Maruti Suzuki Board Decision: Expansion through 100% Suzuki subsidiary in Gujarat

The Board of Maruti Suzuki India Limited (MSIL) had, on 29th 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.

Maruti_Gujarat_SuzukiEarlier this week, the Board 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 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.

MSIL would be able to avoid all risk inherent in any investment. MSIL would also retain the option of investing its own funds for strengthening its marketing network, product development, R&D and any other opportunity of growth or building strength for market leadership.

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.