholder nod for related party transactions up to ₹2,500 crore with MHVSIL over the course of FY26. This compares to the company’s FY24 revenue of ₹2,245 crore and a profit of ₹170 crore.
Over 79% of the minority shareholder votes cast were against the resolution, as per regulatory disclosures made by the company on Monday evening. As per Indian regulations, the promoters are barred from voting on resolutions pertaining to related party transactions.
This arrangement between the two firms is not new. In December 2023, minority shareholders had approved a similar proposal, ratifying related party transactions to the tune of ₹4,000 crore over the course of FY25. Prior to that too shareholders had given their nod to this arrangement.
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“This collaboration has played a crucial role in AAL’s significant business growth in India over the past 21 years,” the company said in a regulatory filing on 4 December.
What do proxy advisors say?
“We do not support this arrangement, since there is no clear rationale for housing the distribution network in a separate promoter-controlled entity,” IiAS said in its report dated 28 November.
“We believe the distribution must be directly carried out through AAL so that all the shareholders of the listed entity reap the benefits of the margin earned on sale to the final customer,” it said.
Since MHVSIL is a private company, its financials are not publicly available, and thus its financial performance cannot be compared with AAL by shareholders, according to SES.
“A comparison of the performance and growth of both the companies would enable the shareholders to understand that no party is benefitting at the cost of the other party,” the proxy advisor said in its report.
Responding to the questions raised by the proxy advisors, AAL said that the main objective of MHVSIL was to design and develop new products tailored to India’s road conditions. The privately-owned company holds all the intellectual property rights while AAL’s expertise was “only to manufacture as per the design and supply.”
“We assure you that every effort has been made to ensure transparency, fairness, and alignment with good governance practices to the best interests of AAL and its shareholders in this proposed transaction,” AAL said in a regulatory filing on 9 December.
Potential impact
Earlier, AAL had said in stock exchange filings that the denial of this transaction could in the short term disrupt the seamless servicing of the company’s customers. The company will have to substantially restructure its process and operations, it said.
“Any proposed changes in the current structure would disturb the trust that we have built with all our end customers and might impact the future business growth for AAL in India,” the company said.
The shares of Automotive Axles Ltd lost 0.9% on the BSE on Tuesday to close at ₹1,807.85. Sensex lost 1.3% during the session amidst investor selloff.
