With the opening up of the Indian economy in 1991, a number of sectors were thrown open to foreign direct investment. The government was keen to show that the policy was pulling in serious investors and wanted to showcase some big-ticket investments to the world. I was asked by the Prime Minister’s Office to check if SMC was willing to increase its investment in Maruti. I contacted Suzuki and suggested that with the government policy having changed (till then only a maximum of 40 per cent foreign equity was allowed), he consider increasing SMC’s stake in Maruti. Suzuki thought over this and decided to approach the government to allow SMC to make additional investments to increase its equity to 50 per cent. He was aware that if the government stake came down to 50 per cent, Maruti would no longer be a public sector undertaking. All the rules and regulations for such undertakings would no longer be applicable. This would give much greater operational freedom to Maruti, and also enable SMC to increase its role in the management of the company, since it would become an equal partner. SMC could in fact have asked for a larger stake, but at that stage Suzuki felt more comfortable being equal partners with the government than a majority owner.
Around the same time I managed to persuade Ford Motors to establish a joint venture company to produce aluminium radiators. Till then this technology was not available in India. Car radiators were all made of copper brass. Maruti had been facing a problem with these radiators, as pinholes would develop in the tubing and the coolant would leak. There were many customer complaints and we had no solution to offer. Ford assured us that aluminium radiators would perform extremely well and there would be no leakage problems. Moreover, a joint venture with Ford would go down well in the United States and Europe. The government supported this project and these two deals were amongst the earliest examples of foreign direct investment in India post-liberalization.
There were some rumblings over SMC’s move to increase equity. Krishnamurthy himself was not too happy with the development. Before making the proposal to increase SMC’s stake, Suzuki had met him in August 1991 in the Planning Commission, where he was member. Krishnamurthy told Suzuki that he did not support the idea and if the latter was inching towards taking control of the organization, it may not be the right thing to do. He suggested that SMC retain its stake at 40 per cent, get the government to also reduce its stake to 40 per cent from 60 per cent and sell 20 per cent to financial institutions, vendors and dealers so that it was a board-managed company. Krishnamurthy had made this suggestion to Mrs Gandhi soon after Maruti was formed as a way of insulating the company from government interference. He had pointed out that if the Congress government fell and another party came to power, they could use Maruti as an instrument to hurt her. Mrs Gandhi had agreed but the heavy industries ministry had pointed out that this would appear as backdoor privatization and that it could not be done because of certain assurances given in Parliament during nationalization of Sanjay’s Maruti. The ministry had suggested this course of action be adopted some other time.
The criticism against Suzuki’s move was somewhat muted. Since the government was aggressively wooing foreign investment as a matter of policy, criticizing one particular instance of foreign investment would have been seen as not only going against the new policy, but also as being discriminatory. One of the features of the new policy was to bring in transparency and simplicity for foreign companies to invest in India, and arguing against SMC’s investment would give the impression that the claim of transparency was a sham, and investments would only be allowed on a case-to-case basis, as in the past.
Another problem with Krishnamurthy’s suggestion for a 40:40:20 equity holding in Maruti was that it would not meet the objective of showing that the new policy for foreign investment was leading to foreign equity in a company increasing beyond 40 per cent, though this limit had been removed, and additional foreign exchange coming into the country. Both these were important policy objectives.
That is perhaps why Krishnamurthy’s objection, and suggestion for the structuring of Maruti, even though coming from a member of the Planning Commission, did not really get debated or support from the government. SMC was allowed to increase its equity to 50 per cent. As a result, Maruti ceased to be a PSU and this became the first instance of privatization. Many years later, Krishnamurthy acknowledged that perhaps his opposition to Suzuki going up to 50 per cent was incorrect and the way events turned out the move was for the best.
In December 1991, Suzuki had written to Krishnamurthy telling him that he had, in September 1991, made a formal proposal to the government to increase SMC’s equity to 50 per cent, in accordance with the discussions he had held earlier with the government, and seeking Krishnamurthy’s help in getting government approval. This was typical of the Japanese way of working. Though Suzuki was aware of Krishnamurthy’s views on the matter, he still sought his support. On the same date, he also wrote to P.K. Thungon, then minister of state for heavy industries, seeking an early decision on the proposal. He also raised the issue about the term of the managing director, since my term was expiring around the middle of 1992. Suzuki felt that a sudden change of the top leadership would not be desirable at this critical juncture, especially as Maruti and SMC had worked very well during my stint. If there was still to be a change in the managing director, Suzuki sought full consultation in terms of the joint venture agreement.
