Seven mutual fund investors in Maruti Suzuki India Ltd (MSIL), who had earlier written to company Chairman R C Bhargava about their concerns over the deal, have now been joined by nine other institutional investors.
These include insurance companies holding MSIL shares and mutual funds. State-run LIC has separately sought clarification from the company over the deal. Institutional investors together hold almost 14 per cent in MSIL, while the promoters have a 56.21 per cent shareholding.
The institutional investors said they are concerned the decision of MSIL's board in January to let Suzuki Motor Corporation implement the Gujarat project to expand production facilities through a 100 per cent subsidiary would convert Maruti into a shell company over time.
"This clearly is not in the best interest of MSIL and its shareholders and is in fact significantly detrimental to them," they added in a letter to the company management.
The institutional investors said Maruti Suzuki board's decision is "ill-conceived" in its entirety and results in outsourcing of the core manufacturing activity that is fundamental and critical for the Indian car maker.
"Worse, such outsourcing is given to the wholly owned subsidiary of Suzuki through a related-party transaction on terms that are very unfavourable to Maruti Suzuki and its shareholders and blatantly favouring the future prospects and interests of Suzuki," the shareholders said in the letter.
The institutional investors include ICICI Prudential MF, Reliance MF, L&T MF, UTI MF, SBI Mutual Fund, SBI Life Insurance, Reliance Life Insurance and Religare Invesco.
An MSIL spokesperson said, "Our purpose is to strengthen Maruti's business and benefit all stakeholders, including minority shareholders...We are communicating with them regularly to convey this intent and purpose."
MSIL's board approved the proposal from Suzuki Motor to expand the production facilities in Gujarat through a unit "because it would result in substantial financial benefits to MSIL and its minority shareholders," according to a BSE filing on January 28.
Institutional investors oppose the move because it would transform MSIL into a distributor from a manufacturer.
The Securities & Exchange Board of India, the market regulator, is looking into the matter on a suo motu basis.
According to corporate governance norms that come into effect on October 1, the deal can be construed as a related-party transaction requiring approval from public shareholders.
Last month, mutual fund houses had written to Bhargava highlighting concerns arising from the deal. The fund houses asked Maruti Suzuki to rethink the decision as it was clearly "neither fair nor in the interest of shareholders."
Investors have said that turning this project over to a Suzuki subsidiary instead of MSIL would lead to significant erosion of value for MSIL. They are also concerned about the royalty paid by Maruti to its Japanese parent.
MSIL had said in the filing that the price of vehicles to the company would include only the cost of production incurred by the subsidiary and "just adequate cash (net of all tax) to cover incremental capital expenditure requirements."
The institutional investors have sought explanations on terms such as incremental capex.
Fund managers said MSIL has been facing declining returns on equity and the Gujarat plant would be the right opportunity to deploy cash profitability.
The parent firm received Rs 7,000 crore as royalty over the past four years, or 5.7 per cent of sales, the fund houses said, adding that in the next four years, Rs 8,500 crore would be paid as royalty.
The latest letter from institutional investors has come days ahead of a board meeting of MSIL, scheduled for March 15.
According to sources, the meeting has been originally called to discuss the company's yearly business plan, but the issue of Gujarat project may also come up for discussion.
While independent board members of the company, who have also been marked a copy of the investors' letter, have given an in-principle approval to the Gujarat project, they may discuss the finer details this transaction on March 15.
When contacted, independent director Pallavi Shroff declined to comment but others, including D S Brar, Amal Ganguli and R P Singh could not be reached for comments.