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Maruti to Seek Minority Shareholders’ Approval for Suzuki Plant

March 15 (Bloomberg) -- Maruti Suzuki India Ltd. said it will seek the approval of minority shareholders on parent Suzuki Motor Corp.’s plan to build a fully-owned factory in the state of Gujarat amid investor calls to scrap the proposal.

“Even though not required by law, the board decided, as a measure of good corporate governance, to seek minority shareholders’ approval,” Maruti, India’s biggest carmaker by volume, said in a statement today.

Suzuki Motor in January said it will spend 50 billion yen ($492 million) on the factory in western India that would start production in 2017 with an initial annual capacity of 100,000 cars, and will supply all its output to Maruti. Suzuki Motor owned 56.21 percent of Maruti as of Dec. 31, according to data compiled by Bloomberg.

“Maruti has addressed minority shareholders’ concerns with today’s clarifications,” said Basudeb Banerjee, an analyst at Quant Broking Pvt. in Mumbai. “With clarifications on the funding, and also on the valuation of the plant, this is definitely a positive development.”

Maruti’s decision comes after as many as 16 investors representing mutual funds and insurers termed the company’s move as a “blatantly wrong and value-eroding oppressive transaction,” in a March 5 letter they wrote to Maruti, a copy of which was obtained by Bloomberg News. Chairman R.C. Bhargava confirmed receiving the letter, which was the second by investors to the board in as many months, and said the company stands by its decision.

‘Shell Company’

Maruti Suzuki shares have dropped 1.4 percent this year, closing at 1,738.45 rupees in Mumbai yesterday. The benchmark S&P BSE Sensex of top 30 Indian stocks has climbed 3 percent in 2014.

Depreciation and equity brought in by Suzuki Motor will fund the entire capital expenditure for the Gujarat unit, which would function on a no-surplus-no-loss basis, Maruti said in today’s statement. The facilities of the Gujarat plant would be transferred to Maruti Suzuki at book value in the event that both parties mutually agree to terminate the contract manufacturing agreement, it added.

The plan would convert Maruti “into a shell company” over time, money managers including HDFC Asset Management Co., the nation’s biggest mutual fund, DSP BlackRock Investment Managers Pvt. and Birla Sun Life Insurance Co., wrote in the March 5 letter.

Fiduciary Duty

“This clearly is not in the best interests of MSIL and its shareholders and is in fact significantly detrimental to them,” they wrote. “We wish to remind you of your fiduciary duty and urge you to carry out the Gujarat project under the ownership of MSIL.”

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.

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. The company 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.

To contact the reporter on this story: Shikhar Balwani in Mumbai at

To contact the editors responsible for this story: James Regan at Andrew Davis, Robert Valpuesta

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