De-risk manoeuvre: Maruti Suzuki to pay royalty to Suzuki in Indian rupees

To de-risk itself from forex fluctuations Maruti Suzuki India will pay…

To de-risk itself from forex fluctuations Maruti Suzuki India will pay royalty to parent Suzuki Motor Co in Indian rupees instead of Japanese Yen, shifting the risk of currency fluctuation to the parent firm, chairman RC Bhargava said on Thursday. he was addressing shareholders at the company’s annual general meeting.

However, the change will not lead to any immediate gain for Maruti as the new arrangement will kick in only once the company signs up a new product agreement for future launches. Current and planned launched would continue to be governed by the present agreement where the forex risk would continue to lie with Maruti. According to a company official the new arrangement may kick in from FY19.

“On all future models the royalty will be expressed in rupees…and not (in) the Yen so that we are not exposed to the variation in the exchange rate which has been happening in the past,” Bhargava said.

Maruti, in which Japan’s SMC holds 56% stake pays royalty on a per-car basis in Yen for use of technical know-how and use of the parent’s brand name. During FY14 the company paid a royalty of Rs 2,486 crore or around 6% of its net sales.

Illustrating how the new arrangement when it comes into force would help the firm, a company official said that currently royalty is paid on per car basis in Yen which would change to rupee. For instance, if the company pays 100 Yen as royalty on per car today once the new arrangement comes into force it would pay Rs 100 per car. The Rs 100 per car outgo would remain even if the Yen appreciates against the rupee, which is not the case today.

Bhargava also said that with Maruti enhancing its research and development capabilities the future royalty payout would decrease. “More and more R&D work will be done in India and royalty calculation would be based on work done here and our expenditures on R&D will be rewarded in the form of reduced royalty,” he said.

On the Gujarat plant, Bhargava said that the plant would be commissioned in 2017 and urged the shareholders to exercise their franchise favourably in the voting that is to take place sometime next month to let Suzuki own and invest at the facility.

The new plant in Gujarat would be owned by Suzuki, which would be manufacturing the vehicles and provide them to Maruti at no cost, with no mark up on account of a return on capital employed. The Gujarat company would not sell cars to any one else anywhere, it would not make any profit or loss or accumulate any surplus. It would be Maruti which would realise all the profits arising from the production in Gujarat, Bhargava said.

The company needs to take the approval of its minority shareholder for this proposal as it is a related party transaction.

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First published on: 04-09-2014 at 21:01 IST