STAKEHOLDERS
EMPOWERMENT
SERVICES
PUBLICATION DATE: 11 FEBRUARY, 2014
CORPORATE GOVERNANCE RESEARCH – MARUTI SUZUKI
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Maruti Suzuki – Gujarat Expansion 2013
Table of Contents
Executive Summary...................................................................................................................... 3
Overview of the Deal ................................................................................................................... 4
SES Analysis ................................................................................................................................. 5
The Proposal .............................................................................................................................. 5
Analysis of the press release ...................................................................................................... 5
The expansion of facilities was kept on hold due to market conditions ...................... 5
The Suzuki subsidiary would always remain a 100% Suzuki owned Company............. 6
Expansion through a 100% Suzuki subsidiary ............................................................... 6
Production contract ...................................................................................................... 6
Transfer price between SMC subsidiary and MSIL ....................................................... 7
Leasing of Land by MSIL ................................................................................................ 8
Risk for MSIL in the structure ....................................................................................... 8
Assistance by MSIL in implementing the project .......................................................... 8
Marketing...................................................................................................................... 8
Financial benefits to MSIL ............................................................................................. 9
Royalty issue at MSIL ............................................................................................................... 10
What is there in it for SMC? ..................................................................................................... 11
Does the deal require shareholders’ approval? ...................................................................... 12
Evaluating alternative structure .............................................................................................. 12
Disclaimers ................................................................................................................................ 15
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PAGE 2 OF 15
CORPORATE GOVERNANCE RESEARCH
Conclusions ............................................................................................................................... 14
Maruti Suzuki – Gujarat Expansion 2013

The proposed arrangement is a related party transaction (RPT). SES recommends that a Company should
not resort to related party transactions unless they are unavoidable and are in the larger interest of the
Company. RPTs should only be partaken if they bring in some definitive advantage to the company and
their Impact can be measured in a holistic manner.

Present laws/regulations do not require shareholders’ approval for RPTs. However, Companies Act, 2013
interalia provides for approval of RPTs by majority of non-interested shareholders. Therefore, it is
desirable that as a good governance practice, the Company should seek shareholders’ approval for this
RPT notwithstanding legal position as on date. If the Company proceeds with the transaction without
seeking shareholders’ approval, it may indicate that the transaction has certain issues which the company
or its promoter “SMC” does not wish to bring to the notice of shareholders. Additionally, in case the
Company does not take approval for the RPT at this stage, there is a possibility that shareholders might
block this RPT in future, when relevant provisions of the Companies Act, 2013 become applicable.

Prima-facie, SES does not find any adverse issue for minority shareholders of MSIL, provided that all
statements made by the Company in its press release announcing the transaction are correct. However, a
lot would depend on the provisions in fine print of the deal and future actions that will determine whether
statements made were for real or only a ploy to circumvent investor approvals/ scrutiny.

In order to ensure that the RPT is at arm’s length and that there are no hidden anti minority-investor
issues, SES recommends that comments/commitments made by SMC in its press release should be a part
of agreement(s) between MSIL, SMC and the subsidiary company. If safeguards are not built to protect
minority investors’ interests, then it would be a clear case of enticing shareholders with high sounding
statements and putting wool over their eyes and hiding real intentions. In such a case, investors should
exercise all their powers to block the transaction.

In view of savings envisaged for investors on account of interest savings (amounting to EPS of `8/share),
SES would advise shareholders not to reject the transaction off-hand but to constructively engage with the
company and discuss each and every related party issue. If the management comes out clean on the
issues highlighted in the report and addresses all concerns in a positive manner, shareholders would
benefit from the proposed transaction. SES believes that governance can only be improved by
constructive engagement of all stakeholders with the company. An outright rejection might not be in the
interest of either party. Stakeholders exercising their rights and ensuring that all their issues are addressed
would ensure that any positive opportunity is not frittered away.