On 2 June 1992, four months short of the tenth anniversary of the original SMC–Government of India joint venture agreement, a Subscription and Amendment Agreement was signed and SMC subscribed to an additional 2,204,860 shares, paying Rs. 269 per share. The price was arrived at on the basis of a formula which, till then, had been used by the Controller of Capital Issues (CCI) in determining the price at which private companies made preferential equity issues. SMC was being issued preferential equity, and so the formula seemed appropriate. In deciding the price for the share issue, the opinion of ICICI Securities had also been taken and it was found that the CCI formula would be quite fair and correct. The government approved the price at which shares should be issued to SMC. Since there was some amount of criticism of the allotment of additional shares to SMC as well as the pricing, I suggested that an additional condition be imposed, namely that if SMC ever sold these 10 per cent shares, the government would have the first right of refusal and the price would be arrived at by the same CCI formula. The government and SMC both accepted this condition. On signing of the agreement, and SMC subscribing to the additional shares, Maruti Udyog Ltd formally ceased to be a government company.
Under the amendment agreement, the post of chairman-cum-managing director, which I had been holding at that time, was split into a non-executive chairman and a full-time managing director. The government and SMC were to nominate the persons who would hold these two posts for five-year periods by rotation. SMC was given the right to nominate the first managing director. Suzuki proposed my name to the government. On 28 August 1992 Surendra Singh, the then secretary, Department of Heavy Industry, wrote to Suzuki that certain complaints had been made against me and these were being checked for their veracity. Action could be taken if they were found to be true. The government thought it necessary to bring this to Suzuki’s attention though it was not, the letter said, the ‘intention to constrain M/s Suzuki Motor Corporation’s choice of a nominee for the post of Managing Director in any way. In accordance with the Agreement, your final choice will be acceptable to the Government.’
The reply from Suzuki, faxed on the same date, was that some of the complaints mentioned had already been discussed and resolved in the Maruti board. It was not possible to make a judgement without having all the facts in hand. Meanwhile, it said, SMC did not intend to make any change in their nomination of me as the managing director. The government accepted this position, and I was appointed to the post, in a shareholders’ meeting, for a period of five years, starting from 28 August 1992. At that point, the government did not exercise its right to appoint a chairman. I had been chairman and managing director ever since Krishnamurthy had relinquished the post of non-executive chairman in 1990. Perhaps, the government thought I would adequately handle the job and a chairman could be elected by the board at each meeting.
With Maruti ceasing to be a public sector company, it was freed from the constraints which prevent public sector companies from maximizing their competitive position vis-à-vis private companies. Overall, there was a sense of freedom from stifling government controls and red tape. Maruti used this newfound freedom to strengthen the organization. Salaries of managers were increased, though they were still nowhere near private sector salaries. We had to keep in mind the fact that the government was still a 50 per cent partner, and therefore policy changes and major regulations had to be approved in the board. The government nominees would have found it very difficult to agree to proposals which were very different from what had existed. However, since Maruti was no longer a PSU, the Comptroller and Auditor General would no longer audit our accounts. Hence we could hire private auditors to do our statutory audit. Unnecessary paperwork, meant only to comply with government systems, could be done away with. We were no longer an Instrument of State and hence paperwork needed to show compliance with the Fundamental Rights while taking business decisions could be avoided. There was greater freedom in taking business decisions and awarding contracts. It was no longer necessary to recruit workers only through government-run employment exchanges, or compulsorily follow the policy of job reservations for scheduled castes, scheduled tribes and several other disadvantaged groups (though Maruti, on its own, decided to reserve the same percentage of jobs for scheduled castes and scheduled tribes). The company now went outside the scrutiny of Parliamentary committees established for the public sector, and various laws which applied only to the public sector.
Perhaps it was just as well. The difficult times that had begun in 1990 were not over. In fact, 1992-93 began on a pessimistic note. The economy was still in the doldrums, with high inflation and interest rates, constraints on credit, and a difficult balance of payments situation with a weakening rupee. The Maruti management needed to be nimble-footed to cope with the myriad challenges.
