|MSL’s Proposal||The Defence|
Before everyone could finish mourning the demise of the iconic Maruti 800 there’s some disquieting news from Maruti Suzuki, a company that retains a strong emotional connect with middle class Indians. The company that has made half the cars clogging Indian streets has taken a baffling decision not to get its hands dirty making cars at an upcoming factory in Gujarat. Instead, Japan’s Suzuki, which owns 56 per cent of Maruti, will make cars at the new unit at Vitthalpur in Gujarat, through another company.
Maruti’s minority shareholders, who own 43 per cent in the company, are outraged. This corporate saga has many dimensions, as it exemplifies concerns raised by industry watchers in recent times on the more-than-generous sops given to multinational companies, which promptly return the favour by transferring royalties out or delisting their subsidiaries from Indian stock exchanges.
There is a political dimension too: the new factory is coming up in Gujarat, led by the BJP’s prime ministerial candidate Narendra Modi, who sings paeans to Indian manufacturing. The India-centric swadeshi concept of growth is essentially a line professed by the RSS and Swadeshi Jagaran Manch. The SJM national spokesperson Ashwani Mahajan told Outlook the matter is “quite disturbing”. “Since Suzuki started to enhance its shareholding in its Indian operations, we’ve been quite troubled. And it isn’t just one company. The large royalty payments by MNCs and the consequent outflow of foreign exchange is very high—totalling $37 billion when we looked last year. It’s just not a healthy trend,” he says.
“It’s strange the press sees this expansion as bad; it holds definite benefits for Gujarat, India, Suzuki, Maruti.”
Tamaka Tsukada, Minister, Japanese embassy, India
As of now, it seems unlikely that Maruti-Suzuki will relent—this, despite all the noise made by six minority shareholders and five insurers who have protested the move. The SEBI has “stepped in” to look at the matter, but going by current laws, all it can do is ask for an explanation from the company.
Since the arrangement was cleared by Maruti’s board on January 28, the shareholders’ key worry is that Maruti will bear all risks while Suzuki, the dominant shareholder, will dictate terms at will. “A very pliable board of Maruti-Suzuki has done grave injustice to minority shareholders of MSIL,” InGovern, a firm that helps institutional investors in public firms assess their risk exposure, notes.
“The Maruti board must put the arrangement to vote by minority shareholders, as many elements in it are related-party transactions,” says Shriram Subramanian, MD, InGovern. Of the investors who have objected to Maruti’s ‘arrangement’ with Suzuki, some are InGovern’s clients. The rules for doing business with related parties—related-party transactions—will have to be put to vote starting November this year, as SEBI’s new norms for public companies come into play.
A key element of the saga rests in Gujarat. The land on which the factory is to come up was bought by Maruti-Suzuki outright, after negotiations with chief minister Narendra Modi, who also holds the industries portfolio. The negotiations lasted two years and included meetings of the CM with Osamu Suzuki, Suzuki Motor Company’s chairman. “The land is completely paid-for. It belongs to us,” says R.C. Bhargava, chairman, Maruti-Suzuki, explaining how the company is well within its rights to negotiate a transfer in which the new entity, instead of Maruti, will do the work.
Bhargava says this land will be leased to Suzuki’s 100 per cent subsidiary. “Yes, we are in talks with the government of Gujarat to smoothen the transition. The arrangement between us and Suzuki should be finalised in about three months,” he says. A Gujarat BJP leader, who was part of the talks, did not respond to requests for comment from Outlook.
Maruti has emphasised on the money it will make—or save—by not making cars in Gujarat. A spokesperson stressed that buying cars from Suzuki at their manufacturing price makes better sense financially. The firms’s cash will now, oddly, generate interest income, and go into existing R&D work. “We’ve gone quite far in explaining our point of view. It’s...as if people are sceptical of what has been done by this ‘MNC’. It’s like they are looking for what can possibly be wrong with the arrangement. There’s a climate of mistrust and doubt,” says Bhargava.
On its part, the Japanese government is making a strong pitch for better business ties, while bemoaning procedural challenges. “Almost daily, [Japanese] companies report facing red tape in India,” says Tamaka Tsukada, a minister at the Japanese Embassy in Delhi. “Verbally there are reassurances from India, but actually nothing moves like it should.” On Maruti-Suzuki’s unfolding saga, he says, “It’s strange the Indian press portrays this expansion as something bad—in fact, it holds definite benefits for Gujarat, India, Suzuki and Maruti.”
“Since Suzuki started to enhance its shareholding in its Indian operations, we’ve been troubled.”
Ashwani Mahajan, Spokesperson, SJM
Bhargava also took pains to explain how associated vendors—not Maruti-Suzuki—produce 60 to 70 per of the firm’s cars at Gurgaon and Manesar even today. “Hardcore manufacturing is a much smaller component of a car-making company than people imagine,” he says. For instance, Maruti’s R&D will not feed the Gujarat plant. This means Maruti’s intellectual property will not be a source of income from the new plant.
When the Indian government relaxed rules for royalty payments in 2010, MSIL was the first MNC to pay Suzuki higher royalty rates than earlier. “The royalty amounted to almost 64 per cent of Maruti’s pre-tax profit or 88 per cent of its post-tax profit,” InGovern’s note says. In July 2010, after Maruti disclosed these payments, its stock dropped 12 per cent. Bhargava emphasises, “We will remain the company that does all the R&D. We will decide what targets are set for the [new] subsidiary.”
This, too, strikes analysts as strange. Manish Sonthalia, senior VP, Motilal Oswal, says, “If the company does no [new] manufacturing, what R&D in marketing do they plan to invest in?” he asks. He says Maruti, if it does not require cash, should give generous dividends—payouts that are typically “dismal”. “Yes, it’s fair to say that Maruti will be a marketing company vis-a-vis the new capacity. That’s not good at all,” says Sonthalia.
“For Suzuki, India is home ground, not a place to reap profits from at the cost of the local economy. It’s their firm belief that they will have to localise. I don’t see what the fuss is about,” counters Tsukada, who regularly interacts with the Suzuki management. But Indian investors and insurers are far from reassured. Given the anti-business sentiment this election season, this issue could fester in months to come.