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PAGE 3 OF 15
CORPORATE GOVERNANCE RESEARCH
Summary
Maruti Suzuki – Gujarat Expansion 2013
Overview of the Deal
On 28th January, Board of Maruti Suzuki India Ltd. (MSIL) issued following Press Release to announce the
decision of Suzuki Motor Corporation (SMC) setting up a Greenfield project for manufacture of cars in
Mehsana District of Gujarat on the land that was bought by MSIL for setting up a plant for expansion. SES has
examined the deal from governance and minority (non-controlling) shareholders point of view. SES has not
analysed financial implications of the deal except where it is necessary to highlight issues of governance.
Press Release: Maruti Suzuki Board Decision on Gujarat Project dated 28 Jan 2014
Maruti Suzuki Board Decision on Gujarat Project
th
New Delhi, October 29, 2011: The Board of Maruti Suzuki India Limited (MSIL) had, on 29 October
2011, approved the purchase of land in Mehsana District of Gujarat for further expansion of
manufacturing facilities. Following this decision, approximately 640 acres of land in Becharaji and
approximately 550 acres in Vithalapur was acquired. The expansion of facilities was kept on hold due
to market conditions.
Recently, the Board received an attractive proposal from Suzuki Motor Corporation (SMC) for
implementing the expansion project through a 100% Suzuki subsidiary. The Suzuki subsidiary would
always remain a 100% Suzuki owned Company.
The Board, today, decided that the time was now appropriate to expand production facilities in
Gujarat. It approved implementing the expansion through a 100% Suzuki subsidiary because it would
result in substantial financial benefits to MSIL, and its minority shareholders.
MSIL would enter into a contract with this subsidiary company under which all production in the
subsidiary company would be in accordance with the requirements of MSIL, and the vehicles would be
sold to MSIL. The Suzuki subsidiary would not sell vehicles to anybody else.
The price of the vehicles to MSIL would include only the cost of production actually incurred by the
subsidiary plus just adequate cash (net of all tax) to cover incremental capital expenditure
requirements. The return on this investment for SMC would be realized only through the growth and
expansion of MSIL’s business.
MSIL would be able to avoid all risk inherent in this investment. MSIL would also retain the option of
investing its own funds for strengthening its marketing network, product development, R&D or in any
other opportunity for growth or building strength for market leadership of the company
MSIL would render all required assistance to the subsidiary company for implementing this project on
an arms’ length basis.
The land for the project would be leased by MSIL to the subsidiary company to establish the production
and related facilities. The rent would be determined on an arms’ length basis.
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PAGE 4 OF 15
CORPORATE GOVERNANCE RESEARCH
MSIL would financially benefit from the interest earnings resulting from not investing its money in this
project. It would also benefit because the vehicles would be sold to MSIL by the Suzuki subsidiary
without any return on capital employed.
Maruti Suzuki – Gujarat Expansion 2013
SES Analysis
In absence of adequate details, SES has analysed the contents of press release of Maruti and to some extent
the interview of Mr R C Bhargava, Chairman of the Company.
THE PROPOSAL
Suzuki Motor
Corporation
SMC
SMC
owns
56.21%
in MSIL
100% Initial
Investment to setup
plant
Dividends +
Royalty
Vehicles @
Cost Price
Maruti Suzuki
India Limited
MSIL
Gujarat
subsidiary
to be
100%
owned by
SMC
Gujarat
Subsidiary
1. Land
2. Cost of Production
3. Incremental
Capital Expenditure
ANALYSIS OF THE PRESS RELEASE
The expansion of facilities was kept on hold due to market conditions
The Company acquired land at Mehsana District in Gujarat at two locations measuring 640 acres and 550 acres
for expansion, but kept the expansion on hold due to (adverse) market conditions. Now that the company has
announced the proposed plan, it is inferred that the market conditions are now conducive for expansion.
SES recognises that the decision to expand or not is a long-term issue and is not impacted by decline of sales
in a month or quarter. However, a change of decision must be made based on certain information, data and
predictions. As a good Corporate Governance practice, the company should have disclosed the information
that impacted its decision-making to its shareholders. SES finds that the company has been rather conservative
on disclosures.
Further, SES has also noted certain inconsistencies in the statements made by the Company.
