Maruti gets minority shareholders’ nod to do contract manufacturing for Suzuki

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New Delhi | Published: December 18, 2015 1:25:25 AM

It has been nearly two years since the Maruti Suzuki board first passed the proposal. And on Thursday, company's minority shareholders approved it, allowing the country's largest carmaker to let its Japanese parent Suzuki Motor...

In 2014-15, Maruti Suzuki produced 1,097,643 units at its plants in Gurgaon and Manesar combined. (Reuters)In 2014-15, Maruti Suzuki produced 1,097,643 units at its plants in Gurgaon and Manesar combined. (Reuters)

It has been nearly two years since the Maruti Suzuki board first passed the proposal. And on Thursday, company’s minority shareholders approved it, allowing the country’s largest carmaker to let its Japanese parent Suzuki Motor Corporation (SMC), which holds a 56.2% stake in the company, to invest and own the upcoming plant in Gujarat.

The shareholders approved the move with 89.75% voting in favour through a postal ballot that took place from November 16 to December 15. Just 10.25% minority shareholders voted against the proposal. However, only 54.7% of public shareholders participated in the postal ballot, that is, out of 13.2 crore public shareholders only 7.23 crore participated.

“Of the 6.58 crore votes cast on the proposal, 89.75% or 5.90 crore votes were for the proposal, while only 10.25% voted against it. The resolution has been passed and passed quite comfortably,” a jubilant Maruti chairman RC Bhargava told a press conference.

“In all these decisions, the biggest issue raised by investors was that this was a unique transaction and hence investors were uncomfortable with something that hasn’t been done before,” he added.

The approval paves the way for Maruti to expand its capacity to 3 million units once all the units of the Gujarat plant is commissioned in stages compared to 1.5 million currently. The first line with a capacity of 250,000 units will be operational in early 2017. The expansion will see six separate lines of 250,000 each as per the market demand, Bhargava said, adding that by 2020 it appears that the capacity needed will be 2 million.

“Operationally, the Gujarat plant will function as any other Maruti plant,” Bhargava added.

The Gujarat plant will see a total investment of Rs 18,500 crore, which will include Rs 8,000-10,000 crore as equity by Suzuki and rest through depreciation over the years.

The Rs 350 crore that Maruti has invested in the Gujarat plant so far will be returned to it by Suzuki with interest once the agreement is signed.

The controversy regarding the Gujarat plant started when on January 28, 2014, Maruti announced that its board had decided it would be owned and built by SMC at an investment of around Rs 3,000 crore. SMC would invest in the plant through its wholly-owned subsidiary Suzuki Motor Gujarat (SMGPL). The plant, which would be the first fully-owned factory of the Japanese giant, will have an initial capacity of 100,000 cars a year, all of which will be supplied to MSIL.

Gr4

Though the Street was upset with the announcement, a subsequent clarification on February 26, 2014, in response to a letter written by a clutch of investors, turned the matter for worse as some of the terms got changed. While earlier the Gujarat unit was to remain an SMC subsidiary, the company later said that if the contract manufacturing agreement expires, and in case it is not extended by mutual consent, the “assets would be transferred to MSIL at a fair value to be determined by independent valuation”.

It also said that the capex needs of the Gujarat subsidiary will be met by the depreciation of the subsidiary, an amount generated as net surplus from the car pricing and equity infusion from SMC, to the extent necessary.

Analysts maintained that it was not clear exactly how much the “net surplus” will be though the company had said that the sum of the surplus and cost of production would be less than the price at which MSIL sells cars to dealers.

Upset, a clutch of 16 institutional investors wrote a strongly worded letter to the company questioning the opacity in the decision regarding the subsidiary and asked the Maruti management to quash it as it would turn the company into a “shell” entity.

On March 15, 2014, Maruti made two changes in its original proposal to make it palatable to the fund houses and institutional investors who had written to it expressing their concerns.

It dropped the provision for “marking up” the cars produced at the Gujarat plant to fund the capex. It said that the entire capex would be funded by depreciation and equity brought by SMC. Further, in the event of the termination of the contract, the Gujarat facility would be transferred at book value to Maruti.

“The entire capex for the Gujarat subsidiary would be funded by depreciation and equity brought in by Suzuki Motor Corporation. In the event that both parties mutually agree to terminate the contract manufacturing agreement, the facilities of the Gujarat subsidiary would be transferred to Maruti Suzuki at book value. The impact of any direct or indirect taxes on account of the contract manufacturing agreement would be assessed before finalising the agreement and as earlier stated, the Gujarat subsidiary would function on the basis that it would neither generate surpluses nor make losses,” the company said in a statement on March 15, 2014.

Though the company law then did not require approval of the minority shareholders for the proposal (the new law had not been passed by Parliament till then), Maruti said that it would seek their approval. The new company law requires that all related-party transactions are to be approved by 50% of the minority shareholders.

In 2014-15, Maruti Suzuki produced 1,097,643 units at its plants in Gurgaon and Manesar combined. With the recent launch of its premium hatchback Baleno, Maruti has also planned exporting the model to over 100 countries.

The exports, which will begin early 2016, are being viewed in the range of 50,000 units.

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