Maruti may sign pact with Gujarat after minority shareholder nod

Maruti Suzuki is expected to sign a re-worked state support agreement with the Gujarat government after an awaited nod from its minority shareholders that will allow Japanese parent Suzuki Motor Corporation to run the upcoming plant in Hansalpur.

India's largest passenger carmaker plans to hold roadshows next month to win over investors to the decision to transfer the Gujarat project to Suzuki, according to sources. Besides, the plant may be commissioned a few months earlier than schedule.

This is the second time Maruti Suzuki will approach investors through roadshows after a round last year to allay fears regarding contract manufacturing arrangements at the Gujarat plant.

Maruti Suzuki is also expected seek a vote by minority shareholders soon on the Gujarat plant arrangements. According to sources close to the development here in Gujarat, the re-worked state support agreement will be signed only after minor-ity shareholder approval comes through.

"It does not make sense for the company to sign a reworked contract before it receives shareholder approval. Maruti Suzuki had run into trouble with institutional investors last year over transferring the plant to its parent," pointed out a Gujarat government official.

A mail sent to Maruti Suzuki remained unanswered. Maruti Chairman RC Bhargava, however, said, "We are waiting for shareholder approval. As of now, we have not heard from the Gujarat government on the fresh state support agreement."

State support agreements typically contain guidelines on payment of installments, dates for commissioning, and sops extended like value-added-tax refund.

A fresh state support agreement became necessary when Maruti deiced in January last year that Suzuki Motor Gujarat, a wholly owned Suzuki subsidiary, would make cars for Maruti Suzuki at the Gujarat plant. The original state support agreement was signed between Maruti Suzuki and the state government in June 2012 for purchase of land and setting up a manufacturing plant.

With the new set of arrangements, there arose a need to rework how the VAT refund will be issued in this two-company model. Maruti Suzuki was offered a VAT refund for 15 years provided the amount did not exceed the company's investment here.

In the original state support agreement, Maruti Suzuki was both a producer as well as a seller. Under the revised scheme, Suzuki Motor Gujarat will produce the vehicles and sell them exclusively to Maruti Suzuki at cost.

Maruti Suzuki approached the state government in March 2014 to incorporate these changes in the state support agreement and the proposal was referred to the finance department for a review after being discussed in the chief secretary's committee on big industrial projects.

Bhargava met Chief Minister Anandiben Patel and the Finance Minister Saurabh Patel in Gandhinagar in May 2014. He had said at that time that Patel had iterated the state government's commitment to the project and that no changes would be made in the proposed subsidy.

Sources in the state government said the new model might work for Maruti Suzuki as it was unlikely to incur depreciation on the Gujarat plant. Maruti Suzuki, on its part, might look at making high-end cars at the plant because it would make more profit per car. The company has indicated at least 10-15 per cent of its production from the Gujarat plant will be exported. The company is working to commission the plant by January 2017, earlier than the scheduled deadline of May 2017. While Bhargava remained non-committal on the timeframe, he said, "For all our plants, we try to commission them as early as possible."

The 640-acre Hansalpur site will have three plants with a total capacity of 750,000 vehicles per annum that will come up with an investment of Rs 8,000-8,500 crore. The first of the plants with a capacity of 250,000 vehicles will require an investment of Rs 3,000 crore and is estimated to go onstream by 2017. The Gujarat plant assumes importance for Maruti Suzuki, which plans to sell 2 million vehicles a year by 2020. It has an installed capacity of 1.5 million vehicles at its plants in Gurgaon and Manesar in Haryana. With sales slated to touch 1.4 million vehicles in 2015-16, the Haryana plants will soon not be able to cope.

In Gujarat, the company also has a second site near Hansalpur, at Vithalapur, where it plans to set up production facilities once it exhausts the capacity at the first site. Bhargava had earlier indicated the second site could also have an installed capacity of 750,000 vehicles, taking Maruti Suzuki's capacity in Gujarat to 1.5 million vehicles a year.

Hansalpur is 60 km from Sanand, another automobile hub in Gujarat, and about 30 km from Mehsana, the nearest town.