“Work on the Gujarat site has commenced and we expect to start production by the end of 2015-16.”
- Chairman’s statement, Annual report 2012-13
“During the year, the Company signed an agreement with the Gujarat government and acquired 700
acres of land near Mehsana for future capacity expansion. Work is likely to start there shortly.” Management Discussion and Analysis, Annual report 2012-13
“The Board, today, decided that the time was now appropriate to expand production facilities in
Gujarat.” – Press release, October 29, 2011
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PAGE 5 OF 15
CORPORATE GOVERNANCE RESEARCH
The decision of the board, especially the timing coupled with proposed structure, indicates that the board
must have mulled over and decided that the time was ripe for setting up the plant. However, the Company has
not substantiated this statement with any figures. MSIL itself reported lower sales both in volume and money
terms for third quarter and reported a 10% dip in sales in month of January 2014.
Maruti Suzuki – Gujarat Expansion 2013
These statements indicate that although work had started earlier and project was being executed under MSIL,
a change has been made now. However, the press release does not give the same impression. SES
recommends that the Board should explain what led to change of decision especially the parameters which led
to the change.
The Suzuki subsidiary would always remain a 100% Suzuki owned Company
The statement gives an impression that the subsidiary will remain 100% SMC owned unconditionally and
perpetually. SES recommends that both MSIL and SMC should state conditions, if any, under which this
decision might change. Else SMC will be able to exit the business only through liquidation of the subsidiary, as
it can neither be sold wholly or partly to MSIL or any third party. Even merger with MSIL or any other company
is not allowed; therefore effectively risk of future dilution is ruled out if the statement is taken at face value.
Expansion through a 100% Suzuki subsidiary
The Company has stated that expansion through a 100% Suzuki subsidiary will result in substantial financial
benefits to MSIL, and its minority shareholders.
Major assertions in the Press Release are as under
1.
2.
3.
4.
The subsidiary will always remain 100% Suzuki subsidiary.
All sales will be made to MSIL.
All sales will be at cost plus just adequate cash to cover incremental capital expenditure requirements.
No return on investment will be realised.
SES is of the opinion that with the stringent conditions self-imposed by SMC, it can be inferred that there will
be no dividend transfer from subsidiary to SMC, and only initial capital brought in by SMC will be repatriated.
To give comfort to MSIL and its shareholders against any other interpretation, the contract between MSIL/SMC
and subsidiary should not only confirm above observations but may also include an option for MSIL to buy out
subsidiary at book value at any point of time in future.
Production contract
1.
2.
3.
4.
MSIL would enter into a contract with SMC subsidiary
All production in the subsidiary would be in accordance with the requirements of MSIL
All Vehicles would be sold to MSIL
Suzuki subsidiary would sell vehicles to MSIL at the cost price plus just adequate cash to cover incremental
capital expenditure requirements.
Plain reading of the above statements suggest that the subsidiary would be a captive unit and its 100%
revenue will come from MSIL. Production programme will also be in accordance with MSIL requirements.
Understanding the impact and meaning of these statements is very important. Concerns have been raised by
various analysts that it may happen that capacity utilisation of MSIL may drop, and that of the subsidiary will
go up. SMC may be in driver’s seat at MSIL being the major and controlling shareholder. SES is of the opinion
that if the decision to expand production facility is commercially correct, then it will be immaterial which unit
produces, operates at what capacity utilisation, subject to following being true.
1.
The entire output will be sold to MSIL.
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CORPORATE GOVERNANCE RESEARCH
Press Release has further emphasised on following points:
Maruti Suzuki – Gujarat Expansion 2013
2.
SMC, through its subsidiary, will not earn any return on its capital employed/invested. As discussed
previously, this statement means that there will be no dividend from subsidiary to SMC at any point of
time in future and at the most it will be repatriation of original investment.
3.
