Maruti Suzuki, which has been under severe pressure from institutionalinvestors to rescind its decision to develop manufacturing facilities inGujarat through a 100% subsidiary owned by parent Suzuki MotorCorporation (SMC), today revised key terms of the agreement to make the dealmore tenable.
In a crucial board meeting which lasted foraround four hours today attended by SMC Chairman Osamu Suzuki, the car makerdecided to rework the financing model for additional capacity expansion inGujarat to address investor concerns. As a measure of "good corporategovernance", Maruti Suzuki also said though it is not required under law, thecompany would seek approval from minority shareholders before executing theproposed arrangement.
R C Bhargava, chairman, Maruti Suzuki IndiaLimited (MSIL) said, "The entire capex for the Gujarat project would be fundedby depreciation and equity brought in by Suzuki Motor Corporation. There willbe no mark-up on the cars sold by Suzuki to Maruti to fund incremental capexrequirements."
Maruti Suzuki had announced a deal on January 28 in accordance with which a 100% subsidiary of Suzuki wouldset up manufacturing facilities on land owned by the Indian subsidiary. Theproposed unit would manufacture cars for the Indian carmaker as per itsrequirements. Suzuki would infuse the initial required capex of Rs 3,000 crore whilefurther expansion would be funded through an "incremental capex cost",depreciation costs and fresh equity brought in by the parent company to theextent necessary.
The incremental capexcost or mark-up, which would be over and above the cost of production ofvehicles, would be borne by Maruti Suzuki. The arrangement met with stiff resistancefrom mutual fund managers and insurance houses in the country, who said thatthe deal was "value erosive" for Maruti Suzuki and was unnecessary since thecompany had the means to develop the facility itself. Some independentdirectors on the board of MSIL had also raised concerns about the initialarrangement.
As per the revised agreement, the Indiansubsidiary would now buy vehicles from the Gujarat plant only at manufacturingcost. A senior official in the company informed, "The price at which we get thecars from Suzuki would be lower than the cost at which we produce vehiclesourselves in Haryana as now there will be no mark-up. The price would also notinclude the cost of capital employed." The construction of the plan, which wouldmanufacture 1.5 million vehicles per annum on complete commissioning, isexpected to start this year itself, Bhargava that the plant will operate at a"no-profit-no-loss" basis and profits for Suzuki would be routedthrough its 56% stake in Maruti Suzuki.
Additionally, to assuage institutional investors whohad accused Maruti Suzuki of flouting good corporate governance norms byaccepting a proposal which would affect adversely interests of minorityshareholders, Maruti Suzuki has said it will seek approval from minority shareholders,three-fourth of whom will have to give their assent via a postal ballot, forthe deal to go ahead. "We are notrequired by law to seek minority shareholders' approval but the board decidedto do so as a measure of corporate governance", Bhargava said. The approvalwill be sought under Section 188 of the Companies Act 2013, which has not beennotified yet. Institutional Investor AdvisoryServices (IiAS) welcomed Maruti Suzuki's decision to put the decision aroundthe Gujarat plant to shareholder vote. "By putting the decisionto vote, Maruti's board has broken through the current regulatory ambiguity andproactively mitigated the need for regulatory intervention", IiAS said in areport dated March 15.
Maruti Suzuki has also tweaked norms which would regulate the transferof facilities in Gujarat in the event of termination of the contractmanufacturing agreement. The facilities of the Gujarat subsidiary would now betransferred to MSIL at book value. As per the earlier arrangement the plant wasto be transferred at "fair value" to Maruti Suzuki. An independent director on MSIL board Amol Ganguli said, "MarutiSuzuki could have invested in Gujarat on it own but that means taking on risks.This (revised agreement) is an attractive proposal and we thought it is abetter option.
All directors have supported the proposal today. As far as I amconcerned, all my concerns have been addressed." Maruti Suzuki had originally proposed to set up the plant near Mehsanaand had in 2012 bought land for the same but it has been taken over by SuzukiMotor Corporation to allow the Indian firm to focus more on product developmentand marketing.
As many as 16 mutual fundhouses and insurance companies had aopposed the move and approached marketregulator Securities and Exchange Board of India (Sebi), seeking itsintervention to safeguard interests of minority shareholders and to ensurecompliance with good corporate governance norms with regard to the transfer ofa Gujarat project to Suzuki. MSIL's largest institutional investor LifeInsurance Corporation of India (LIC) too had sought clarifications from MSILabout the Gujarat project.