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Sunday, February 25, 2001













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Messing up Maruti's privatisation

Raghuvir Srinivasan

IT IS as convoluted as it can get. The Government's strategy for privatising Maruti Udyog through a two-stage process could not have been more complex and long-winded.

Even after such an elaborate strategy, there appears no certainty that the Holy Grail of privatisation will be reached. There are a number of pitfalls along the way that the Government has to watch for, if it is to show a net gain from the exercise.

The elaborate process appears to be driven by two factors. First, the compulsion to soften political opposition to privatising a successful public sector unit. That the control of Maruti could pass on to a multinational is something to be noted here. Second, the need to work around the debilitating clause in the joint venture agreement with Suzuki Motor Corporation by which the first right of refusal rests with the latter, if the Government were ever to consider selling its equity.

If the Government thought that its strategy will now take care of these two prickly issues, it could not be more wrong. It will surely be up against political opposition, especially if Suzuki mops up equity from the market to gain majority control. The Japanese major can certainly be expected to shore up its holdings from the market once the institutions divest their stake. As for the second point, only the naive will believe that Suzuki will not see through the game-plan to circumvent the clause and demand its pound of flesh.

The success of the whole strategy rests on whether Suzuki accepts the game-plan. There is reason to suspect that it may not. The Government wants Maruti to make a rights issue of shares which it would renounce in favour of the financial institutions. But Maruti may not need equity infusion now; even after the beating it has taken in the market in the last couple of years, its balance-sheet is still healthy. This means that Suzuki may not agree to an expansion of the equity base.

Assuming that it, indeed, does agree, there will still be the sticky question whether the Government can renounce its rights to a third party. Suzuki can be expected to oppose any such move as it is clearly a strategy to overcome the prickly clause in the joint venture agreement. The Japanese major is not likely to be deceived and end up compromising itself. So where does this leave the Government? It may have to either abandon the strategy or offer a sop to Suzuki. The latter appears more possible. Either way the Government will end up the loser.

If the Government assumes that now it would be shielded from accusations of selling out to a multinational, it could not be more wrong. Suzuki can, and will, surely purchase shares from the market or even from the financial institutions when they divest their holding. Theoretically, the Japanese major cannot be prevented from gaining control of the company. When that happens, the Government is bound to feel the heat politically. So what is it now that it is trying to avoid?

The inclusion of the financial institutions in the strategy is good neither for them, nor for the government. Renouncing rights to the institutions cannot pass for divestment. They would be mere warehouse agents for the government stake. This is also not good from the institutions' viewpoint, as they would be taking on a large risk while merely bankrolling the government. Given the state of the passenger car market in the country, it would be difficult to say with certainty that the institutions would make money at the end of the day. The market is not going to take kindly to the Government's move which spells trouble, as the major financial institutions are all listed.

Instead of such a convoluted exercise, the Government could have made the best of a bad bargain by negotiating with Suzuki to get a fair price for its stake. Of course, the Japanese company would have been negotiating from a position of strength, given the clause in the agreement. Besides, all that it would need is one share from the government to become the dominant partner in the company. But there is one important factor that may have worked in the Government's favour.

The consolidation exercise in the global automobile industry is bound to reach India soon. In this context, Suzuki, and its back-seat driver, General Motors, would like to gain complete control of Maruti. With some smart, transparent negotiations, the Government could have converted this to its advantage to arrive at a fair price.

What the convoluted strategy betrays is a lack of conviction on the part of the Government. It would have been better, instead, to adopt a straight course over the entire issue and take the political opposition head-on. As the outcry over the Balco privatisation proves, political opposition cannot be avoided when it comes to privatisation. Suzuki Motor Corporation, for its part, is now sitting pretty in the driving seat, thanks to that one clause in the joint venture agreement somebody had been most prescient to think of, almost two decades ago.


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