It may be argued that the subsidiary will dump its production to MSIL and will continue to produce more
vehicles and put MSIL to disadvantage. More so, as SMC is controlling MSIL it may do favours to subsidiary
being 100% owned. SES does not agree to this view because subsidiary or SMC may resort to this, only if
the subsidiary could earn and give any return to SMC. In the absence of any returns to SMC from
subsidiary, there is no reason for subsidiary to do anything that will hurt SMC and MSIL as well.
4.
Factually, if the subsidiary does not operate at full capacity or, hypothetically produces only a single car in
a year, even then the entire cost of subsidiary will have to be absorbed by MSIL. At the end of the year,
the subsidiary will have revenue equal to its cost returning NIL profit and loss. It may appear that this
structure brings a big risk for MSIL as lack of demand may result lower operation level at subsidiary. SES is
of the opinion that risks for this transaction should be the same as that of any expansion project, and
should not be seen as additional risk from the structure proposed. If the decision to expand is sound and
prudent, then profitability of MSIL on account of change in demand and supply position would be agnostic
to structure chosen for expansion as in all the cases entire costs would be absorbed by MSIL in its
consolidated account.
5.
Post the subsidiary becoming operational, MSIL’s financials will be akin to consolidating financials of the
SMC subsidiary with MSIL. For purpose of Profit and loss, the entire cost will be borne by MSIL. Therefore,
individual capacity utilisation will be immaterial. It will be the aggregate capacity utilisation that will
matter due to nature of contract.
6.
The above analysis would be incorrect if there is no control on the costs at subsidiary and SMC is able to
derive benefit through supply of spares, parts, technology etc. to subsidiary. As, such a situation is
practically possible, proper safeguards need to be built into the deal to ensure that import content at
subsidiary is at similar levels to that at MSIL at any given point of time. If the subsidiary sources all its
inputs through MSIL and direct import, if any, are equal to or less than MSIL and are at the same rates,
there is no issue with the structure.
SES is of the view that any transaction / agreement between proposed 100% subsidiary of SMC and MSIL will
be a related party transaction and would also be subject to applicable transfer pricing rules. The Press Release
mentions the following, about price of vehicles produced by proposed subsidiary:
1.
2.
The price of vehicles to MSIL would include the cost of production actually incurred
plus just adequate cash (net of all tax) to cover incremental capital expenditure requirements
Cost of production includes cash and non-cash cost. Depreciation and writing off of the preliminary expenses
are the only non-cash expenses. While rate of depreciation will impact the cost year by year, however it will be
immaterial in the long run as total cost recovered will be only the capital cost and if the agreement between
MSIL and SMC will provide for an option to MSIL to take over the proposed subsidiary at book value, rate of
depreciation at best will impact cash flow timing and nothing beyond that.
The potential issue could be with Incremental Capital Expenditure being adjusted and included as part of cost
of production. At this stage, there is no clarity about what could be this incremental capital expenditure. By
definition, incremental can mean only a small amount vis a vis the original investment. Initially, the plant is
being set up with a capacity of 100,000 vehicles (this is as per newspaper report and not confirmed hence SES
is not placing any reliance on this data). In case the incremental capex is beyond normal repair and
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PAGE 7 OF 15
CORPORATE GOVERNANCE RESEARCH
Transfer price between SMC subsidiary and MSIL
Maruti Suzuki – Gujarat Expansion 2013
replacement, for any contribution towards incremental capital expenditure by MSIL, the Company (MSIL)
should either get equity in the subsidiary or that portion of expenditure should not be a part of cost of
production.
However, if MSIL gets the option of buying out the subsidiary at any point of time in future by paying initial
cost fewer amounts repatriated to SMC, then even contribution for capex would not be an issue except for
taxation purposes.
In case incremental capex is provided by MSIL and the capex becomes part of the subsidiary with right to SMC
to take it back, it will be against the statement made by SMC that “The return on this investment for SMC
would be realized only through the growth and expansion of MSIL’s business“ because SMC would be getting
returns from subsidiary in the form of increased assets.
