The Telegraph
Wednesday , March 12 , 2014
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Pressure mounts on Maruti

New Delhi, March 11: Raising fresh concerns over Maruti allowing parent Suzuki to undertake the Gujarat project on its own, institutional shareholders have asked the car maker’s board to quash this “oppressive transaction” to save the company from becoming a “shell” entity.

Seven mutual fund investors in Maruti Suzuki, who had earlier written to chairman R.C. Bhargava about their concerns over the deal, have now been joined by nine other institutional investors.

These include mutual funds and insurance companies holding Maruti Suzuki shares. State-run LIC has separately sought a clarification from the company. Institutional investors together hold almost 14 per cent in Maruti Suzuki, while the promoters have a 56.21 per cent share.

Institutional investors said they were concerned that the decision of the Maruti board in January to let Suzuki Motor Corporation implement the Gujarat project through a 100 per cent subsidiary would convert Maruti into a shell company over time.

“This clearly is not in the best interest of Maruti and its shareholders and is in fact significantly detrimental to them,” they said in a letter to the company management.

In response, a spokesperson for the company today said, “Our purpose is to strengthen Maruti’s business and benefit all stakeholders, including minority shareholders. ... we are communicating with them regularly to convey this intent and purpose.”

In the first seven-page letter the shareholders had highlighted their concerns not only about the Gujarat plant but also about high royalty payments made by Maruti to parent Suzuki.

“The press release answering the first letter wasn’t satisfactory. We will wait for a few days for their response,” officials of the mutual funds said.

Institutional shareholders fear that Suzuki may transfer profits that would normally accrue to Maruti to itself by taking over manufacturing, while turning Maruti into a marketing arm.

Sources said some of Maruti’s independent directors have also raised questions about the deal they had earlier approved in-principle and may voice their concerns at the next board meeting to be held later this week or next week. According to sources, mutual funds have also asked for a clear explanation on incremental capex, cash flows and initial investments.

Representatives of the fund houses also met the Securities and Exchange Board of India (Sebi) over the Maruti issue last week.

Chairman Bhargava had earlier said, “We are convinced that what we are doing is the right thing. We are also answering anybody who has any questions and doubts and we will continue to make efforts in that direction and that’s all we can do.”

Besides fears that the move could make Maruti merely a “marketing firm”, the fund houses, including ICICI Prudential MF, Reliance MF and UTI MF, expect a spurt in royalty payments to the Japanese firm, affecting Maruti’s profitability.

Bhargava did not fully refute such apprehensions either, said sources.

“We have always been a marketing company. We assemble, mark my words, assemble 1.2 million cars at the moment. But remember in this assembly of 1.2 million cars, 70 per cent of the manufacturing is done by the vendors and not by us. And in any case 1.5 million units will be produced in Gurgaon and Manesar (together), so it’s not as if all our production is outsourced,” Bhargava had said.

“They (Suzuki) will not get any more royalty than what they are getting (now). The same system will continue.”

The parent firm received Rs 7,000 crore as royalty over the past four years, or 5.7 per cent of sales, the fund houses said, adding that in the next four years, Rs 8,500 crore would be paid as royalty.