Among the first things a newly free management did was to negotiate and sign a four-year wage agreement in April 1993, but with retrospective effect from April 1992. Keeping the workers happy and content had always been part of Maruti’s ethos, but this had become more important now, with the company set to launch another new car—the YE2, better known as the Zen.
The Zen was designed by SMC to conform to the new European standards applicable from 1 January 1993. However, this model was to be manufactured not in Japan but in India, and exported from here to Europe (to be sold as the new Alto, replacing the 800) and other countries, through SMC’s marketing channels. This was the first acknowledgement of India’s potential to become a manufacturing hub for automobile exports. ‘The importance of this development,’ as I noted in my chairman’s address in August 1990, ‘lies in the acceptance by a multinational that India can be a viable source for a sophisticated engineering product, and that such a product can be produced at internationally competitive costs.’
Meanwhile, the original ten-year licence agreement came to an end in 1992. SMC wanted to discontinue the 800, since royalty payment would have ended, and replace it with the Zen. This became a point of tussle between Maruti and SMC. I was not willing to give up the 800, which was our bread-and-butter car, as it were. The cost of the upmarket Zen, with a one-litre engine, was significantly higher, and the car could not have catered to the mass entry market, the way the 800 could. A meeting was convened in Hamamatsu where Y. Saito, the executive vice-president of SMC, insisted on discontinuing the 800. I did not agree and tried to explain why this would be against the interests of Maruti. I found that I could not change Saito’s views in the matter.
I thought I had no other option but to resign, since I believed that discontinuing the 800 would seriously hurt Maruti. I could not be a party to implementing such a decision. Suzuki then called me into his room, which was adjoining the room where our discussions had been going on. I explained the issue to him and said that since I was not prepared to implement what SMC wanted, it was only proper that I should quit. Suzuki replied, ‘Would I have met you if I wanted you to quit?’ He agreed that we should continue to manufacture the 800. In order to ensure that SMC would continue to upgrade the 800, we agreed to pay a fixed royalty of Rs. 1,000 per car, against the 2.15 per cent paid till then, which amounted to Rs. 2,210 per car. The 800 continued to sell in large numbers for many years after that and it is only in the late 2000s that its sales declined. The 800 contributed handsomely to our bottom line. I can have the pleasure of saying, with hindsight, that my insistence on continuing the 800 was correct. Suzuki also displayed great faith in my judgement by overruling the views of his own vice-president.
But manufacturing the Zen posed some new problems. Since Maruti wanted to export the Zen in large numbers, it was necessary to reduce the costs of production. Suzuki, during his discussions with government officials, stressed the need to reduce costs if Maruti was to succeed in its export efforts. The European market was very price sensitive for cars in this segment. Both SMC and Maruti requested the government to consider exempting capital goods from the payment of import duties. The government was sympathetic, especially as earning foreign exchange was a very high priority objective. However, a scheme had to be devised to enable this benefit to be given. The scheme could not be specific to Maruti and had to be available to others who would meet the conditions applicable to it.
I had several meetings with the Member, Customs, in the Central Board of Excise and Customs to find a mutually acceptable solution, which we evolved. In November 1993, the government issued an ad hoc exemption order allowing Maruti to import plant and machinery for the Zen project at nil custom duty on taking an obligation to export 140,000 cars over seven years between 1995-96 and 2001-02. This would result in India earning foreign currency which was several times the value of the capital goods to be imported. Later, it was agreed that the scheme would apply to all who imported capital goods in excess of Rs. 100 crore with the condition that they would have to export, over a period of seven years, products equal to five times the value of the capital goods imported. This eventually became the Export Promotion Capital Goods Scheme. The scheme was subsequently modified to make its application wider. It has provided a big incentive to promote the export of more sophisticated and quality manufactured goods.
The European Commission (now the European Union) also had stringent rules of origin (a trade term for specifying a certain level of localization to avoid exports from one country being routed through another which enjoys duty concessions in the importing country). At that time, cars exported from India could enter Europe at concessional duty, provided the value addition in India was 56 per cent. SMC insisted that it would decide which component would be localized, so as to ensure that quality was not compromised. A certain quantity of imports had to be made in any case, because the cars exported to Europe would be left-hand drive. Manufacturing components for such cars, in small volumes, would not have been viable. This made it even more important that the other components made in India should be of very good quality.
