Maruti is a national company which has grown because of the support of the

government. We can't hand it over to Suzuki on a platter."

- Murasoli Maran, Industry Minister, India, 1997.

"Suzuki feels they can no longer afford the disadvantage of government control over
Maruti's decision making. They feel they can do better on their own."

- A Government of India Source, 1997.

A Bitter Fight
In August 1997, the Government of India (GoI) appointed R.S.S.L.N. Bhaskarudu
(Bhaskarudu) as the managing director (MD) of India's passenger car market leader
Maruti Udyog Ltd. (MUL). The appointment was strongly opposed by Suzuki Motors
Corporation (SMC) of Japan, the GoI's 50% partner in MUL joint venture. In a press
release following the appointment, Osamu Suzuki (Osamu), President of SMC,
claimed that the appointment was illegal on the grounds five of the directors who
comprised the majority of MUL's board strength of nine, had objected to the
appointment. Suzuki even alleged that Bhaskarudu was incompetent and unsuitable
for the MD post.

The GoI argued that as per the 1992

amendment in the GoI-SMC joint venture
agreement, both the partners were entitled to
nominate the MD for five years in turns, and
there was no need for any consultation on it.
Industry minister Murasoli Maran (Maran)
alleged that SMC was opposing the
appointment of Bhaskarudu as it wanted
Jagdish Khattar (Khattar), Executive
Director (ED), MUL (reportedly a SMC
loyalist) to become the MD. Following the
disagreement over Bhaskurudu's
appointment, a furious exchange of letters
took place between SMC and the Industry
ministry. SMC asked for Bhaskurudu's
resignation claiming that the minutes of the
meeting when Bhaskurudu was appointed,
did not fully record its objections to the
same. However, the GoI refused to remove
Bhaskurudu and reportedly even started
looking for a prospective partner in the
event of SMC's exit.

Soon after, in the AGM held on September22, 1997, SMC and the GoI representatives
even resorted to verbal violence.1 SMC nominees on the board attempted to prove
Bhaskarudu's unsuitability of the post by questioning him regarding MUL's
functioning. When Bhaskarudu's appointment was put to vote, there was a tie. Prabir
Sengupta (Sengupta), Chairman of the MUL board, used his casting vote to ratify the
appointment. Following this, SMC nominees passed a no confidence motion against
Sengupta and proposed the name of Yoshio Saito2 (Saito) for the chairmanship.

The GoI strongly backed Sengupta stating

that he should be allowed to complete his
scheduled term of five years until 2000.
SMC then lodged an arbitration petition
against Bhaskarudu's appointment in the
International Court of Arbitration.3 In June
1998, the new ruling Bharatiya Janata Party
(BJP) government intervened into the issue
and arranged for an out-of-court settlement
between the parties.4 As per the settlement
deal, Bhaskarudu was to step down in
December 1999, two years ahead of
schedule and Khattar was to replace him in
January 2000.5 Further, Saito was to replace
Sengupta as the chairman. Though the
dispute between SMC and GoI seemed to
have been put to rest for the time being, the
issue did not come as a major surprise to
industry watchers. This was because the
company's history was marked with frequent
conflicts between the two partners over the
years.

Background Note
Till the early 1980s, the Indian passenger car industry offered limited choice to the
customers, with only two popular models in the form of Hindustan Motors' (HM)
Ambassador and Premier Automobiles' (PAL) Padmini. The government not only
controlled the price mechanism in the industry, but the entry of foreign players was
also strictly regulated.

However, the scenario changed in 1981,

when the GoI itself entered the car business
by establishing MUL by acquiring the assets
of Maruti Ltd.6 In October 1982, the GoI
signed a licensing and joint venture
agreement with SMC where in Suzuki
acquired the 26% share of the equity.7
Suzuki's history dates back to 1903, when
Michio Suzuki founded Suzuki Loom
Works in Hamamatsu in Shizuoka, Japan.
For the first 30 years, company focused on
the development and production of complex
machines for Japan's silk industry. In 1937,
the company diversified into building cars
and in 1939 began manufacturing cars for
the Japanese market. But due to the Second
World War it had to stop the production of
cars and concentrated on the manufacture of
the looms.

The company shifted its focus back to automobiles with the termination of war and
collapse of cotton market in 1951. In 1952 it manufactured its first motorized bicycle
called 'Power Free'.

In 1954, the company changed its name to

Suzuki Motor Co. Ltd. and was by then
producing around 6,000 cars per month.
With 57 production centers all over world,
its manufacturing and assembly network
expanded to over 26 countries all over the
world. Company established 22 automotive
manufacturing facilities in 17 countries.
Suzuki's vehicles were sold through 134
distributors in 175 countries. By March
2001, Suzuki's net sales were ¥ 1,600, 253
billion and it was one of the top 5
automobile manufacturers of the world.
MUL manufactured passenger cars at its
factory in Gurgaon, Haryana with an
installed capacity of 350,000 vehicles. The
first product, Maruti 800 was launched in
1984. Consumers hitherto without any
choice rushed to buy the vehicle. Maruti 800
earned the tag of being the 'people's car...'

The Conflict
SMC had raised its stake in MUL to 40% in 1987 and to 50% subsequently in 1992.
As MUL ceased to be a government unit, SMC began managing the company, with
MD R.C. Bhargava (Bhargava) taking directions from Japan.

As R.C. Bhargava reportedly shared a good

rapport with the secretary and other higher
officials at the Industry ministry, the
relations between SMC and GoI remained
cordial. The first signs of dispute surfaced in
late 1993, when SMC proposed a Rs 2,200
crore expansion and modernization plan.
The plan envisaged increasing the
production by 1,00,000 vehicles to
effectively meet the growing competition in
the sector. The Heavy Industry secretary
Ashok Chandra and the Finance secretary,
Montek Singh Ahluwalia suggested SMC, in
an informal discussion, to go in for a public
issue to raise the finance for the expansion
plan. Though initially SMC was reluctant to
go for a public issue, Bhargava managed to
persuade it in 1995 for the same. However,
things changed with K.Karunakaran
(Karunakaran) becoming the Union minister
for Industries in 1995...

The MUL Disinvestment Issue

In late 1999, following the recommendations of Disinvestment Commission, the GoI
announced its decision to divest its stake in MUL. The GoI decision was a part of its
industrial policy to privatize PSUs through gradual disinvestment or strategic sale.
The first phase of MUL's disinvestment was to start with a Rs 400 crore rights issue
with renunciation option for the government, in December 2001.

The second and final phase of MUL

disinvestment was to be completed by the
end of 2002, wherein GoI would divest its
remaining equity holding in MUL through a
public offering. The GoI was to sell its
interest to the best bidder at a premium.
However, subject to a clause in the MUL
joint venture agreement, the GoI could not
sell its stake without the written consent of
SMC. This was expected to complicate the
disvestment process of MUL. In January
2002, the GoI announced its willingness to
renounce its portion of the rights in favour
of SMC during the rights issue. The
negotiations between the GoI and SMC to
fix the renunciation premium and the control
premium were scheduled to begin in January
2002. GoI was reportedly hopeful of getting
a substantial 'control premium' for letting
SMC get MUL's full control...