In today’s Finshots, we dive into why Hyundai Motor India’s related party transactions are raising eyebrows.

The Story

Why is Hyundai Motor India (HMI), one of last year’s blockbuster IPOs, sourcing a staggering ₹12,000 crore worth of capital goods from an Indian entity?

This isn’t a question we’re asking. It’s something that InGovern Research, a proxy advisory firm, is actively scrutinising, raising concerns about HMI’s corporate governance.

Let us explain.

It all started when Hyundai Motor India sought shareholder approval for a series of related party transactions (RPTs). Now, these RPTs are basically business deals between HMI and companies closely tied to its South Korean parent. And there’s nothing unusual about them. Big auto companies do this all the time, especially for sourcing auto components.

But here’s the thing. These aren’t small deals. We’re talking about seven transactions worth over ₹31,000 crores. That’s nearly 40% of HMI’s annual revenue, with the top five alone making up more than half of last year’s total purchases. That’s massive. So, naturally, proxy advisory firms are digging deeper.

First up, there’s one deal in particular that stands out: a ₹12,525 crore transaction with Mobis India. And InGovern has raised a few red flags:

• Mobis India has no other clients. Its only customer is HMI. So why is Hyundai routing such a massive purchase through a single entity?
• It’s not your usual auto component deal. The transaction involves capital goods, typically sourced directly from global arms to keep costs in check. So why go through an Indian entity at all?
• Transparency could’ve been better. Hyundai hasn’t explained why this deal is structured this way or how it benefits shareholders. So shareholders might be left wondering if this arrangement is designed to benefit Hyundai’s promoters instead of the company itself.

And that’s not the only transaction raising concerns. Another major deal involves HEC India LLP, another Hyundai affiliate. Believe it or not, but on paper, it has just 10 employees and fixed assets worth only ₹11 lakhs. Yet, it has bagged a contract worth ₹3,000 crores. That has led another proxy advisory firm, SES (Stakeholders Empowerment Services), to question whether HEC even has the financial muscle to independently execute such a massive contract. The worry is that HEC might just be a pass-through entity. Meaning, it could be subcontracting all the work while taking a cut, without adding any real value.

And this concern isn’t theoretical because it has precedent.

You see, back in 2017, HMI awarded a major contract to HEC India, which HEC then subcontracted it to Kotec Automotive Services India (KAS). KAS further subcontracted it to You Seung Sang Sa India Construction (YSSS) and YSSS, in turn, passed it on to RT Construction, the company that actually did the work. But things got messy when YSSS defaulted on ₹9 crores worth of payments to RT Construction, sparking financial disputes and legal trouble.

So now, the question is could history repeat itself. In that case, there’s reason for concern.

And what if HEC again does the same subcontracting - after all it has just 10 employees.

But interestingly, not all proxy advisory firms are on the same page about this.

• IiAS (Institutional Investor Advisory Services) believes that these deals are justified, arguing that Hyundai’s global structure inherently involves such big-ticket affiliate transactions for strategic reasons.
• InGovern on the other hand, is skeptical, citing the lack of clarity and potential risks to minority shareholders.
• SES is particularly worried about HEC’s financial strength, or a lack of it, to independently handle such a large contract.

Now, in theory, shareholders have the power to reject such deals.

Proxy advisory firms just play a crucial role in shaping shareholder votes, especially for institutional investors who rely on their guidance. After all, investors can’t sit to extensively research and vouch for all the companies in their portfolio. For instance, just a couple of months ago, Gokaldas Exports saw four of its proposals rejected after IiAS advised shareholders to vote against them.

But here’s the reality. In Hyundai’s case, the shareholder vote on these transactions, (which was scheduled for March 12-13), is unlikely to pose a real challenge. That’s because to pass, they need a majority or over 50% approval from shareholders. But HMI’s parent company owns 82% of the shares. So even if minority shareholders oppose these deals, Hyundai still holds the majority vote.

So yeah, while the final verdict arrives on March 17, it’s highly likely these transactions will get approved. And by the time you read this, these transactions may already have the green light.

And if that happens, this entire episode raises broader governance concerns. Shareholders might remain cautious, keeping this in mind if similar deals pop up again. And that could play a role in how the company’s stock price moves in the long run. Questions about these RPTs could also surface in upcoming investor meetings, potentially putting pressure on management to be more transparent.

On the flip side though, Hyundai’s core business and fundamentals remain strong.

So despite the governance cloud, many analysts are still bullish on the company's stock, highlighting Hyundai’s strong position in the SUV segment, its ambitious electric vehicle (EV) plans and aggressive expansion strategy. And that actually makes sense. The company has recorded highest-ever sales in 2024, significantly expanded its EV infrastructure and laid out bold growth targets.

Sure, it has slipped from being India’s second-largest carmaker to fourth place, losing ground to competitors. And perhaps that explains HMI’s aggressive push for RPTs. RPTs can be quicker, more efficient and help keep costs low. So the company might be using these to quickly claw back market share through expansion. After all, HMI aims to launch five EV models by 2030 and ramp up production capacity, particularly through its Talegaon plant expansion. And it also has announced that India will play a key role in its bigger goal of selling 2 million EVs globally by 2030.

The long-term risks however, is that if these transactions inflate costs or hint at any layered subcontracting, it could hurt investor confidence and Hyundai’s future growth prospects.

So yeah, for now the company will need to walk a fine line. If it can prove that these deals genuinely add value, it might just put governance concerns to rest. If not, this won’t be the last time investors demand answers.

Until next time...

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