No sellout, only salvation

They have not specifically spelt out, because they cannot, how Maruti’s profits or growth prospects have been harmed, or how Maruti could have better competed with the numerous foreign-owned, -controlled and -managed car companies operating in India, if its owners continued to fight each other in court.

Recognising the absence of automotive technology in India, the government had decided in 1981 that Maruti should be a joint venture with a foreign licensor. SMC was selected as the partner because it offered the best technology and products, and was prepared to invest in a PSU.

The runaway success of the company was largely due to the confidence and trustthat existed between the government and Suzuki, whose views on production, equipment selection, plant layout and human resource management were fully respected.

Consequently, the Indian managers and workers were highly motivated, proved to be quick learners and made success possible. Maruti functioned as a board-managed company, and government did not interfere. It is difficult to understand why, from 1995, an attempt was made to change this very successful arrangement.

The resolution of the dispute with Suzuki recognises the validity of the reasons for forming the joint venture in 1982 and restores the conditions which had brought success.

The government and Suzuki have different strengths, which should be combined for the well-being of Maruti, and not used against each other.

The charge of a sellout against the government is baseless and politically motivated. The settlement stands on its merits and does not have to be defended by arguing that the real sellout was by the Congress government in 1992,when SMC was allowed to increase its equity from 40 percent to 50 percent, and a Rs 100 share was sold for Rs 269 whereas, in March 1991, SMC was willing to pay Rs 500 per share.

Maruti had in 1990 sought government approval for investments required to increase its production capacity by 70,000 units a year and to introduce the YE-2 (Zen) car. An estimated US $ 125 million was required for the project, and a possible source was the International Finance Corporation.

However, IFC did not lend to PSUs and the Balance of Payments Committee had approved that new equity of Rs 24 crore be issued by Maruti. It was proposed to issue this equity to IFC at a price of Rs 500, and as a consequence Maruti would not remain a PSU. In terms of the JV Agreement shares could be held by a third party only with the consent of both partners.

SMC agreed to the sale of equity to IFC, but also made the offer to buy the shares at the same price as IFC. Acceptance of this offer would have resulted in SMC’s equity crossing 50percent. And these shares could be sold at market prices in the future. This was the background to SMC’s acceptance of a price of Rs 500.

Now let us see what happened in 1992. The Zen project was cleared, but IFC funding did not materialise. The 40 percent restriction on foreign equity had been relaxed. The government agreed that Maruti should become a non-government company, so that it acquired greater managerial flexibility, and consequently increased its competitiveness. The Zen export programme was one of the reasons why freedom from governmental restrictions was required.

Future competition in the domestic car sector was also not difficult to foresee. Maruti’s experience of the handicaps of being a PSU was no different from that of other PSUs, where lack of autonomy is a major reason for their indifferent results.

Under the 1992 decision no government shares were to be sold to Suzuki, but a preferential issue was to be made. The price of preferential issues had, in the past, been determined by thecontroller of capital issues, using a formula based on net worth and yield. SMC requested for the same formula to be used, as the purpose of the share issue was only to privatise Maruti. The government accepted this request, and the price of Rs 269 was fixed by the finance ministry using the CCI formula.

A safeguard was provided to prevent SMC ever making any windfall profits from the sale of these shares. The agreement then made provided that if any time in the future Suzuki sold its shares, these preferential shares would be the first to be sold, with government having the first right of refusal, and the price would be determined by applying the same formula as was used to arrive at the price of Rs 269.

It is obvious that this preferential issue was qualitatively different from the proposed issue of equity in 1991, and comparison of prices is not meaningful because of the restriction on the sale price.

Let us look at the company’s performance after privatisation, to judge the merits of the 1992decision. A comparison of performance data for the years 1991-92 and 1996-97 shows that production increased from 122,438 units to 339,445 units (177 percent), total income from Rs 2,005 crore to Rs 7,958 crore (297 percent), PBT from Rs 35.8 crore to Rs 807.7 crore (2144 percent), value added per employee from Rs 5.2 lakh to Rs 22 lakh (323 percent), and return on capital employed from 12 percent to 51 percent (325 percent).

It is apparent that the performance of Maruti improved dramatically in the five years after privatisation, despite the fact that during this period there was much more competition and no concessions of any kind were available to Maruti. Privatisation was an outstanding success, if we value results.

The conclusion is obvious. There was no sellout in 1992. There was also no sellout in 1998. If India is to progress, let us value people and institutions who produce results. Managers in PSUs can never be motivated if they are always looked upon with suspicion, and condemned without testedevidence.

If Suzuki selects an Indian to be their nominee, why is he automatically dubbed a partisan? Should Suzuki then appoint only the Japanese in Maruti?

Governments too cannot take good economic decisions if they are accused of sellouts, only on political grounds. The 1992 and 1998 decisions have, in fact, created a win-win situation, and Maruti can now aspire to be an internationally relevant company.

The writer is a former chairman of Maruti Udyog Limited