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An Open Letter To Maruti’s Shareholders

Published on Tue, Nov 24,2015 | 21:25, Updated at Tue, Nov 24 at 21:25Source : 

24 November 2015

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 mn 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 Private Limited (SMGPL), a wholly-owned subsidiary of Suzuki Motor Corporation (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 Rs.49.9 mn for the land an initial period of 15 years.

In this letter 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. Its main contentions are in the open letter to shareholders that is attached.  

Disclaimer: The information/opinions expressed in this report/newsletter are those of the author. This website has not verified the accuracy of the claims made in the report/newsletter, nor does it agree or disagree with, or endorse any information/opinions contained therein.
Attachments : F1 0 Maruti_Open_Letter_Letter_24Nov2015.pdf

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