Suzuki has to double equity in Gujarat arm

Removal of mark-ups to be paid by Maruti, other changes could raise funding need to Rs 6,000 cr

Suzuki Motor Corporation, the Japanese parent of Maruti Suzuki India Ltd (MSIL), might have to infuse nearly double the equity amount it had earlier planned to put into its proposed 100 per cent subsidiary for the Gujarat passenger vehicle factory.

This is because Maruti Suzuki, after facing an opposition from minority shareholders and analysts, has effected some changes to the structure. Chairman R C Bhargava, however, says the deal has not been fundamentally altered. "The structure remains unchanged. The only difference is, under the earlier plan, Suzuki was to invest Rs 3,000 crore as equity in the new plant. But now, it might have to invest close to Rs 6,000 crore, depending on growth, timing and the amount accruing from depreciation, and when the plant reaches production of 1.5 million cars, he says."

Bhargava adds the move will be better for both MSIL and its shareholders. "Yes, it will increase the quantum of profit for Maruti Suzuki." But he rejects the shareholders' contention that the earlier plan would have affected the company's profitability. "The new plan does not mean they (shareholders) would not have made profits under the earlier one... If they are making 'x' profit now, they would have made 60 per cent of x earlier, that's not small. If everyone is saying the second deal is very good and share prices are going up, there was no reason for shares to fall earlier, either. A deal, even under the earlier proposal, would have been better than no deal. No shareholder ever said he was opposing the deal because he wanted more profits... they said it was bad for the company's shareholders, which is not true."

Bhargava emphasised the fundamentals of the deal stayed intact: "Our fundamental position - that Suzuki will set up a 100 per cent subsidiary - remains unchanged. That the subsidiary will undertake contract manufacturing exclusively for Maruti Suzuki also remains unchanged."

Responding to criticism that the MSIL board was not given any alternative plan, Bhargava said: "No, we did have alternatives... one was setting up the plant as a joint venture with Suzuki. But, after discussions, the plan for a 100 per cent (Suzuki) subsidiary looked the most attractive."

On January 28, MSIL had surprised the investor community by announcing the plan that Suzuki would set up a fully-owned subsidiary to run the proposed Gujarat plant. The unit would manufacture cars exclusively for Maruti, according to its requirements. It had said Suzuki was going to fund the initial capital expenditure of Rs 3,000 crore, while further expansion would be funded through "mark-ups" on vehicles that MSIL would pay in addition to production cost on those, besides depreciation costs and fresh equity brought in by the parent company, if and when required.

This arrangement had met with stiff resistance from mutual fund managers and insurance houses holding stakes in the company. They called the plan "value erosive" for MSIL. Some independent directors on the Maruti board also raised concerns. On March 15, the board modified the agreement by removing the "mark-ups" on cars and decided to seek minority shareholders' approval and execute the plan only after getting assent from three-fourths of them.

Bhargava says he is confident that the minority shareholders will clear the proposal. "I have no doubt minority shareholders will approve the proposal. See how the share price has hit nearly Rs 2,000 (apiece). What does it show?"

On timeline for minority shareholders' resolution, Bhargava says two key things have to be resolved before that. One, the newly-incorporated subsidiary has to call a board meeting to clear the contract-manufacturing agreement. Two, tax experts have to be hired to understand the implications of the deal from the transfer-pricing and other direct-tax angles. Once this process has been completed, the company will organise a roadshow to meet minority shareholders. "July is a bad month, as quarterly results come up. At that time, we don't meet investors as a rule. So, not before August or September... though a deadline cannot be fixed," he says.

MOVING IN A LOW GEAR

Jan 28: Maruti Suzuki announces Suzuki, its Japanese parent, will set up a 100% subsidiary to run the proposed Gujarat factory

Feb: MF houses like Axis MF, DSP BlackRock, HDFC MF, ICICI Prudential, Reliance MF, SBI MF and UTI - all minority shareholders in Maruti - write to the company saying it's a raw deal; take up matter with Sebi

Feb 26: Maruti clarifies on it proposal, says there will be a "mark-up" on production cost on the price of vehicles to partly fund the Gujarat plant's capital expenditure

Mar 5: Maruti Suzuki's 7 MF investors and nine other institutional investors, including five insurance firms, write to Maruti and ask for scrapping of Suzuki's plan to build a fully-owned arm for the Gujarat plant

Mar: LIC asks Maruti for clarification on the deal

Mar 28: The Maruti Suzuki board clears a new plan that excludes mark-ups on vehicles and says capex is to be funded entirely by Suzuki. Also proposes to seek minority shareholders' nod and execute the plan only after getting assent from three-fourths of them