 "Maruti Suzuki climbs down, tweaks Gujarat project pact")
At a key board meeting attended by SMC Chairman Osamu Suzuki, among others, the car maker on Saturday decided to rework the financing model for additional capacity expansion in Gujarat to address investor concerns. Maruti Suzuki said, though it was not required under law, the company would seek minority shareholders’ approval as a measure of “good corporate governance”.
Maruti Suzuki India Ltd (MSIL) Chairman R C Bhargava said: “The entire capital expenditure for the Gujarat project will be funded by depreciation and equity brought in by SMC. There will be no mark-up on cars sold by Suzuki to Maruti to fund incremental capex requirements.”
Bhargava had earlier said assuming depreciation at 12 per cent a year on a single assembly line of Rs 3,000 crore, Rs 720 crore for setting up the second assembly line would come from depreciation. The remaining Rs 2,280 crore would have to be put in by SMC. The amount from depreciation would increase thereafter on addition of newer lines.
According to a deal announced by MSIL on January 28, a 100 per cent subsidiary of SMC is to set up manufacturing facilities on land owned by Maruti. The proposed unit will manufacture cars for the Indian carmaker according to its requirements. Suzuki is to fund the initial capex of Rs 3,000 crore, while further expansion is to be funded through an “incremental capex cost”, depreciation costs and fresh equity brought in by the parent firm to the extent necessary. The incremental capex cost or mark-up, to be over and above the cost of production of vehicles, is to be borne by Maruti Suzuki.
This arrangement had met with stiff resistance from mutual fund managers and insurance houses with stakes in the company. They said the deal was “value erosive” for Maruti Suzuki and was unnecessary, as the company had the means to develop the facility itself. Some independent directors on the MSIL board had also raised concerns over the initial arrangement.
According to the revised agreement, MSIL will buy vehicles from the Gujarat plant only at manufacturing cost. A senior company official informed: “The price at which we will get the cars from Suzuki will be lower than the cost of producing vehicles ourselves in Haryana, as there will be no mark-up. The price will also not include the cost of capital employed.”
The construction of the plant, which will manufacture 1.5 million vehicles a year on complete commissioning, is expected to start this year itself. Bhargava said the plant would operate at a “no-profit-no-loss” basis and profits for Suzuki would be routed through its 56 per cent stake in MSIL.
Additionally, to assuage the concerns of institutional investors, which had accused Maruti Suzuki of flouting good corporate governance norms by accepting a proposal that might affect minority shareholders’ interests adversely, the company said it would seek nod from minority shareholders, three-fourths of whom would have to give assent via postal ballot for the deal to go ahead
“We’re not required by law to seek minority shareholders’ approval but the board decided to do so as a measure of corporate governance,” Bhargava said. The approval will be sought under Section 188 of the Companies Act, 2013, which has not yet been notified.
Institutional Investor Advisory Services (IiAS) welcomed Maruti Suzuki’s decision to put the Gujarat plant decision to shareholder vote. “By putting the decision to vote, Maruti’s board has broken through the current regulatory ambiguity and proactively mitigated the need for regulatory intervention,” IiAS said in a report. Maruti Suzuki has also tweaked the norms that will regulate the transfer of Gujarat facilities in the event of termination of the contract-manufacturing agreement. The facilities of the Gujarat subsidiary will now be transferred to MSIL at book value.
The impact of any direct or indirect tax on account of the contract manufacturing agreement will also be assessed before finalising the pact.
According to the earlier arrangement, the plant was to be transferred at “fair value” to Maruti Suzuki. Amol Ganguli, an independent director on the MSIL board, said: “Maruti Suzuki could have invested in Gujarat on it own but that meant taking risks. This (revised agreement) is an attractive proposal and we think it is a better option. All directors have supported the proposal. As far as I am concerned, all my concerns have been addressed.”
Maruti Suzuki had originally proposed to set up the plant near Mehsana and bought land for it in 2012. But that was taken over by SMC to allow the Indian firm to focus more on product development and marketing. As many as 16 mutual fund houses and insurance companies had opposed the move and approached market regulator Securities and Exchange Board of India (Sebi), seeking its intervention to safeguard interests of minority shareholders and to ensure compliance with good corporate governance norms with regard to transfer of the Gujarat project to Suzuki.
MSIL’s largest institutional investor, Life Insurance Corporation of India (LIC), too, had sought clarifications from MSIL about the Gujarat project.