Suzuki Faces Shareholder Pushback Over India Venture
Maruti Suzuki is campaigning to convince global and local investors of the benefits of parent Suzuki’s wholly owned India operation. But some Maruti Suzuki shareholders oppose the plan and regulators have questioned its legality.
MUMBAI – Japanese automaker Suzuki is facing unexpected complications in its plans to launch a wholly owned Indian subsidiary.
Suzuki Motor Gujarat (SMG), headed by Senior Executive Officer Naoki Aizawa, would operate on 1,190 acres (480 ha) of land leased from its 32-year-old Maruti Suzuki joint venture near Ahmedabad. It would supply vehicles solely to Maruti Suzuki, which also would handle distribution and sales.
Maruti Suzuki is organizing a 2-month campaign to convince global and local investors of the benefits of SMG. But the plan is opposed by some Maruti Suzuki minority shareholders and has prompted questions from regulators about its legality.
In response, Maruti Suzuki has filed with the Bombay Stock Exchange an outline of terms of the proposed contract-manufacturing agreement and the lease deed it intends to sign with Suzuki.
“We are not required by law to seek minority shareholders’ approval to these proposals, but the board has decided to do so as a matter of good governance,” says R C Bhargava, chairman of Maruti Suzuki’s board of directors.
Maruti Suzuki shareholders are expected to vote on the proposal after the automaker has made its case before potential investors. But the plan requires approval by 75% of the minority shareholders, which appears unlikely as of now.
In addition to minority shareholders’ opposition, the government says it cannot offer tax breaks or other financial incentives to the Suzuki-owned business because it would be a direct foreign investment.
Suzuki intends to initially invest Rs1 billion ($16 million) and eventually spend Rs30 billion ($480 million) on the plant, scheduled for completion in the 2015-2016 fiscal year. Initial annual capacity would be 250,000 units.
Maruti Suzuki has modified the proposal and continues to clarify it. But several questions remain:
Minority shareholders opposing the plan believe Maruti Suzuki’s long-term interests may be harmed by the manufacturing contract, which initially would run for 15 years, then be automatically renewed for 15 more years and continue for 30 years after that.
The assumption of an 8.5% post-tax return over 15 years on surplus Maruti Suzuki funds not invested in the new plant is unrealistically high and unlikely to be achieved.
The deal does not address the possibility of profitable returns that Maruti Suzuki could have gotten by investing its own funds, not parent Suzuki’s, in the new plant.
Apart from the minority shareholders’ financial concerns, a spokesman says, more fundamental issues are involved in the proposal: “The balance of power, already in favor of Suzuki with its 56% current holding (in Maruti Suzuki), will tilt completely towards Suzuki, and Maruti will lose control over its own destiny.”
There also is a widespread belief among the institutional shareholders and regulators that the deal protects SMG while exposing Maruti Suzuki to market risks.
The relationship between Maruti Suzuki and SMG has not been clearly defined. SMG, for example, may choose to export vehicles rather than supply them to Maruti Suzuki. Ownership of designs and brands has not been determined, and it is not clear what would happen if SMG could not fulfill its manufacturing agreement.
The only benefit to Maruti Suzuki under provisions of the current proposal is that any eventual transfer of SMG to Maruti Suzuki would be based on the prevalent book value and not the market value. But that situation is a long way off, and answers to many other questions will be available only during the 30 years or more after SMG launches production.
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