Leasing of Land by MSIL
As per Press Release, land will be leased by MSIL to the subsidiary and the rent payable by the subsidiary will
be determined at arms’ length. While it may be argued that MSIL, as owner of land, would be at a
disadvantage because SMC/ Subsidiary may not pay appropriate rent, SES is of the opinion that amount of rent
will not affect MSIL adversely in any manner. The amount of rent will be just a book entry. The revenue on
account of rent will be offset by equal amount that will be recovered by subsidiary as cost. Therefore, MSIL
needs to determine rent at fair value according to tax law in order to avoid transfer pricing issue.
The other important issue is that, one has to view the provision of land as capital contribution by MSIL; the
term lease is only for the purpose of accounting. The terms of the Lease deed should be stipulated in such a
manner that SMC cannot operate the plant if MSIL is not a willing partner. Further, it is not clear from the
Press Release whether both the parcels of land will be leased or only one of them will be leased.
Risk for MSIL in the structure
Assistance by MSIL in implementing the project
The Press Release states that MSIL would extend all help in implementation of the project at arms’ length
basis. The issue arises as to how MSIL will price its services. Although, in the long run it may not matter as
ultimately MSIL will have to reimburse the same to SMC subsidiary in form of cost of vehicles. Yet as the two
entities are separate legal entities it will be desirable to keep transaction at arms’ length basis and to disclose
the same to shareholders. Once again in view of nature of agreement the amount will be immaterial as
ultimately it will be recovered in cost over a period, indicating at best an issue of cash flow only.
Marketing
MSIL will continue its marketing activities as it is. All the production of subsidiary of SMC will be sold through
MSIL and all the profits would be parked in MSIL. The Company in its Annual Report of 2012-13 had provided
following information related to exports.
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CORPORATE GOVERNANCE RESEARCH
The Company has stated that “MSIL would be able to avoid all risk inherent in any investment.” SES is not in
agreement with the statement. In the opinion of SES, MSIL is placed in the same risk as it would have been if it
had undertaken expansion on its own. At best, it could be a matter of timing of cash flow and conserving its
cash. MSIL is exposed to operational risks e.g. in case of a slowdown and lower capacity utilisation, all the costs
of subsidiary will get reflected in MSIL books. Therefore, MSIL has all the risks inherent in this structure due to
commitment to buy entire production at cost.
Maruti Suzuki – Gujarat Expansion 2013
“Suzuki Japan has decided that India will now be responsible for the export markets of Africa, the Middle East and
our neighbouring countries. We have to ensure adequate sales and marketing arrangements in these countries,
with the help of Japan. We also have to determine the products to be manufactured for these markets and, if
necessary, establish assembly plants overseas. This decision will greatly help the growth of our exports.”
At face value, this appears to be a positive statement for MSIL and its shareholders since MSIL will become an
export hub for the territories. However, at this stage, the efforts and expenses required to develop the market
are not known. It is also not clear what will be the pricing policies for sales in the territories assigned. Will MSIL
be required to subsidize sales? It may happen that after spending time and money, SMC might decide to
export the vehicles directly, thus jeopardising MSIL interests and future potential gains. Therefore SMC and
MSIL should spell out the minimum period for which these export territories would be exclusive domain of
MSIL .What would be the parameters that will determine further extension? Will it be at the option of MSIL or
SMC or mutual?
Financial benefits to MSIL
The Company has stated that MSIL would financially benefit from the interest earnings resulting from not
investing its money in this project. It would also benefit because the vehicles would be sold to MSIL by the
Suzuki subsidiary without any return on capital employed.
SES is of the opinion that as long as vehicles are sold by the proposed subsidiary to MSIL at actual cost, MSIL
would stand to gain interest on the funds that MSIL otherwise would have invested in expansion.
CORPORATE GOVERNANCE RESEARCH
However, the Company has not given amount that would be invested by SMC in the new subsidiary. In
absence of this information, the expected financial benefits on this amount cannot be calculated. However
given tax free rate of 8.5% available in tax free bonds, for every `100 Cr invested by SMC, MSIL would save
`8.5 Cr tax free (interest saved by not investing MSIL’s own funds), which will belong to shareholders of MSIL
including SMC. There is an indication that SMC would invest close to `3,000 Cr in the subsidiary, which would
result in savings of nearly `255 cr for MSIL. With approximately 30 crore shares outstanding, the savings works
out to over `8 per share. Therefore, MSIL would avoid dilution of EPS to the extent of `8 per share on the
amount perpetually or till the arrangement continues.
