Modi Rubber Limited Case

A Case Study of MRL Vs Financial Institutions Presented by Richa Srivastava 2008mb0032

Financial institutions: Meaning and Types Institutions that perform the essential function of channeling funds from those with surplus funds to those with shortages of funds

Types Of Financial Institutions Finance companies Mutual Funds Pension Funds Commercial banks Insurance companiesfirms and investment Securities banks

Modi Rubber Ltd.

Modi Rubber Ltd was incorporated in February 1971 and promoted mainly by B. K. Modi to manufacture automotive tyres. The original project was set up at an estimated cost of Rs 40 crore B.K.Modi and V.K.Modi held 23.87%of MRL equity, the FI’s held 44.5% and the Public held 31.62% Major part of FI stake in MRL was with LIC and UTI. others were ICICI &IFCI Modi traded in automobile tyres/tubes/flaps and retreading materials Throughout the 80s Modi dominated the domestic market.

A culmination of aspirations and the dream to transport the then nascent Indian industrial scenario to the dizzying heights of success. a vision to succeed, to cast an indelible impression on the firmament of success. To pursue it, to achieve it and then to excel it. Only to make yet another beginning.

Case Analysis On june 30 2001 Paduranga Rao chairman of MRL to revome MD Mr B.K.Modi. On june 31 B.K.Modi held a press conference and taked about the constitution of the board. On july 5, B.K.Modi sent a notice to V.K.Modi charginghim of breach Of shareholders agreement The move of MRL against B.K.Modi was as victory by FIs Since the early days of MRL two brothers were never seen eye to eye. The reason behind this was B.K.Modi desire to get higher share

Modiswere defaulting on FIs loans since 1980,as due to complex family factions liability of each brother could not be fixed

The open offer In march 1998 MRL decided to repay the entire loan if FIs would sell their Stake to MRL for a price higher than the ruling price. But this initiative failed

Hard time for Modi Rubber Limited In 1995-96 Modipon and Modi Spinning defaulted, the government cancelled a loan of Rs 125 crore Modi suffered a net loss of 18 croredue to the defaulting of two units. The company slumped into a loss of Rs 43.05 crore in 1999-2000. MRL had to slash production by 15 per cent. They even resorted to heavy discount sales to clear stocks. The company was also found investing in various loss-making subsidiaries. An amount of Rs 21.37 crore was swallowed by Modistone Ltd which became a sick company by 1997.

The last payslips were given out in November 2001. Except for Modipon, 20 Modi factories are lying closed leaving hundreds of unemployed scrambling around for jobs to Noida, Faridabad, Delhi or Ghaziabad. serious lapses in management and corporate governance practices followed by the Modi Rubber Management, the FIs decided to sell their stake. Modi Rubber’s first plant at Modinagar was shut down on December 18, 2001, without any notice to the workers

Corporate Governance: An overview Corporate governance is defined as the distribution of rights and Responsibilities among different participants in the organizations such as the board, manager, shareholders, other stakeholders and it spells out the rules and procedure for making decision on corporate affairs

Concept of corporate Governance The system whose aim is to align as nearly as possible the interest of the Individual, corporation and society. The board of directors is responsible for

Corporate governance and Financial institutions By being active, FIs should ensure that their role as directors on the board is effectively fulfilled As FIs hold public money, it is implicit in their charter that they sere as guardians protecting the interests of shareholders and investors Short comings of financial Institution in context with corporate governance It is totally under the clutch of the government FIs most often act according to the convenience of the situation and the attitude of the Government towards a particular promoter or chairman

Reliance case. Swraj Paul case

FI makes rules by seeing the company and the person behind it means it Totally goes with the name and not the performance

How can FIs be really effective in corporate governance: Each institution should appoint a full-time trained panel of four to five employees to sit on the board of companies where they have a stake. Each panel could cover about three to four companies. As these people will have up-to-date information on the affairs of the company, they will better understand its transactions. This is the simplest and best way to ensure FIs play a more effective role in corporate governance, without, of course, undue interference

The $100-million ITC fraud highlights the need for FIs to play watchdog and maintain shareholders’ democracy

Hindrance in the path of FI’s as an effective corporate governance

corporate management could get away without giving the FIs any clout over company decisions •Lack of information when needed •Promoter worries about delay in decision •FI’s active role also can’t stop the scam and can’t improve the results

Modi vs FIs: corporate governance issues Promoters point of view ØNeither selling their stake nor allowing them to borrow from anyone else ØCharging high rates of intrest FIs point of view Before going on to FI point of view I would like to analyze that Is it the FIs’ job to lend money and not run companies? As far as FI as lender is concerned, any lender will want to ensure that his money is safe

Real picture FIs should act as both the lender and the owner FIs can shape up incompetent management by threatening to withdraw their stakes. The value of the company will fall dramatically if FIs pull out. Sen Committee has been entrusted with the task of formulating policies regarding disposing the shareholding of FIs in companies performing unsatisfactorily This policies was made prompted by modi rubber case. There was a conflictP.R. Khanna, an FInominee on the Modi Rubber board, and promoter B.K. Modi. Both Khanna and chairman Mantosh Sondhi have resigned and the FIs have decided to sell their stakes to the public and not to the Modis

Present picture of MRL As on august 5, 2009 Pawan Chopra as Special Director, Nominee of BIFR: The Board for Industrial and Financial Reconstruction, (BIFR) Mr. Vinay Kumar Modi, Vice Chairman has been re designated as Chairman of the Company in place of Mr. S S Kohli In order to have MRL Board broad base, the Board of Directors, at its meeting held on July 27, 2009, has appointed Mr. P R Khanna, and Mr. Chandan Bhattacharya, as Directors of MRL.

Present picture of MRL Now, The Modi Rubber family consists of nearly 4000 members, each striving to attain the corporate dream of surmounting all obstacles Modi Continenetal Tyres are popular not only in India but also in 25 nations all over the world. The Company has established its leadership in the highly competitive export sector by winning the CAPEXIL's Highest Export Award for a record eight times The company has excelled by registering an impressive export turnover of Rs. 120 crores in the year 2007-08