Maruti seeks minority shareholder view on Gujarat

Though not required by law, the Board of Directors of Maruti Suzuki India Limited (MSIL) in a meeting held on March 15, 2014 has decided to seek minority shareholders’ approval as stipulated in Section 188 of the Companies Act 2013, for allowing Suzuki Motor Corporation (SMC) of Japan to take over the proposed Gujarat plant project from MSIL.

The MSIL board reviewed the Gujarat project in the context of the views and opinions expressed by the shareholders as well as the media. The board meeting which Osamu Suzuki, Chairman, SMC, also attended, decided among other things that as a “measure of good corporate governance” it will seek approval from minority shareholders.

Early this year, the MSIL board had decided that the proposed Gujarat project would be undertaken by SMC of Japan and in turn the latter would do business with Maruti Suzuki Ltd. SMC had announced that it would invest $488 million (about Rs. 3,050 crore) to build a car factory in Gujarat by 2017, which was originally proposed to be set up by MSIL. The former had decided to invest in the plant through wholly-owned unit Suzuki Motor Gujarat (SMGPL).

It may be recalled that on October 29, 2011, the MSIL board had approved the purchase of land in Mehsana District of Gujarat for further expansion of manufacturing facilities. Following this decision, approximately 640 acres of land in Becharaji and approximately 550 acres in Vithalapur was acquired.

The MSIL decision to allow SMC taking over the proposed plant was met with a lot of opposition from Maruti shareholders, both major as well as minority shareholders. The latest move by MSIL to seek the minority shareholders’ views may backfire in case the shareholders feel they have more to lose and less to gain in an SIC subsidiary taking over the proposed Gujarat plant.

The board also decided that the entire capital expenditure for the Gujarat subsidiary would be funded by depreciation and equity brought in by Suzuki Motor Corporation. Also, 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 India Limited at book value, the board decided.

The impact of any direct or indirect taxes on account of the contract manufacturing agreement would be assessed before finalising the agreement and the Gujarat subsidiary would function on the basis that it would neither generate surpluses nor make losses.

As per the original decision of the MSIL board early this year, MSIL would enter into a contract with this subsidiary company under which all production in the subsidiary company would be in accordance with the requirements of MSIL, and the vehicles would be sold to MSIL. The Suzuki subsidiary would not sell vehicles to anybody else. The price of the vehicles to MSIL would include only the cost of production actually incurred by the subsidiary plus just adequate cash (net of all tax) to cover incremental capital expenditure requirements. The return on this investment for SMC would be realised only through the growth and expansion of MSIL’s business.

Even though the company said that MSIL would financially benefit from the interest earnings resulting from not investing its money in this project, the point had no takers among the vigilant media and shareholders of MSIL, especially the financial institutions and other large institutions. The land for the project would be leased by MSIL to the subsidiary company to establish the production and related facilities. The rent would be determined on an arms’ length basis, an earlier MSIL note had mentioned.

Picture for representation purpose only/ Mohd Nasir