The company claims that Suzuki will not make money from the creation of the subsidiary, which is a clear lie, as Suzuki stands to make an estimated 20% IRR over 15 years, which is higher than the current return on equity of Maruti Suzuki, said a fund manager on condition of anonymity. Maruti Suzuki's return on common equity stood at 16.99% for the quarter ended September 2013, Bloomberg data show.
Fund officials said there has been a huge breach of corporate governance trust and that the company has denied minority shareholders a say in the directional changes undertaken by the Maruti Suzuki India management. They added that this could set a bad precedent for other companies, which might also set up similar subsidiaries.
Fund houses believe there is no need for Suzuki to invest directly in the Gujarat plant as Maruti is sitting on a cash pile of over Rs 7,000 crore as at the end of September last year. Only Rs 3,000 crore is needed to be invested by FY17 (2016-17) in the proposed Gujarat facilities. MSIL (Maruti Suzuki) thus already has more cash than what the business needs, a letter written by at least seven fund houses to Maruti Suzuki says.
These seven fund houses are HDFC MF, ICICI Prudential MF, Reliance MF, SBI MF, UTI MF, DSP BlackRock Investment Managers and Axis MF.
According to a report released last month by proxy advisory firm IiAS, Suzuki appeared to be going down the same route as many of the other MNCs in India. Several MNCs in India have parked their most profitable businesses lines in 100% subsidiaries: the listed companies either house the less profitable businesses or operate as marketing arms of the 100% subsidiary, the report had said.
All cars manufactured at the Gujarat plant will be purchased by Maruti at cost plus some margin sufficient to fund the second phase of capex at the Gujarat plant. Royalty agreements will be similar to those with Maruti, and the royalty paid by the 100% subsidiary will be built into the cost of the cars purchased by Maruti.
Suzuki has been slowly losing investor confidence as it steadfastly doubled royalty payouts over a five-year period to 5.8% of net sales in FY2013. Maruti paid royalty aggregating around Rs 2,450 crore to Suzuki, which, in turn, accounted for 47% of Suzuki's 2013 profit after tax.