Maruti Suzuki: An open letter to the shareholders from IiAS

IiAS, a proxy advisory service says that if the Gujarat plant transfer to Suzuki is approved, Maruti will lose all control over its own destiny, and its shareholders will always remain subservient to the interest of parent Suzuki’s shareholders

Proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS) has asked shareholders of Maruti Suzuki India Ltd to vote against a proposal to allow the company’s parent Suzuki Motor Corp of Japan to own its upcoming plant in Gujarat.

 

“Allowing Suzuki to own the Gujarat plant and its manufacturing has implications that extend beyond commercial arrangements. Suzuki is currently dependent on Maruti, but allowing Suzuki to own the Gujarat plant will shift the balance of power in favour of Suzuki. If the transaction is approved, Maruti will lose all control over its own destiny, and Maruti’s shareholders will always remain subservient to the interest of Suzuki’s shareholders. Equally important are the implications of such transactions on other family-run and MNCs in India – they too may begin manufacturing in unlisted companies and allow the listed company to merely trade,” IiAS said in the open letter.

 

Last year, Bengaluru-based InGovern Research Services also had advised shareholders of Maruti Suzuki, to vote against the country’s largest carmaker's proposal to enter into contractual arrangements for expansion with a 100% subsidiary of Suzuki, the dominant shareholder in the company.

 

Here is the open letter from IiAS to shareholders of Maruti Suzuki…

 

Dear Shareholder:

For a company with as strong a manufacturing track record as Maruti has, to willingly cede ground to another manufacturer should be anathema - yet this is just what your company is proposing, by allowing Suzuki to own the Gujarat plant. Make no mistake, this vote is about the shifting power equation and whether shareholders will allow a manufacturer to continue to ‘manufacture and sell’ or let it shift gears, and ‘buy to sell.’ To put it simply, you - the shareholders of Maruti - need to decide whether Maruti will continue to remain a manufacturer of cars or will it become a glorified distributor.

 

Equally important are the implications of this vote on family run firms and on other MNC’s. If shareholders agree to Suzuki doing owning the Gujarat plant, why should they not agree to the Tata’s, Munjal’s, Mahindra’s or the Bajaj families proposing the same?  Will Glaxo or Nestlé or Holcim now set up fully owned subsidiaries and have their Indian arm only market the products? If so, it will spell doom for the Indian equity markets.

 

About Maruti and this vote

Your company, Maruti currently has two facilities - in Gurgaon and in Manesar, which have a combined capacity to manufacture 1.55 million cars. Your company planned to expand its capacities by setting up a third plant in Gujarat (1,500,000 cars annually – to be set up in a phased manner). 

 

However, in early 2014, Maruti took us all by surprise when it announced that, Suzuki (and not Maruti) will set up and own the Gujarat plant. Suzuki will manufacture the cars in Gujarat that will be purchased by Maruti at cost and be sold under the Maruti product portfolio.  

 

In order to execute this arrangement, your company now proposes to enter into two related party transaction contracts with Suzuki Motor Gujarat Pvt Ltd (SMGPL), a wholly-owned subsidiary of Suzuki Motor Corp (Suzuki), and as required by the Companies Act, 2013, is seeking your approval for the following  transactions:

 

I. Contract Manufacturing Agreement for manufacture and supply of vehicles for an initial period of 15 years. All goods will be sold at cost by SMGPL to Maruti with no profit or loss for SMGPL.

II. Lease Deed for developing the plant on land owned by Maruti. As per the deed, SMGPL will pay Maruti an annual aggregate rental of Rs49.9 million for the land an initial period of 15 years. 

 

IiAS recommends that you vote AGAINST the resolution. Voting AGAINST this resolution means that Maruti will own the Gujarat plant and not Suzuki – it will not result in any stoppage of capacity creation at the Gujarat plant.

 

IiAS has had reservations about this deal since it was first announced in January 2014 and continues to believe that the deal is not in Maruti’s long-term interest. Our main contentions are in our open letter below to shareholders.