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Customer LoginsSame-Day Analysis: India: Maruti Suzuki wins shareholders' approval for Gujarat plant
Shareholder approval for Maruti's plan regarding its Gujarat plant removes uncertainty and brings about much-needed clarity on the production front.
IHS Automotive perspective
- Significance: Maruti Suzuki has won approval from its minority shareholders for its controversial plan regarding its Gujarat manufacturing plant. In a statement, the automaker said that the proposal was passed with the support of 89.75% of the total votes cast.
- Implications: The result brings to an end a rare show of investor activism in India after several shareholders abstained from voting.
- Outlook: The approval clears the way for a contract-manufacturing and leasing pact that will allow a wholly owned Suzuki subsidiary to operate the Gujarat plant. Maruti will be tasked with domestic and overseas sales of the vehicles produced by Suzuki.
Maruti Suzuki has won the approval of minority shareholders for its controversial plan regarding its Gujarat manufacturing plant. In a statement, the automaker said that the proposal was passed with the support of 89.75% of the total votes cast. Nearly 6.74 million votes, or 10.25% of the total vote, opposed the resolution. A total of 65.83 million votes were cast, representing nearly 54.7% of Maruti's public shareholding. The company held the vote between 16 November and 15 December. Shareholders voted on the twin proposals to allow leasing of land to a wholly owned Suzuki subsidiary and to set up a contract-manufacturing agreement for the production and sale of vehicles. The land, in Becharaji, Gujarat, was originally acquired by Maruti Suzuki to set up a vehicle production plant. According to the Times of India, several investors, including the Life Insurance Corporation of India (LIC), index funds, passive funds, proxy advisory firm Institutional Investor Advisory Services, many retail investors, and those holding participatory notes abstained from voting.
"This [outcome] is beneficial for Maruti because we do not have to now invest in the Gujarat plant. Maruti can use the money instead for strengthening its R&D [research and development] and on extending the marketing and distribution network," said Maruti Suzuki India chairman RC Bhargava after the results of the vote were made public.
The plant's first manufacturing line will become operational in early 2016. The plant is expected to have six manufacturing lines with a total production capacity of 250,000 units per annum. Of the expected investment of INR185 billion (USD2.78 billion) in the plant, Suzuki is expected to contribute INR80-100 billion. Under the arrangement, Suzuki will produce the vehicles at the plant, while Maruti will be tasked with selling the vehicles in the domestic and overseas markets.
Outlook and implications
The controversial plan, first floated in February 2014, faced strong opposition from minority shareholders including domestic mutual funds. These shareholders felt that the proposal would turn Maruti Suzuki from a vehicle manufacturer into a sales company. Following the objections from mutual funds, the automaker made some changes to the plan and promised to seek minority shareholders' approval for the revised proposal. Voting was delayed several times on account of pending amendments to India's Companies Act.
The changes to the Companies Act made it easier for Maruti to push through its proposal. Under the previous regulations, Maruti needed the plan to be approved by at least three-quarters of its public shareholders through a special resolution. However, following the changes to the act, related-party transactions now require a simple majority of more than 50% through an ordinary resolution. With a nearly 6% equity stake, LIC is one of the biggest shareholders in Maruti Suzuki, which is 56% owned by Suzuki. Domestic mutual funds including some prominent names such as SBI, ICICI Prudential, HDFC, Reliance Asset Management, and Birla Sun Life hold nearly 8.4% of the company. Foreign institutional investors (FIIs) hold another 22%. Under the new regulations, the domestic financial institutions clearly faced a losing battle and LIC's absence from the voting practically tilted the outcome in favour of the proposal.
Although Maruti made some changes to its original plan to address concerns regarding its margins on vehicles produced at the factory, the biggest concern that Maruti might gradually turn from a manufacturer into a sales company remains unaddressed. Although the company's management has reiterated that it will continue to exercise control over the Gujarat plant, there does not seem to be a well-defined plan in place indicating the management's view.
Nevertheless, shareholder approval for the plan has removed uncertainty and has brought about much-needed clarity on the production front. Maruti currently operates two manufacturing facilities in India with a combined annual production capacity of 1.45 million units. The automaker is keen to start operations at the Gujarat plant as the Gurgaon and Manesar facilities are operating near full capacity. With a clear roadmap on the sales front, and a cohesive product strategy to support sales growth, production has been the only sticking point for the automaker. Under its plan, Maruti aims to sell 2 million vehicles annually by 2020 and is working to expand its product line-up and dealership network. Maruti recently unveiled an aggressive investment plan involving INR150 billion to double its sales infrastructure in India over the next five years. Separately, the automaker has started ramping up its Nexa premium dealership network. The Nexa dealership network, which operates independently from the rest of the network, is expected to be scaled up to 100 outlets by March 2016.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. Further components of this service include competitor and country intelligence. Get a free trial.