Maruti's Gujarat plant: a test case for corporate governance

The controversy at Maruti seems to be hotting up with news that independent directors on the board- or at least some of them- have raised the flag of revolt. The issue is the decision on the part of Maruti's parent, Suzuki, that it will invest in a car factory on land provided in Gujarat and not Maruti, which will be used more a sales arm for the products of the Gujarat plant.

Institutional shareholders- mutual funds and insurance companies- have protested, saying that the decision on the part of Suzuki is against the interests of minority shareholders. One critical issue is of transfer pricing of cars between the proposed Suzuki plant in Gujarat and Maruti. There are apprehensions that the transfer price can be managed in ways that suit the parent and work to the detriment of Maruti shareholders.

Now, independent directors have been stirred to protest. If they do take an uncompromising stand- and if some of them resign if Maruti and Suzuki stick to the decision on the Gujarat plant- we can say that we have finally a fundamental shift in corporate governance in India. Maruti is thus an important test case- and its resolution will be worth watching now that Sebi has reportedly taken up the matter suo moto.

ET reports:

Highly-placed sources said that the majority of independent directors on Maruti's board have opposed the decision. The independent directors are corporate lawyer Pallavi Shroff, former Ranbaxy chief executive D S Brar, NHAI chairman R P Singh and ex-PwC head Amal Ganguli. Suzuki chairman Osamu Suzuki, instrumental in pushing the deal, is also a member of the Maruti board.

The sources said the minutes of the last board meeting, where the surprise decision on the Gujarat plant was taken, will be discussed when the directors meet on March 15. The protests by shareholders and directors is bound to crop up given that the issue has now reached the market regulator Sebi.

While describing the latest event as "a repeat of 2004" when Suzuki Powertrain (majority owned by Suzuki) was formed for making diesel engines, some of the independent directors want Suzuki to clearly state that Maruti will not be asked to fund the Gujarat project later. In any case, there are fears that Maruti, which commands nearly 50% market share, will turn from a leading carmaker into a "trading concern".

Maruti management, however, insists that the deal remains profitable for the company and investors. "It is a win-win proposition and we are not re-considering it," Ayukawa told TOI, in perhaps the first reaction from the Japanese MD after the investors went public with their dissent. 

The Gujarat plant is not the only contentious issue involving Suzuki and Maruti's minority shareholders. The royalty that Maruti pays to Suzuki is also an issue. On this TN Ninan of BS has some scathing observations to make:

Consider the royalty question. Suzuki charges 5.7 per cent of Maruti sales as royalties (nearly double the level that prevailed before the government abolished caps on such payments in 2009). This is an astonishing 40 per cent of pre-royalty profits, and the company is far and away the top remitter of such royalty payments. What makes the payment particularly egregious is that cars are not like pharmaceuticals - between a half and two-thirds of the final product value comprises bought-out items like tyres, ball bearings, wheels, batteries, seats, headlights and gear assemblies. To claim royalty payments on their value, to which Suzuki has contributed nothing by way of technology, is rich. The royalty outgo, if calculated on the car value that is not bought-out, works out to 15 per cent or more. This is extortionate; the company's defence, that Maruti nevertheless offers good profits, is not an answer. Ambit Capital, which has looked at international companies in India, ranks Maruti as the worst for how it treats its Indian shareholders. 

There are conflicts of interest between the majority and minority shareholders at PSUs and Indian industrial houses. The revelation in recent years is that MNCs are not exactly exemplars of governance when it comes to treatment of minority shareholders.