Though Maruti had been making continuous efforts since its early years in bringing about an attitudinal change regarding quality among vendors, the results were mixed. There was still an inclination among many vendors to cut corners and not adhere rigidly to the laid-down systems and procedures. This meant that quality from these vendors was not consistently maintained. While Maruti could get around this problem for cars sold in the domestic market by importing a larger number of critical components, this could not be done for the Zen because of the higher localization levels required by the European Union. Maruti once again had to spend a lot of time, effort and resources in upgrading the vendors’ processes and training their manpower, and started a vendor upgradation department in 1993. The effort was not wasted. The Zen, when it was exported, was considered one of the best cars in Europe.
A year later, Maruti launched the 1298 cc Esteem. It was in addition to the Maruti 1000, whose sales rapidly declined. It also rolled out a new-look 800, with changes in the headlights and bonnet and wraparound taillights. The robust sales of all of these saw Maruti further increasing its market share to over 76 per cent in the next two years, even as the waiting list continued to be quite long.
Maruti may have managed the external challenges with aplomb, but it was soon to be wracked by internal wrangling, with consequences that would last for several years.
Soon after 1992, the question of successor-planning came up. This concept was alien to the public sector but was an integral part of SMC’s ethos, as it is of all the better-managed companies in the world. I was to retire in 1997 and my successor had to be trained so that there could be a smooth transition. R.S.S.L.N. Bhaskarudu, who had joined Maruti in 1983 as general manager after working for twenty-one years in BHEL, and had risen to be director on the board, was the seniormost person. He was expecting his succession to be a shoo-in.
However, Suzuki had come to the conclusion that he was not CEO material and did not feel that he could work with him as a partner. In the Japanese system, personal confidence and trust between top management is given far more importance than academic qualifications and seniority. This approach is, of course, quite alien to the public sector and the governmental way of working, where seniority is the main factor in promotions. This cultural difference between Japan and India, and the inability of each partner to understand the thinking of the other, was one of the main reasons why the dispute between the two sides was to later escalate. Suzuki wanted the field for selecting the next CEO to be widened. Since the government was still playing a strong role in the economy, and given the fact that I had come from the IAS, Suzuki thought it might be a good idea to tap the service for the next managing director also. An IAS officer would be able to manage relationship issues with the government better than an outsider. I was asked to look for somebody from the service who could be brought in as director, marketing (just as I had), and then become one of the options for the next managing director.
I asked around and the names of some IAS officers from the Haryana, Punjab and Uttar Pradesh cadres were suggested. However, they declined, because the government rules then required that a service officer would have to resign from the IAS before joining Maruti. The name of Jagdish Khattar, a 1965 batch officer from the Uttar Pradesh cadre (to which I belonged), who was joint secretary in the steel ministry, was then suggested. I had never met Khattar or worked with him before. I made enquiries and the reports about him were very good. We then met. Khattar appeared to have the right credentials, with nearly ten years’ experience in the public sector involving stints at the Tea Board of India (he had some innovative marketing strategies to his credit when posted in London), the Uttar Pradesh Cement Corporation and the Uttar Pradesh Road Transport Corporation. I felt he had potential to lead the company and suggested his name to Suzuki, who gave the green signal to his appointment. In 1993, Khattar joined as officer on special duty, marketing. He was sent to Japan for a few months to expose him to the working and management style of SMC.
The Maruti and Suzuki management did not realize it then, but this was to make Maruti’s hitherto smooth ride very rough.
The beginning of differences between SMC and the Maruti management on one side, and the Ministry of Heavy Industries on the other started, in a small way, in 1994 over the issue of extension of the licence agreement. The licence for the 800 and the Omni had expired in December 1992, and that for the Gypsy in December 1993. At Maruti, we had taken the view that we needed continued support from SMC for these products, so that improvements made in technology and design in Japan could be made available to us. There was also the need for availing training facilities for our workers and engineers, particularly in the R&D area. If the licence agreement was not extended, we would not be able to make improvements in the vehicles on our own and would become like the other car makers, who continued to make decade-old models with no improvements. We were able to get the royalty rates reduced on the grounds that our volumes were much higher than what was envisaged when the original rates of royalty were fixed in 1982. The Maruti board, which included the government directors, approved the proposal to extend the licence agreement in March 1994 and requested the government to approve our proposal in this regard in April 1994.
