Maruti seeks to allay investor fears over Suzuki plant in Gujarat

Maruti Suzuki India Ltd has sought to allay concerns raised by its investors over plans by its parent company, Japan's Suzuki Motor Corp, to set up a wholly-owned subsidiary in Gujarat to meet Maruti's needs, saying it would be run on a no profit-no loss basis, and any profits would be transferred to MSIL.

Moreover, the entire plant would be transferred to MSIL if the manufacturing agreement expires.

''If the contract manufacturing agreement expires, and in case is not extended by mutual consent, the assets of the Gujarat subsidiary would be transferred to MSIL at a fair value to be determined by independent valuation,'' an MSIL statement released late on Wednesday said.

The investors have raised concerns over Suzuki Motor's plan to set up the Gujarat facility which was earlier planned to be built by MSIL. The investors were planning to move the Securities & Exchange Board of India with the complaint.

In its clarification, MSIL highlighted the following points:

Suzuki Motor's subsidiary in Gujarat would not take any losses, but would also not accumulate any cash surpluses; the cost of cars produced at the subsidiary would be calculated in an identical manner to that followed by Maruti's plant in Haryana and would not include return on investment and profits.

It further said funds for capital expenditure in the Gujarat subsidiary would be met by (i) the depreciation amount available with the subsidiary (ii) by an amount generated as net surplus from the car pricing and (iii) by Suzuki Motor's infusing fresh equity. The capex needs of the subsidiary would be determined jointly by Maruti and the subsidiary.

Maruti's clarification comes days after large Indian investors wrote to the company saying minority shareholders would be better off if Maruti made the cars itself. The group of heavyweight fund managers wanted Maruti to reconsider its decision to outsource car manufacturing.

The shareholders said they were concerned that the contract for the plant in Gujarat meant the Japanese carmaker rather than Maruti would reap the benefits of rising domestic sales, at a time when India is tipped to become the world's third largest auto market by 2020. (See: Suzuki plan for Gujarat subsidiary has Maruti investors fuming).

Suzuki Motor Corp, which owns 56 per cent of Maruti, announced plans to invest Rs3,000 crore in the Gujarat plant. It said it would sell cars from the plant to Maruti, going back on an earlier plan that would have seen Maruti set up the factory itself.