Maruti Suzuki India chairman says the gains from the interest earned on cash of Rs 3,000 crore, over a period of 15 years would far outweigh the benefits of depreciation that it would have got by setting up the plant. RC Bhargava told FE on Wednesday that since Suzuki Motor Corporation (SMC)’s subsidiary would supply vehicles to MSIL without retaining a profit for itself, the cost to MSIL would be lower to the extent of the return on equity. He said that the proposal has not been rushed through and Sebi had asked for some information last month, which the company has provided. Excerpts:
How do you assess the costs of the vehicles at the SMC subsidiary if the models being made there are different from those in MSIL?
We will be in charge of sourcing from the vendors and we know the cost of components. What they make is what we tell them to make.
How do shareholders know that the pricing will be arms’ length and transparent?
Whatever profit made in Gujarat, will be made by us, we will get the car at a cost without the RoE. So the price will be lower to the extent of the return on equity. If SMC is putting in R3,000 crore, and they’re not taking back any profit, where does that profit go? It has to go somewhere. The subsidiary will not accumulate a surplus, it will run as a no-profit, no loss entity and therefore they will not remit anything. The royalty will be paid by us and the licence for any product is with us, not with them. They are only a manufacturer.
Why is SMC making the investment if is not going to earn a return?
SMC will realise its profits through MSIL. They are investing here because they earn a zero return in Japan. Had they brought in the money through preference capital they would not have made the same return. And a yen loan would have hurt MSIL.
The clarification issued by MSIL in February envisages that SMC’s Gujarat subsidiary will be merged with MSIL after 15 years...
We have said 15 years but people have suggested that we lengthen the contract manufacturing period. So we need to see what happens when we lengthen that period of the contract to say 25 years. With the new Companies Act, a merger would require minority shareholders to vote on the