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PAGE 9 OF 15
Maruti Suzuki – Gujarat Expansion 2013
ROYALTY ISSUE AT MSIL
Over the last 5 years, royalty payments by MSIL to SMC have increased and presently account for more than
what SMC gets from its share
Total Payments to SMC
of profits.
8.7%
It is presumed that the
proposed structure will also
involve payment of royalty to
SMC by MSIL on vehicles
produced by subsidiary.
8.6%
7.5%
6.7%
6.0%
3.3%
3.3%
6.3%
5.2%
4.9%
3.5%
4.5%
5.0%
3.5%
3.1%
2.5%
2009
NPM
2010
5.5% 5.5%
2011
2012
2013
SMC's share in Profit as % of Sales
SMC Royalty Payments as % of Sales
SMC Total Pay as % of Sales
Royalty Payment to SMC
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
200.0%
180.0%
160.0%
146.4%
136.4%140.0%
120.0%
100.0%
4.1%
3.5%
80.0%
2.7%
60.0%
40.0%
20.0%
0.0%
2011
2012
2013
Royalty as % of PAT from Operations
185.4%
However, MSIL should ensure
128.0%
6.2%
that the royalty is not doubly
paid i.e. included in the cost of
the subsidiary and again in sales
2.6%
of vehicles to MSIL. SES maintains
55.7%
that present royalty payments by
MSIL to SMC are unfair and nontransparent and are enriching
2009
2010
SMC at the cost of minority
NPM from Operations
shareholders of MSIL. One of the
main reasons for this is that the shareholders do not have any say in the matter. Shareholders may note that
this will change soon when provisions of Companies Act, 2013 in respect of related party transactions are
made effective and SEBI decides to implement new Corporate Governance Code based on its Consultative
paper issued in Jan, 2013.
NPM = Total Profit as percentage of Sales
NPM from Operations = Profit from Operations as a percentage of sales
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CORPORATE GOVERNANCE RESEARCH
Royalty Payments increased
3.61 times from `680 Cr in
2007-08 to `2,454 Cr in 201213. During the same period,
sales rose by 2.15 times and
profit by approximately 2
times. This indicates faster
growth of royalty as compared
to sales and profits.
8.7%
8.3%
Maruti Suzuki – Gujarat Expansion 2013
WHAT IS THERE IN IT FOR SMC?
If we take the Press Release at face value, the questions that come to mind are that what’s in it for SMC? Why
should SMC shareholders consent to investing money on such terms?
This analysis can be done with principally two approaches:
1.
Indirect gains to SMC from Interest earning of MSIL that would be protected.
2.
To calculate extra profit that will be generated for SMC along with extra royalty.
Analysis 1
Benefit to SMC on account of interest earning of MSIL is explained in following diagrams, broken into two
steps for clarity. Step 1 depicts use of own cash by MSIL and the Step 2 creates proposed structure
Step 1 – Use of own cash by MSIL
Step 2 – Proposed structure
Increased
Royalty and
Dividends
Increased
Royalty and
Dividends
MSIL
(Minus Cash)
SMC
Sale of
production
at cost
Capital
investment
Gujarat
Expansion Project
MSIL
(Cash neutral)
Cash
Refund
SMC
(Minus Cash)
Sale of
production
at cost
Gujarat
Expansion Project
Subsidiary of
MSIL
In nutshell SMC is effectively deploying its surplus cash at 4.76% interest rate per annum against 0% available
in Japan and probably taking ¥ - ` exposure risk. (Details of which will only be known after details of funding of
the subsidiary can be revealed)
Analysis 2
For working out extra profit, few assumptions need to be made.
Assumptions:
 Investment made is Rs 1,000 Million
 Net profit margin remains the same as at MSIL, Royalty remains same.
