The Hindu Business Line : Engine of opportunity

SHOULD THE GOVERNMENT allow Suzuki Motor to float a venture for its foray into manufacture of diesel engines and additional assembly facilities for car-making when it already has a profitable venture going in the form of Maruti Udyog with a substantial government and public stake? The question assumes relevance as the Government has for some years now been following a policy of permitting fresh investment by a foreign player only with the concurrence of its domestic partner, should there be one. The proposed new investments would be a non-starter should the Government, as the joint venture partner in the car venture, withhold permission; not that it cannot otherwise exercise its inherent prerogative to decide whether or not a particular investment is in national interest.

But viewed purely from the larger perspective of the economy, the case for granting such permission is indeed strong. The policy was put in place when the country had decisively moved away from the stiff norms on foreign ownership to a more liberalised regime across many sectors. A safety valve was necessary to protect the interests of domestic promoters who may not have thought it necessary to put in place clauses restricting the right of foreign promoters to enter into new ventures that could potentially undermine existing investments. In other words, the state came to the aid of domestic investors by doing through the instrument of public policy what they ought really to have incorporated in the joint venture contract. But this argument does not hold water in the Suzuki case as the Government itself had renegotiated the terms of the joint venture when it persuaded the Japanese auto company to pay a renunciation premium at the time of Maruti's rights issue of capital a year ago. Having failed to secure its interests then, it could not in fairness now take recourse to an instrument of public policy governing foreign investments to secure it. But that apart, at least insofar as the diesel engine venture is concerned, the case for permitting the new venture is even stronger. Maruti has not been quite able to capitalise on the Indian penchant for diesel cars and, if it has to, a secure domestic access to diesel engines, incorporating the latest technology becomes vital. Here Suzuki, having signed a technology agreement with Fiat, can dictate the course of future strategic direction of the company. If Suzuki were to be denied the permission to float the new venture, Maruti could well end up sourcing diesel engines from some other manufacturing location controlled by Suzuki and the potential for value addition by the domestic economy would be lost without any advantage flowing to the local investors in the car company.

Considerations of realpolitik then demand that Suzuki be allowed to go ahead with its plans. It is another matter that domestic investors who have invested in the shares of Maruti in the belief that they are buying into a piece of automotive technology, both present and future, belonging to the Japanese car major, end up being disabused of that notion. But this has become so commonplace that it now ought to be accepted as almost a standard component of `risk' in investing in the domestic equity market even if SEBI does not quite classify it as such.

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