Suzuki plan for Gujarat subsidiary has Maruti investors fuming

Large Indian investors, including fund houses, are challenging a plan by Maruti Suzuki to source cars from an Indian plant to be built in Gujarat by its parent, Suzuki Motor Corp, saying minority shareholders would be better off if Maruti made the cars itself.

In a relatively rare case of shareholder activism in India, the group of heavyweight fund managers holding just under 4 per cent of Maruti Suzuki's stock urged the company to rethink the move in a 13 February letter to its chairman, R C Bhargava.

''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,'' The Financial Express quoted a fund manager as saying anonymously

Bhargava told Reuters the factory, slated for an initial annual capacity of 100,000 by 2017 but potentially rising to 1.5 million, would go ahead as planned.

The shareholders said they were concerned that the contract for the plant in Gujurat meant the Japanese carmaker rather than Maruti would reap the benefits of rising domestic sales, when India is tipped to become the world's third largest auto market by 2020.

"We sincerely urge you to rethink the Gujarat facility decision as the same is clearly neither fair nor in interest of MSIL (Maruti Suzuki India Ltd) shareholders," said the letter, a copy of which was seen by Reuters.

Suzuki Motor, which owns 56 per cent of Maruti, announced plans to invest $488 million on the plant on 28 January. It said it would sell cars for the plant to Maruti, going back on an earlier plan that would have seen Maruti set up the factory itself.

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.

The letter was signed by HDFC Asset Management, Reliance Capital Asset Management, ICICI Prudential Asset Management, UTI Asset Management, DSP BlackRock Investment Managers, SBI Funds Management and Axis Asset Management, which together own 3.93 of Maruti's shares. The letter was also sent to independent directors of the Indian company and to Suzuki.

Bhargava said the company has no intention of changing the plan. "We are clear that it's very much in the interest of all the parties to do this, including the shareholders," he said by phone.

Separately, state-owned Life Insurance Corporation of India (LIC), which is Maruti's largest public shareholder with a 6.93 per cent stake, sought clarification from Maruti Suzuki, according to the carmaker. The insurer did not reply to a request for comment.

In its letter, the group also said the royalty paid by Maruti to its Japanese parent was too high, a complaint that has been raised before by investors.

Maruti will continue to produce cars at its existing factories in Manesar and Gurgaon in north India that have a capacity of 1.5 million vehicles per year.

Shareholder activism is relatively rare in India, although recent regulatory and legal changes suggest that could change. India last year passed a new companies law aimed at giving more power to minority shareholders and improving transparency.

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 Rs7,000 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,'' the letter written by the seven fund houses to Maruti Suzuki says.

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.