If you are a multinational company with a foreign subsidiary that contributes more to your bottomline than even your home business, general wisdom would be that you handle the subsidiary and its issues with care. Not so with Suzuki Motor Corporation (SMC), which is now embroiled in a controversy over a plan to set up a car plant in Gujarat as a fully owned subsidiary when it already has Maruti Suzuki India Ltd, where it owns a little over half the equity. Maruti’s royalty payment to SMC last year was higher than the Japanese corporation’s net profit derived from its business in Japan, and Maruti is the market leader in the Indian car market. Yet, SMC came up with a proposal that is adverse to Maruti’s minority shareholders. Confronted by adverse reaction from the market and institutional and retail investors alike, the multinational has now watered down the proposal and also said it will seek the consent of the minority shareholders as envisaged under Section 188 of the new Companies Act. SMC has also clarified that the cost of the new plant will be funded by depreciation and by its equity contribution. Should the contract-manufacturing agreement between the two end, the plant will be transferred to Maruti at book value and not fair market value, as was first decided. So far, so good.
The basic question, however, has not been answered, and that is: why does SMC want to go it alone when it has a 56.21 per cent subsidiary in Maruti Suzuki? The question becomes more relevant if you consider that Maruti has Rs.7,500 crore of free cash idling on its balance-sheet, earning about half of what the company earns as return on its capital employed. This is the point that some minority shareholders are still unhappy about, and the company has not answered the question. The issue is one of corporate governance especially because the creation of a wholly owned subsidiary when a partly owned one exists can lead to conflict of interest. It could also lead to tricky transfer pricing issues in transactions between the wholly owned subsidiary and the parent given that Maruti will be taking the cars produced by the new plant at cost. There is the fear among Maruti’s minority shareholders — not entirely misplaced — that in course of time the company will be reduced to a marketing unit selling cars produced by the wholly owned subsidiary. The role of institutional investors, including FIIs, will be critical to the fate of the resolution when it is put up for vote. Shareholder displeasure being justified, the Life Insurance Corporation of India, which is the single-largest shareholder after SMC with 6.93 per cent stake, should take the lead and vote down SMC’s proposal for being unfair to minority shareholders.
