Shareholders' nod to let Suzuki set up first Indian unit

Japan's Suzuki can now invest Rs 8,000-10,000 crore to set up its first car manufacturing plant in India, products from which will be marketed by its Indian subsidiary Maruti. The minority shareholders of Maruti Suzuki have voted in favour of a contract manufacturing agreement between Maruti and Suzuki. Suzuki will sell cars to Maruti at no-profit, no-loss. Maruti will pay royalty to Suzuki for products from Gujarat like it does now for products from the two plants in Haryana. The royalty is capped at five per cent of the vehicle price for new products.

Of the 65.83 million votes that were cast, 89.75 per cent have favoured the arrangement. Maruti needed a minimum of 50 per cent votes in favour. However, minority shareholders with nearly 65 million shares did not cast their vote. General insurer Life Insurance Corporation, the single-largest public shareholder in Maruti with a six per cent shareholding abstained from voting, Maruti Suzuki chairman R C Bhargava said, adding that LIC as a policy only casts its vote when it thinks that a proposal will harm its interests.

Announcing the results, Bhargava said, "The results speak for themselves on how shareholders reacted to the recommendation of proxy advisors". Indian proxy advisory firm IiAS had advised shareholders to vote against the proposal claiming it will weaken Maruti.

The Gujarat plant will have a full capacity of 1.5 million units, of which an initial capacity of 250,000 units is likely to be operational in early 2017. "Our existing capacity utilisation will touch 109 per cent this year and then we may have to go for some improvised method to augment production next year," said Bhargava, indicating the critical role that Gujarat plant will play in helping Maruti reach an annual sales of two million units by 2020. Maruti will produce about 1.4 million units this year with a full capacity utilisation.

Dismissing the 10.25 per cent votes cast against the proposal, Bhargava said there will always be people who remain distrustful. Maruti is sitting on cash reserves of Rs 15,000 crore, which its plans to deploy in developing new products, acquiring land for dealerships and expanding the sales-service infrastructure.

After the voting results was declared, Iias said that the company's management "must not underestimate the challenges it now faces. Unlike an election rally where promises are made only to be forgotten, Maruti's management has empowered shareholders watching over them. Maruti will need to come good on the promises it has made to shareholders, especially with respect to the use of its excess liquidity."

IN MOTION

• Suzuki will sell cars to Maruti on no-profit, no-loss basis
   
• Maruti will pay royalty to Suzuki for products from Gujarat like it does now for products from the 2 units in Haryana
   
• Royalty is capped at five per cent of the vehicle price for new products
   
• Of the 65.83 mn votes that were cast, 89.75% have favoured the arrangement. Maruti needed a minimum of 50% votes in favour