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The move is meant to address a concern raised by mutual funds and minority shareholders, who had questioned royalty payments the Indian company made every year to its Japanese parent, Suzuki Motor. They complained the royalty outgo was high, going up from 2.7 per cent of sales in 2007-08 to six per cent in 2013-14. Maruti’s royalty payment in 2013-14 was more than Suzuki’s standalone profit.
However, Maruti Chairman R C Bhargava said royalty payments in rupees could be a double-edged sword. “On all future models, the royalty will be expressed in rupees, and not in yen, so that we are not exposed to exchange-rate variations. Also, it will bring in stability about royalty payments,” he said but he also pointed out, “which direction the yen will go is uncertain. So it could work both ways”.
Maruti said the yen appreciated a little more than 88 per cent against the rupee between 2007-08 and 2012-13, going up from 35 paise to 66 paise. As a result, the company had to shell out more rupees as royalty. Had the yen been stable, royalty payment as a percentage of sales would not be so high. However, in 2013-14 the yen depreciated nine per cent over the previous year. Between April and September the yen hovered at around 59 paise.
In absolute terms, Maruti’s royalty payout to Suzuki increased from Rs 677.7 crore in 2008-09 to Rs 1,016.8 crore in 2009-10 and Rs 1,892.5 crore in 2010-11. For the financial year ended March 30, the outgo on this count was Rs 2,486 crore, compared with Rs 2,453.8 the previous year and Rs 1,803.1 the year before that.
The support of minority shareholders is crucial for Maruti as it has to get clearance for setting up its manufacturing facility in Gujarat through a new Suzuki subsidiary. The new company will then sell the cars to Maruti.
The new subsidiary was opposed by mutual funds, which feared Suzuki would sell the cars with a mark-up to Maruti. Succumbing to pressure, Maruti reworked the deal for Suzuki to sell the cars at cost. The resolution to clear the proposal is expected to come for voting in October.
Maruti’s brass has been meeting shareholders to explain the benefits of the proposal. The offer to pay royalty in rupees is another attempt to get their buy-in. “I think it’s a fair move, as cars sold in India in rupees should also peg royalty payments in rupees. It is not fair that they should make up for the loss to their parent as a result of exchange fluctuations. That’s a legitimate risk of business they have to take. But we still think that as a percentage of sales, the royalty is too high and should come down as volumes go up,” said Amit Tandon, managing director of iIAS, a proxy advisory firm.
Bhargava did not specify the models on which royalty would be paid in rupees but company executives said these could be upcoming cars for which Maruti is yet to sign a technical pact with Suzuki. Bhargava, however, added, with Maruti playing a greater role in product development with Suzuki, the royalty payout would fall. “More R&D work will be done in India and the royalty calculation will be based on work done here.” Maruti is investing Rs 2,000 crore in an integrated R&D facility, including a test track in Rohtak, and will launch its first sports utility vehicle early next year. “Maruti has not been present in the SUV segment and Suzuki has been aware of it. Early next year, we will launch our SUV and a compact SUV will follow a year later. With these, we will have a sizeable presence in the SUV segment and fill unutilised capacity at Gurgaon and Manesar plants,” Bhargava said.
Bhargava urged the shareholders to exercise their franchise favourably in the voting that is to take place sometime next month regarding the development of manufacturing facilities in Gujarat by parent Suzuki.
He said the arrangement is a win-win situation and would enable Maruti Suzuki to invest on strengthening its distribution, after-sales network and in enhancing the company's R&D capability. He said that the Gujarat facility is expected to be commissioned in 2017.