After some months, when no approval was forthcoming, I discussed this matter with Ashok Chandra, the secretary in the ministry. He told me that since he was going to retire in a few months, he was not willing to take up any issue which had the potential of creating a controversy and would keep the matter pending for his successor to handle. There was very little that I could do to change his mind and I told SMC that they would have to wait till 1995.
Chandra’s successor was T.R. Prasad. My initial meetings and discussions with him were very cordial and it seemed that Maruti and the ministry would continue to work together in a cooperative manner. I was wrong. The events which followed show how much difference can take place in government working, merely through a change of individuals who hold top positions.
In May 1995, Congress leader K. Karunakaran became industries minister. Soon after he took charge I had a long meeting with him and briefed him about Maruti, what we had been able to achieve and also the pending issues. At this and some other later interactions there was no indication that he would not trust the Maruti management and that the ministry would become very interventionist. But in the one year that he held that position (the Congress government’s term ended in May 1996), Maruti and the ministry were involved in several collisions.
Besides the issue of extension of the licence agreement, another issue on which differences developed between the government, Maruti and SMC was that of financing the Zen project and also on expanding capacity. The need for this had become evident when, in 1992-93, Maruti produced 128,000 units against the installed capacity of 100,000. Demand was growing and there was a long waiting list for the car. But funds proved a problem. Maruti’s profit levels at that time were quite low. Profit before tax in 1991-92 was Rs. 35.8 crore and in 1992-93 Rs. 36.6 crore. Internal resources were not going to be adequate to establish another production line, which would be a modernized version of the existing line. As early as December 1992, the board was informed that the proposed expansion programme would involve an investment of close to Rs. 770 crore and that it would be necessary to enlarge the equity base of the company to avoid any distortion in its debt-equity ratio.
The board had then agreed that the company’s equity could be raised to Rs. 198 crore and asked me to discuss the matter with the government, SMC as well as financial institutions. The matter had come up at various board meetings after that but the government kept delaying a decision. Meanwhile the amount of equity needed was reduced to Rs. 150 crore. The government needed to find Rs. 75 crore to invest in Maruti.
But this was too soon after the 1991 economic crises and the government was very strictly controlling all expenditure. We were told that the government would not be able to invest this amount. The option to go public was considered, but neither of the parties was willing to accept this route. Suzuki was unfamiliar with the Indian capital markets and was not sure what the consequences would be of having private shareholders in the company, and perhaps outside directors on the board.
The work on expanding capacity and establishing a second plant, at the same site, started about the end of 1992 and was completed in 1994. This plant, which was to produce the Zen, had a rated capacity of 100,000 units, like the first plant. The funds were secured through a loan raised in Japan, as well as some internal resources. With this plant, production rapidly increased to 278,000 in 1995-96, and the need for another plant was obvious. One of the reasons for Maruti being able to keep prices of cars low—and make profits—was the ability to run both these plants at about 140 per cent of the rated capacity. This was achieved by a combination of balancing facilities, innovative practices and full cooperation from the workers.
While the second line was being installed, Maruti was still looking for funds for its investment requirements. After discussions with SMC in October 1993, an option was suggested to the government—SMC would subscribe to the entire Rs. 150 crore, but the government would have the right to buy back Rs. 75 crore worth of equity within a period of three to five years. The terms of the buy-back were to be agreed between the parties, but essentially they would be based on treating the Rs. 75 crore as a loan. This option did not find favour.
In 1995 the proposal to establish the third plant came up. Maruti wanted to locate the new plant within its factory premises in Gurgaon, like the second plant. However, by this time the ministry had decided that it should play an active role in decision making in Maruti. Karunakaran wanted the new plant to be set up in his home state of Kerala, or at least somewhere in the south. The argument was that cars were sold in the south as well and having the second plant there would reduce the cost of transporting cars from Gurgaon. But Maruti did not think that this would be a good business decision for several reasons.
For one, the capital cost of establishing a new plant in the south would be much higher for Maruti, as land would have to be acquired and the factory, along with supporting infrastructure, built on a greenfield site. In Gurgaon, land was already with us and investments on infrastructure would be limited. This included the standby power generating capacity and water treatment plant.
