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Monday, Sep 05, 2005

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Exiting Maruti

EVER SINCE SUZUKI was allowed to raise its stake in Maruti Udyog — first from 26 per cent to 40 per cent and then to 50 per cent in the early 1990s — there was little strategic purpose in the Government continuing to hold any stake in the company. If the situation was inherently unstable from the point of view of harmonious conduct of the company's affairs, subsequent events only reinforced this perception.

Having earlier allowed the company to issue shares to an employees' trust, the Government now found its holding dropping below 50 per cent of the total equity. Its strength vis--vis the Japanese partner was compromised. The public wrangle in the late 1990s between the two over the choice of a managing director — a right the Government held under the terms of the joint venture agreement — even as Suzuki's own candidate for the post of Chairman had a relatively smooth sailing, was a clear loss of face for the Government. The compromise that ensued cut short the term of the Government's first choice candidate and elevated the person acceptable to Suzuki as managing director. This accelerated the process of marginalisation. As if all this was not enough, more followed. For a modest "control premium", the government allowed Suzuki to subscribe to a further issue of capital by Maruti and consolidate its stake. The case for a full and comprehensive exit for the Government could not have become any stronger.

It is just as well that the Government has chosen to do so now rather than later. But a few questions remain: Why, for instance, has it chosen to offload only a part of its stake? Or, why has it not set a time-frame for the exercise? The retention of 10 per cent residual stake defies logic. It offers no leverage whatsoever, even assuming for a moment that it may strengthen the Government's case for a seat on the board. Even the proposition that a 10 per cent stake makes it easier for an investor to mount legal action on grounds of gross mismanagement is absurd. For one, the investor in question is the Government itself with the full force of regulatory apparatus available to it even without any ownership stake. In any case, there is nothing in the Japanese company's record of management of Maruti to suggest that mismanagement is even a remote possibility.

No less explicable is the Government decision to offer the shares only to public financial institutions, which have not shown any interest in picking up a stake in the company in the 18 months since it went public. Why force it on them, now? With its ownership stake already reduced to 18 per cent, the joint venture with Suzuki and the binding covenants, such as there are, exist only on paper. The sooner the Government ends the fiction, the better it will be for all concerned.

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