 Returns have been calculated at three different Assets turnover ratio. SES expects Assets Turnover Ratio
to be less than MSIL in subsidiary as it will be a new plant.
A
B
C
(In Rs Million unless otherwise mentioned)
Investment Made
Fixed Assets Turnover Ratio (assumed)
Net Profit Margin
Case 1
1,000
4
3%
Case 2
1,000
3
3%
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Case 3
1,000
2
3%
PAGE 11 OF 15
CORPORATE GOVERNANCE RESEARCH
SMC pays cost for this by foregoing 44% of interest earnings to minority shareholders of MSIL. If Tax Free Rate
of 8.5% available on PSU bonds is taken, then tax free earnings of SMC will be 4.76% per annum (56% of 8.5%)
less dividend tax. However, the return earned by SMC in this case may still be more than the Interest earned
on its Yen balances.
Maruti Suzuki – Gujarat Expansion 2013
D
E
F
G
H
I
(In Rs Million unless otherwise mentioned)
Sales (A x B)
PAT (C x D)
Royalty %
Royalty Amount (D x F)
Total to SMC (G + 56% x E)
Return to SMC as % of Investment Made (H / A)
Case 1
4,000
120
5%
200
267
27%
Case 2
3,000
90
5%
150
200
20%
Case 3
2,000
60
5%
100
134
13%
The above calculations show that SMC is going to earn a moderate to high return on its investments. However,
this return would have been there for SMC even if the expansion was done by MSIL at its cost.
What’s SMC gaining?
As discussed above, by undertaking this project, SMC would be able to redeploy its cash which may have been
earning low interest rate and bears the Yen-Rupee currency risk. Additionally, the holding company would gain
from the increased sales and royalty payments by MSIL.
DOES THE DEAL REQUIRE SHAREHOLDERS’ APPROVAL?
Taking into account laws and regulations existing presently in India, the deal does not require any approval
from the shareholders of MSIL. The deal can be viewed as two major related party transactions (RPTs) for MSIL
(i) Proposed lease of land and (ii) purchase agreement for vehicles produced by the subsidiary. These decisions
are ordinary business decisions and the board is empowered to take such decisions on behalf of the Company
in the ordinary course of business.
Since the transactions are with a related party, the Board and the Auditors’ need to confirm that the
transactions will be at arms’ length basis. This statement should also be disclosed by MSIL in the Annual Report
to its shareholders.
The current provisions, especially relating to related party transactions, are likely to change once the
Companies Act, 2013 is implemented. As a good governance practice, MSIL should obtain shareholders’
approval. The shareholders may note that once the provisions of the Companies Act, 2013 are implemented,
all related party transactions will have to be approved by majority of minority shareholders.
If MSIL intended to go for expansion, it could have gone for two alternative ways to implement it i.e. 1) Within
MSIL as a separate division or 2) as a 100% subsidiary of MSIL. However, the Company has gone for 100%
subsidiary of SMC, its promoter. SES has evaluated the three options in table below on various parameters of
evaluation.
Ownership of by SMC
Ownership by Minority Shareholders of MSIL
Business Risk for MSIL
Profit for SMC
Marketing Rights for MSIL
Interest Income of MSIL
Benefit of Increased Exports/ Domestic Growth
Royalty for SMC
Growth of MSIL business
MSIL - division
56%
44%
Yes
56% Directly
Neutral
Reduction
Neutral
Neutral
Neutral
MSIL subsidiary
56%
44%
Yes
56% Directly
Neutral
Reduction
Neutral
Neutral
Neutral
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SMC subsidiary
100%
0%
Yes
56% Indirectly
Neutral
Unchanged
Neutral
Neutral
Neutral
PAGE 12 OF 15
CORPORATE GOVERNANCE RESEARCH
EVALUATING ALTERNATIVE STRUCTURE
Maruti Suzuki – Gujarat Expansion 2013
Related Party Issue
Investment Risk of SMC
Currency Exposure Risk of SMC
Strong
Strong
Shared
Shared
Same as at present Same as at present
Strongest
100%
Increased
CORPORATE GOVERNANCE RESEARCH
From the table above, we can see that there are minor differences between all three options and other than
loss of interest income to MSIL, in case expansion is by using its reserves, the only significant concern is the
related-party issue. The loss of income to MSIL in cases can be easily compensated by SMC, as discussed in
approach 1 above. Therefore, shareholders should be specifically concerned about the related party issues
that arise from current scenario and should urge the board/ management to implement strongest measures to
minimize any future risks.
