It is Maruti’s Suzuki after all

By seeking minority shareholder approval to develop a new car manufacturing facility in Gujarat through a separate 100 per cent parent-owned subsidiary, Maruti Suzuki India Ltd (MSIL) has set a healthy precedent for India Inc to emulate. The altered investment plan — which also dispenses with the mark-up costs Maruti will pay for vehicles sourced from the new facility — follows concerns raised by domestic financial institutions and mutual funds that the manufacturing agreement would erode MSIL’s value. The company, in which Japan’s Suzuki Motor Company (SMC) owns 56 per cent, was not legally obliged to secure minority shareholder approval. But to have ignored this on the ground that the relevant provisions in the Companies Act 2013, which requires such approval with respect to major ‘related-party’ transactions, are not yet notified, would have been to seek refuge in a technicality. Rather than back off completely, Maruti has thrown the ball back at those who were complaining loudly by clarifying and altering the terms of the contract manufacturing agreement. Now, institutional investors and mutual funds have a choice – support the special resolution and stay invested in MSIL or sell out.

This whole episode could have been avoided had Maruti declared it would seek minority shareholder approval earlier; greater clarity about the manufacturing agreement would have helped as well. There is a logic in these depressed market conditions for the company deciding against setting up a new facility with its own resources. Investing a part of its ₹7,500 crore cash reserves may not yield the desired returns when industry capacity utilisation is low; moreover, no one really knows how long the downturn will last. In such an uncertain environment, executing the Gujarat project through a separate wholly-owned subsidiary of SMC has benefits. The entire risk from the investment gets passed on to SMC and there is also the possibility of an upside gain, as the new arrangement allows the transfer of the new subsidiary’s assets to MSIL in the future at book value.

The clarity that exists now should assuage doubts that the terms of the original asset transfer, which was to be at ‘fair value’, would be anything but fair. The apprehension that this was an insidious conspiracy to convert MSIL into a shell company and replace it with a 100 per cent parent-owned subsidiary has also been laid to rest. The clarity on the terms of the manufacturing agreement may have been late in coming, but will help to foster trust between shareholders and the management — always a good thing for a company. The former have been given good reason to believe that it is Maruti’s Suzuki after all.

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