Maruti to take minority shareholders’ nod for deal with Suzuki’s Gujarat plant

Under fire for its plan to plough back profits to parent company Suzuki Motor through a contract manufacturing agreement with Suzuki's wholly-owned manufacturing plant in Gujarat, Maruti Suzuki  Ltd today agreed to alter key terms of the proposed deal to make it tenable to opposing institutional investors.

Ukder the contract manufacturing plan proposed earlier, Suzuki would initially infuse only Rs3,000 crore equity required while further expansion would be funded through an ''incremental capex cost'' that Maruti would pay as an additional markup cost for vehicles produced -- over and above the cost of production.

Minority shareholders of Maruti Suzuki were quick to oppose the deal that they said, would be detrimental to the Indian auto maker. The investors, mostly financial institutions, also approached market regulator Securities and Exchange Board of India (SEBI) seeking intervention (See: Irate shareholders approach SEBI over Maruti-Suzuki deal).

The board of directors of Maruti Suzuki India (MSIL) on Saturday reviewed the Gujarat project in the context of the views and opinions expressed and took some decisions including the entire capex will be funded by depreciation and equity brought in by Suzuki Motor Corpotation, Japan.

In the event that both parties mutually agree to terminate the contract manufacturing agreement, the facilities of the Gujarat subsidiary would be transfered to MSIL, it said.

"Even though not required by law, the board decided, as a measure of good corporate governance, to seek minority shareholders' approval as stipulated in Section 188 of the Companies Act 2013," RC Bhargava, chairman, MSIL, told reporters here after the board meeting.

The impact of any direct or indirect taxes on account of the contract manufacturing agreement would be assessed before finalising the agreement, which will take at least two months, he added.

In January, Maruti had announced a deal in which a 100-per cent subsidiary of Suzuki would set up a manufacturing plant on land owned by Maruti and which the latter intended to develop. The plant would manufacture cars for the Indian carmaker and as per its requirements.

But the terms of the deal said that Suzuki would infuse only the initially Rs3,000 crore equity required while further expansion would be funded through an ''incremental capex cost'' Maruti would pay as an additional markup cost for vehicles produced -- over and above the cost of production.

The deal met with intense hostility from top mutual fund managers in the country, who together hold about 5.5 per cent stake in the company and who said that the deal was ''value erosive'' for Maruti and was unnecessary since the company had the means to build the plant itself.

Maruti has now decided that the cost of capex would be funded by the plant's depreciation and only by further equity infusion by Suzuki itself, chairman RC Bhargava said.

The Indian carmaker would now essentially buy vehicles from the Gujarat plant only at manufacturing cost. The backtracking in the company's stance -- which had earlier expressed its intention to go ahead even in the face of stringent opposition from investors -- would be seen as major win for institutional investors in the country, who went up in arms in a rare show of united strength on a corporate-governance issue.

Maruti also agreed to tweak the clause of the transfer of the plant in case the manufacturing agreement was not to be renewed at the end of its 15-year stint.

Now, the plant would be transferred at a book value rather than ''fair value'' as was decided earlier. The company will also seek approval from minority shareholders, three-fourth of whom will have to give their assent via a postal ballot, for the deal to go ahead.

The construction of the plan, which is slated to manufacture 1.5 million vehicles per year when complete in in 2017-2018, is expected to start this year itself, Bhargava said, who added that the plant will operate at a "no-profit-no-loss" basis and profits for Suzuki would be routed through its 56 per cent stake in Maruti.