Moreover, it would have meant that all the vendors who had established manufacturing plants near Maruti in Gurgaon would either have to transport the components to the south, or establish another manufacturing plant there. Transporting parts would not only add to cost but also create the need to keep large inventories in the south because of the distance and transportation uncertainties. In Gurgaon, Maruti worked on a just-in-time system with all vendors who were in that area, and inventory costs were very low. If vendors were to establish plants in south India, capital expenditures would be much higher compared to expanding capacity at their existing sites. Economies of scale would be lost by splitting production in two sites, since total volumes of production in India are still low compared to international standards. Management costs and overheads would also increase. As a result, component costs would go up.
Clearly, running two plants 1,500 km apart would be far more costly than having the plants in the same compound. Supervision and management problems multiply with distance. The ministry also did not realize its assumption that transportation costs would reduce was faulty. The two plants would have to make different models, as the dies, tooling and fixtures could not be duplicated. Doing so would have meant a very large investment. As a consequence, the models produced in the south would now need to move to the north. Models being produced in the north would still need to move to the south. There would thus be no savings as far as transportation costs were concerned. In fact, since the north was a larger market than the south, transportation costs would have probably increased.
Despite these issues being pointed out, the ministry did not change its stance. The stalemate on this continued well into July 1996, when a committee consisting of four directors—Kobayashi and I nominated by SMC and Bhaskarudu and Anup Mukherji (a joint secretary in the heavy industries ministry) nominated by the government—was set up to examine this matter and give recommendations. This had been agreed upon at a meeting between Suzuki and the new minister for industry, Murasoli Maran, after a new government had been formed. In the meetings of the committee, Bhaskarudu would not clearly support the arguments for expanding in Gurgaon and Mukherji would keep repeating his view that a plant in the south would be better. The committee finally gave its report in August 1997, pointing out that a new facility at a greenfield site would not only be much more expensive but would also delay start of production by eighteen months. Since Maruti was making good profits, the delay in increasing production would result in losing huge amounts of money, besides creating customer dissatisfaction due to delayed deliveries. In any case, the expansion had already got delayed by over a year.
This case illustrates the impact which an individual in the governmental system can make. The secretary to the ministry could also have taken note of the continued success of Maruti since its inception, and recognized that SMC and the Maruti management were much more qualified to take business decisions relating to the company. In that event he could have left the decision on location of the expansion to the board and attempted to convince the minister that the government should not interfere in such matters. He did no such thing as he himself was also of the view that the plant should be located in the south.
In terms of corporate governance, the role of the ministry in such cases is a matter of some doubt. If the ministry was questioning a decision of the board, in its role as a 50 per cent shareholder, it should have called a formal meeting with the other shareholder to discuss this matter. One shareholder, even if it is a sovereign government, should not veto the views of the board, as a measure of good corporate governance. In this form of governance nobody remains accountable for the consequences of the delay.
In August 1995, Suzuki wrote to the minister about various pending matters. This included the extension of the licence agreement. The secretary had proposed that a committee of six directors, including three from the government side, examine this matter and report to the government. He had also proposed that the extension of the licence agreement be linked to the establishment of gear manufacturing and a R&D centre. The committee of directors had met and unanimously recommended extension of the licence agreement, without any conditions being attached. Yet the matter was being kept pending. Suzuki said in his letter that SMC would not be able to continue to provide assistance to Maruti after August if the licence agreement was not extended. He also wrote about approval of the expansion project and the reports of three merchant bankers on the best way of financing the expansion. He sought early decisions on all the pending matters, which included revision of the remuneration of directors, so that Maruti should remain competitive and not lose out to other companies. Karunakaran was livid when he read this letter. He called me and gave me a dressing down. He felt that the sovereign rights of the government were being questioned. He was unable to separate the role of the government as a shareholder in a commercial company with that of a sovereign government.
The issue of financing expansion had remained a live issue all this time. In May 1995 A.N. Varma, the principal secretary to the Prime Minister, had gone to Tokyo and, along with the Indian ambassador there, Kuldip Sehdev, met Suzuki. Varma clarified that the government was not willing to reduce equity below 50 per cent because of the political background of the project and likely criticism from the media. This put an end to the option of SMC alone subscribing to the equity increase. Karunakaran maintained the position that the government had money to subscribe to the equity increase of Maruti, but the need had to be properly established. The view expressed by the finance department was different.
