Maruti Suzuki’s plans to acquire land and do business
in Gujarat has taken a slight twist with the board deciding that the expansion
in Modi-land will be done by a 100pc subsidiary of Suzuki Motor Corporation of
Japan which in turn will do business with Maruti Suzuki Ltd.
On October 29, 2011, the Board of Maruti Suzuki India
Limited (MSIL) had 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
According to a press note from Maruti Suzuki, “Recently,
the Board received an attractive proposal from Suzuki Motor Corporation (SMC)
for implementing the expansion project through a 100pc Suzuki subsidiary. The Suzuki
subsidiary would always remain a 100pc Suzuki owned company.”
The company statement said that the board decided that
the time was now appropriate to expand production facilities in Gujarat. It
approved implementing the expansion through a 100pc Suzuki subsidiary because
it would result in substantial financial benefits to MSIL, and its minority
“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 realised only through the
growth and expansion of MSIL’s business,” the statement added.
It further noted
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. 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.
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