India's top carmaker Maruti Suzuki said Saturday it would seek minority shareholder approval for a controversial plan to source cars from a plant to be built by its Japanese parent that spurred an investor revolt.
Executive Director Engineering of Maruti Suzuki India Limited, C.V. Raman poses with a new Celerio motor car in Hyderabad on February 7, 2014
Japan's Suzuki Motor Co which owns some 56 percent of Maruti, said in January it would invest nearly $500 million in building a plant in western Gujarat state -- reneging on an earlier plan under which Maruti would build the factory itself.
Now, in the face of intense opposition from institutional shareholders, Maruti after a board meeting said it had decided to give minority shareholders a chance to approve the decision.
"Even though not required by law, the board decided, as a measure of good corporate governance, to seek minority shareholders' approval," the company said in a statement.
The decision by Maruti Suzuki to procure its cars form the Gujarat plant to be constructed by its parent Suzuki Motor Co triggered an outcry from shareholders, including institutional investors.
In an unusual display of shareholder activism in India where institutional investors are often just silent partners, fund managers wrote to Maruti asking the company to reconsider its plans, saying they were unfair.
Analysts have said minority shareholders might profit more if Maruti made the cars itself at the Gujarat plant as it has traditionally done at its other plants and remains a manufacturing company.
Maruti added in the statement that in the event that "both parties mutually agree to terminate the manufacturing agreement, the facilities of the Gujarat Sub (plant) would be transferred to Maruti Suzuki India Ltd at book value".
Maruti, whose shares have come under heavy pressure since the plan emerged in January, has two factories in north India located in Manesar and Gurgaon that can produce up to 1.5 million vehicles a year.
Local media had reported fund managers were considering taking legal action against Maruti over the Gujarat plant which would have an initial capacity to make 100,000 cars a year, rising to an expected 1.5 million a year -- equal to the Indian carmaker's current capacity.
"I think this is a good move by management as minority shareholders often feel their voices aren't being heard," said Deepesh Rathore, director of India's Emerging Markets Automotive Advisors.
Maruti, which dominates India's car market, has insisted that the deal is a "win-win" plan for both the company and investors.
But minority shareholders assert that the winners would be parent Suzuki which would obtain the gains from higher domestic sales.
Under the proposal, Maruti would buy cars made by Suzuki at the new factory and then sell them through its dealers.
Suzuki says its funds in Japan are generating lower than desirable returns and that it would be better for its money to be invested in the Gujarat plant.
Given the Indian car market's current weak outlook, some analysts also say it might be tough for the company to fund construction of the Gujarat plant.