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Home / Industry / Manufacturing /  Maruti wins shareholder nod for Gujarat plant pact

New Delhi: Maruti Suzuki India Ltd, the nation’s largest car maker, has won minority shareholders’ approval for a plan to source cars from a Gujarat plant to be built by its parent Suzuki Motor Corp.

As much as 89.75% of the 65.8 million votes cast were in favour of the resolution that sought shareholders’ consent for a contract manufacturing agreement for the production and sale of vehicles between Maruti Suzuki and Suzuki Motor, Maruti said on Thursday. The voting concluded on 15 December.

“The resolution has been passed quite comfortably," R.C. Bhargava, chairman of Maruti Suzuki, said at a press conference.

To be sure, only 54.7% of public shareholders participated in the postal ballot—that is, out of 132 million public shareholders, only 72.3 million participated. Those who abstained from voting included the company’s single-largest institutional shareholder, Life Insurance Corporation of India (which owns 6% of Maruti).

Suzuki Motor owns 56.4% of Maruti Suzuki.

A second clause of the resolution involved the deed for leasing land for purposes of implementing the contract manufacturing agreement.

The chances of Maruti Suzuki getting the shareholders’ approval improved after capital markets regulator Securities and Exchange Board of India (Sebi) eased norms regarding related-party transactions to bring them in line with amendments made to the Companies Act that came into effect in 2014.

Earlier, Sebi norms required a vote by two-thirds of minority shareholders on a special resolution before a related-party transaction could be approved.

In September, this was reduced to 50% along the lines prescribed by the Companies Act. The change has made it easier for publicly traded firms to get such deals cleared.

Maruti Suzuki completed the voting process a month short of two years from when Suzuki announced that it would build the Gujarat plant on its own.

Maruti had claimed that the process got delayed as the Gujarat government had to redo all the paperwork in favour of Suzuki Motor Gujarat, a wholly owned unit of the Japanese company. It had earlier drawn them up in the name of Maruti Suzuki.

“At one level, it was not a surprise. We liked the fact that they tweaked the agreement and engaged the shareholders. Most boards have taken note of the development and they will engage their shareholders in future," said Amit Tandon, managing director of proxy advisory firm IIAS.

Bhargava said that the biggest issue was that it was a unique transaction, which made investors a bit uncomfortable.

“Human beings don’t like change. You face a lot of opposition when you make changes," Bhargava said, referring to at least 14 asset management companies which, along with IIAS, had rejected the deal in the beginning.

Maruti was assisted by Axis Capital and Kotak Mahindra in the process while an independent scrutinizer, Manish Gupta, carried out the vote for Maruti.

“The reason why Suzuki is doing this is because it is a 56% shareholder in Maruti’s profits. On the other hand, Maruti shareholders will get profit from 3 million cars instead of 1.5 million now," Bhargava said.

Tandon of IIAS said Maruti’s management must not underestimate the challenges it now faces.

“Unlike an election rally where promises are made only to be forgotten, Maruti’s management has empowered shareholders. Maruti will need to come good on the promises it has made to shareholders, especially with respect to the use of its excess liquidity," he said.

By not investing directly on the Gujarat plant, Maruti is sitting on a cash pile of 15,000 crore which it intends to invest in buying land and beefing up its sales and marketing infrastructure.

The Gujarat plant will have six separate assembly lines, which will be set up in stages, with each having the capacity to produce 250,000 cars per annum. The Haryana and Gujarat plants will eventually take Maruti’s total capacity to three million units.

According to the plan announced in January 2014, Maruti will buy cars from Suzuki Motor Gujarat. That raised the hackles of investors and proxy advisory companies, prompting the vote.

The plan was a significant departure from the earlier one under which Maruti would have built the plant itself. The announcement raised concerns that Suzuki might sell the cars to Maruti at a higher price than it would have cost the latter to produce them.

Institutional shareholders such as Axis Mutual Fund, DSP BlackRock Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, Reliance Mutual Fund, SBI Mutual Fund and UTI Mutual Fund opposed the plan.

In March 2014, Maruti, bowing to pressure from investors, independent directors and Sebi, agreed to seek minority shareholders’ approval for the contract manufacturing agreement.

Three months later, the firm clarified that it could earn about 10,500 crore, assuming a post-tax return of 8.5% per year, during the initial 15-year period of the contract manufacturing agreement, from the total investment ( 18,500 crore) it would have otherwise have had to make in the Gujarat plant. And in the event of termination of the agreement, the company added, the plant would be transferred to it at book value.

Under the new agreement, Suzuki Motor Gujarat will operate on a no-profit, no-loss principle, and manufacture and sell the products to Maruti Suzuki. It will not directly supply or assign the products to a third party.

In October, the Maruti board approved the contract manufacturing agreement with Suzuki for a period of 30 years, allowing it to seek a minority shareholders’ vote.

“The project will go ahead and the plant will get commissioned in early 2017," Bhargava said, adding that Maruti has no scope to expand capacity at its plants in Haryana.

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