Maruti shareholders root for agreement with Suzuki after revised deal terms

Suzuki will make cars in Gujarat, which its Indian arm will buy and sell in the domestic market

The contract manufacturing agreement between Maruti Suzuki Ltd and parent Suzuki Motors that came under sharp criticism from the shareholders of the Indian automaker in January last year is all set to be approved in its revised format.

Institutional investors and proxy advisory firms that had earlier opposed the agreement are now in its favour as they view the new terms of the agreement “reasonable and balanced” for both, Suzuki and Maruti.

The issue goes back to January 2014 when Maruti said a plant at Gujarat would be developed by Suzuki and the Indian arm would buy cars from Suzuki and sell it in the market. Shareholders felt that Maruti’s role would be diminished from being a manufacturer to just a distributor and opposed the move.

The terms of the agreement were revised in March and it was clarified that Suzuki will operate the plant on a ‘no-profit-no-loss’ basis and Maruti would have the option to buy the plant at book value.

“The revised terms are much more reasonable and we think investors can vote in favour of the resolution. Obviously, Suzuki being a Japanese entity, has cheaper access to credit. Also, whenever Maruti wants to buy the plant, it can do so at book value rather than the then prevailing market price. This reduces the cost for Maruti,” says the head of a mutual fund house that owns Maruti shares worth Rs.855 crore. Incidentally, the interest rate in Japan is very low compared to India and so Suzuki can get funds at a much cheaper rate compared to Maruti.

The head of another mutual fund house, which owns almost eight lakh shares of Maruti, says the automaker has held discussions with most of its institutional shareholders to get a feedback on the revised agreement.

“Suzuki and Maruti have been receptive to the earlier criticism that led to the amendments. In the current form, the agreement looks acceptable to the shareholders,” a source said.

Recently, Institutional Shareholder Services Inc. (ISS), a leading provider of corporate governance advisory, advised shareholders to vote in favour of the resolution, saying that the agreement “makes good economic sense” for the growth of Maruti.

Glass Lewis & Co, another global proxy advisory firm, has also advised shareholders to vote in favour of the resolution, saying that since Suzuki will be building the plant, Maruti can redirect its capital for other business purposes and be able to source vehicles from Suzuki on cost basis.

In the recent past, global majors such as Goldman Sachs, Deutsche Bank, UBS and Credit Suisse have all expressed a positive view on Maruti in the light of the revised clauses of the agreement.

In October, the revised agreement was approved by the audit committee of Maruti and put up for voting by public shareholders. The last date for submitting votes is December 15 and the result will be declared on December 17. According to the shareholding data available on BSE, Life Insurance Corporation of India is the largest public shareholder with a stake of 5.37 per cent, followed by Europacific Growth Fund (1.13 per cent) and ICICI Prudential Life Insurance Company (1.03 per cent).

The public shareholders of Maruti include 647 foreign institutional investors (FIIs) and 418 schemes of mutual funds. Promoter Suzuki Corporation holds 56.21 per cent in the Indian arm.

The Japanese auto major will operate the Gujarat plant on a ‘no-profit-no-loss’ basis