Meanwhile the debate on debt versus equity continued. While conventional wisdom is that debt is cheaper than equity, at that point of time I was of the view that equity was a better option because it could be raised at a huge premium, if the equity was offered to the public or financial institutions. Maruti commanded about 80 per cent of the market and, on an equity base of Rs. 122 crore, made a profit of Rs. 808 crore in 1996-97. The premium on the equity would, in a sense, be ‘free’ money, as dividend would be paid only on the face value of the equity. Many companies that start as closely held companies, and do really well, unlock value by going public. On the other hand, interest rates in those days were in the 14-15 per cent range, and servicing a loan would be far costlier than servicing the comparatively small increase in the equity which would be required. Maruti’s finance director, A. Halasyam, who was a government nominee on the board, did not want to go against the government and refrained from taking a definite stance in the matter. Since no consensus could be reached, a study by three financial institutions—Industrial Development Bank of India (IDBI), ICICI and DSP Financial Consultants (Merrill Lynch)—was commissioned. That study upheld my view that equity was a preferable option. It said that Maruti could not afford to fund capital expenditure entirely through debt and recommended a mix of equity and debt.
In July 1996 I had sent a note to the finance secretary showing that if the government and SMC each put Rs. 480 crore into Maruti, as equity plus premium on the equity, this amount would be recovered by the government from the additional income tax which Maruti would pay on higher profits, compared to what the situation would be if expansion was funded by debt. Maruti itself would generate Rs. 1,800 crore more internal cash if the expansion was funded by equity. But nothing happened and finally Maruti had to fund these plans through a mixture of debt and internal resources.
Between 1995 and 1996, several other issues relating to the operations of Maruti and investments also came up. Maruti wanted to upgrade the 800 with a new, improved four-valve engine which SMC had developed. This engine would be more fuel efficient, generate more power and be cleaner. The existing engine had become very old. The government nominees on the board, however, insisted that the company must establish the validity and performance of the new engine before it could be accepted, and that Maruti engineers should go to Japan, study the engine and its performance, and report if it would perform in Indian conditions and be an improvement on the existing engine.
The Maruti management found this approach hard to understand. SMC was Maruti’s technology provider, besides being a 50 per cent partner. Till then its products and technology had been accepted without question and had delivered excellent results. Maruti had also followed SMC’s advice in adopting the manufacturing processes and the equipments to be used. Engineers had been trained by SMC. The results had always come up to expectations. Why then doubt an engine developed by SMC and whose specifications and performances were given by SMC as being distinctly superior?
The reason was, of course, the concern in the government that if a new engine were to be manufactured, large investments would have to be made in installing the equipment. Funds would be needed and the question of additional equity would come up. The government did not want to dilute its shareholding, but it also did not want to invest more money. Hence the solution was to not make investments even if they were beneficial to the company. Bhaskarudu also did not clearly support the case for accepting the new engine when the matter was discussed in the board.
The modernization of the paint shop was another point of contention. The first paint shop had been commissioned in 1984 and was nearing the end of its useful life. Depreciation was being charged treating the life of the shop as twelve years. The facility was being used in excess of its rated capacity and any breakdown would mean a serious loss of production. Despite Maruti adopting preventive maintenance practices recommended by SMC, the possibility of a breakdown is always higher in old equipment. SMC believed that the paint shop should be upgraded so that the quality of painting could be improved and capacity increased to match the higher capacity utilization of the first plant. This process would be carried out over two to three years in a manner that would ensure that production was not affected. Investments would naturally be required. Bhaskarudu argued that the paint shop could be used without change for some more time.
The government accepted his opinion and not that of SMC. Here again, the view of the government was shaped less by the technical requirement for upgradation and more by the suspicion that SMC was proposing investments only to create a situation which would necessitate additional equity infusion. There had been a breakdown in the trust that had existed till then between the government and SMC, and responses were determined on the basis of distrust.