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PAGE 13 OF 15
Maruti Suzuki – Gujarat Expansion 2013
Conclusions

Although not strictly required by present laws and regulations in India, the Company (MSIL) should get the
approval of the transaction from its shareholders as a good corporate governance practice.

If the statements made by the Company are taken at face value, there is no negative issue for minority
shareholders of MSIL. However, a lot would depend on the fine prints. In order to ensure that there are
no hidden issues that may surface in future, the Company should ensure and confirm to shareholders that
agreement(s) between SMC/MSIL and subsidiary would have the following safeguards:
o
o
o
o
o
o
o
o
There would be no dividend from subsidiary to SMC and subsidiary will at the most repatriate to
SMC only amount equal to its contribution.
MSIL will have option to buy back the subsidiary at book value or initial investment of SMC less
repatriation made by subsidiary to SMC.
Incremental capital expenditure shall be treated as capital contribution of MSIL or as a loan from
MSIL. It shall not become part of subsidiary. However, this will not matter if MSIL gets the right to
buy back the subsidiary at cost. Incremental capital expenditure if any contributed by MSIL shall
not be counted as cost for pricing vehicle sales/ cost from subsidiary to MSIL.
Sourcing of components for subsidiary will be done either jointly by subsidiary and MSIL or by
MSIL.
Supplies from SMC to subsidiary shall be at arms’ length and in no case import percentage will be
more than what is at MSIL at any point in time.
There should be an agreement between MSIL and SMC spelling out duration for which export
territories are exclusively assigned to MSIL. This agreement shall specify role of MSIL and SMC
including support to be provided by SMC.
The land will always remain in the ownership of MSIL.
Subsidiary should voluntarily adopt disclosure norms as applicable to public listed company in
India
MSIL should have authority to get cost-audit of subsidiary done at any point of time and board of
MSIL shall certify to shareholders of MSIL that cost audit was done and board is satisfied.

MSIL is exposed to same operational risks it would have had, had it gone for in-house expansion because
of 100% sales, at cost, from subsidiary to MSIL.

SMC will be exposed to Yen-Rupee exchange-rate risk on its investment in subsidiary. No details are
available as to what will be the nature of SMC’s investment in subsidiary. In case it is part loan and part
equity, and loan is denominated in Yen, then risk will be limited to equity portion only.

MSIL will save interest cost on the amount brought by SMC to invest in subsidiary.

In a nut shell, SMC will gain only interest on its investment through MSIL conserving the cash and that too
after sacrificing 44% in favour of minority shareholders. It sounds reasonable return for SMC if seen in
backdrop of 0% rate of interest in Japan and with no visibility of improvement of these rates in near term.

SES would recommend the deal, if all the protection as suggested are built in and the management can
assert that the decision for expansion was in-house and not dictated by SMC. If the protections suggested
are not built in in the agreement(s), then shareholders may conclude that it was an attempt to put wool
over the eyes of investors/shareholders by making grand sacrificial statements.
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PAGE 14 OF 15
CORPORATE GOVERNANCE RESEARCH
o
Maruti Suzuki – Gujarat Expansion 2013
Disclaimers
Sources
Contact Information
Only publicly available data has been used while making the report. Our
data sources include: BSE, NSE, SEBI, Capitaline, Moneycontrol,
Businessweek, Reuters, Annual Reports, IPO Documents and Company
Website.
research@sesgovernance.com
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any of the research analyst’s compensation was, is, or will be directly or
indirectly related to the specific recommendations or views expressed by
the research analyst(s) in this report.
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CORPORATE GOVERNANCE RESEARCH
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