Minority investors in Maruti Suzuki India Ltd. (MSIL), India’s biggest carmaker by volume, sought the scrapping of parent Suzuki Motor Corp. (7269)’s plan to build a fully-owned factory in the state of Gujarat. Shares dropped.
In their second letter to the board in as many months, 16 investors representing mutual funds and insurers termed Maruti’s move as a “blatantly wrong and value eroding oppressive transaction.” Maruti Chairman R.C. Bhargava confirmed receiving the letter and said the company stands by its decision.
In January, Suzuki Motor said it will spend 50 billion yen ($485 million) on the factory in western India. The facility, to start production in 2017, will have an initial annual capacity of 100,000 cars and will supply all its output to Maruti, the Hamamatsu, Japan-based automaker said at the time. The investors in the letter said that the plan would convert Maruti “into a shell company” over time.
“This clearly is not in the best interests of MSIL and its shareholders and is in fact significantly detrimental to them,” they wrote in the letter dated March 5, a copy of which was obtained by Bloomberg News. “We wish to remind you of your fiduciary duty and urge you to carry out the Gujarat project under the ownership of MSIL.”
Shares of Maruti Suzuki fell as much as 4.2 percent to 1,680 rupees, the biggest intraday loss since Feb. 28, and traded at 1,683 rupees as of 9:25 a.m. in Mumbai. The benchmark S&P BSE Sensex (SENSEX) slipped 0.1 percent.
The money managers that sent the letter include HDFC Asset Management Co., the nation’s biggest mutual fund, Franklin Templeton Investment Management Ltd., DSP BlackRock Investment Managers Pvt. and Birla Sun Life Insurance Co.
The production of cars by a Suzuki-owned subsidiary would lead to lower earnings than from cars manufactured by Maruti directly, Ashvin Shetty and Ritu Modi, analysts at Ambit Capital, wrote in a research note on Feb. 28.
“Our purpose is to strengthen Maruti’s business and benefit all stakeholders including minority shareholders,” Maruti said in a text message yesterday. “We are communicating with them regularly to convey this intent and purpose.”
The cost of production of vehicles at the Suzuki Gujarat factory would be calculated in an identical manner to those made by Maruti’s existing plants, Maruti said in a statement on Feb. 26.
Suzuki’s Gujarat unit won’t make any losses nor accumulate any cash surpluses, according to the statement. Maruti will profit from the sale of the cars to dealers and will get a higher return on capital than if it had been the Indian automaker’s investment, Bhargava said Jan. 28.
“This raises corporate governance concerns at Maruti,” said Paras Bothra, vice president for equity research with Ashika Stock Broking Ltd. in Mumbai. “This is the first time I recall all the major fund managers raising their voice unitedly.”