Another longstanding complaint of the government—SMC not transferring technology for making gears—came to the fore again. These were still being imported from Japan, although the casing had been localized and the gearbox was being assembled in India. Suzuki and I pointed out that the investments required for making gears was very high, running into several hundred crores, and the gears constituted only about 2.8 per cent of the total kit. It was estimated that gear production would not be economical at the existing volumes, since the cost of production would be higher than the landed cost of imported gears. Moreover, money available for investment with Maruti was limited and could be much more profitably used to expand capacity. There was a large unmet demand for cars, as evidenced by the waiting lists, and selling cars generated good profits. It made business sense to use the available funds for expanding production capacity and introducing new models like the Zen and Esteem. Localizing the production of gears would not lead to extra sales and profits, but would probably reduce profits. Thus, the business interests of Maruti dictated that expansion of production should get priority over gear production. However, the government was not convinced by these arguments and periodically there would be criticism about SMC’s reluctance to transfer technology to Maruti. Bhaskarudu and Halasyam, who were government directors on the board, did not also lend support to my views.
The argument that producing gears in Maruti would be costlier than importing them became evident when gear production started in 2007. By that time the volume of car production was over 700,000 units a year (more than double that in 1996). Even then the cost of production of gears in Maruti is higher than the landed cost of gears, which has benefited from the lower import duties but gone up due to a weaker rupee. It is expected that by 2010 or so, when Maruti would be producing over a million vehicles, the local cost of production would equal the landed cost of imported gears. The company would have suffered a very heavy loss if the gear plant had been established in 1995. While the intentions of the ministry, namely to increase localization and acquire technology, were good, there was no real understanding of the commercial and business implications of doing so at that point.
The government believed that SMC had been making enormous profits from supplying CKD kits to India. This belief was based on the assumption that over the years SMC would have made a profit which was a fixed percentage of the sale value of parts to India. Since the volume of production was increasing rapidly, the value of imported parts was also increasing, despite the higher localization levels each year. However, the government did not take into account two facts. One, the base price of the kits had remained unchanged. Two, the yen had appreciated strongly against the US dollar and because of SMC and Maruti absorbing 50 per cent of the impact of the change in the yen-dollar exchange rate, the number of yen which SMC was getting from Maruti for the same part had declined sharply. Clearly, the impact of the unchanged price for the kits and the exchange rate change would be a steady loss of profitability. Data provided to show that SMC was getting a much smaller number of yen for a part supplied in 1992, as compared to what it got for the same part in 1984, was ignored. The reality was that for many years before 1992 SMC was losing money on the supply of parts for the 800, Omni and Gypsy.
These events demonstrate the inadequacy of government officers trying to manage business and industry. While those who man senior posts in the ministries are, almost without exception, possessed with high intelligence, have a great sense of duty and believe that they are in a position where they have to promote national interests, few of them have hands-on experience or understanding of technology and what is required to make a business profitable and competitive in the marketplace. The relatively short tenures on posts dealing with commercial decision making prevents building expertise. While they have authority over the decisions made by a public sector board, and can exercise a virtual veto at board meetings, they have no accountability. Usually they get transferred, or retire, before the results of their actions can be evaluated.
Even then, it can be argued that decisions were taken by the boards and not by anyone in the ministry, and that it is the duty of the ministry to fully examine and evaluate proposals emanating from any public sector undertaking. In the case of Maruti, which was no longer a public sector entity after 1992, the delays in expansion of capacity or introducing a new engine or modernizing the paint shop did not mean that anyone was accountable for the losses suffered as a consequence.
The result was that in 1995 and 1996 most major decisions relating to Maruti were delayed because of the need to convince the ministry, after the board had taken a view on them. But this was not the end of the story. The government does not usually look kindly upon persons who are perceived as ‘not cooperating’ with what the incumbent minister or secretary wants. When the CBI filed criminal cases against me, after its director had been summoned by the Assurance Committee chaired by S. Jaipal Reddy, the government found this to be an opportunity to try and remove me from the post of managing director. There was a long history to this.
In the early 1990s, a petition had been submitted by some MPs alleging various wrongdoings by me as the managing director. The heavy industries ministry had asked for my comments, which I had provided. Most of the matters were those on which the board had taken a decision. These allegations had also been sent to SMC when it had nominated me as managing director and Suzuki had also replied that he did not find any wrongdoing. The government had accepted me as the managing director in 1992, despite these allegations.
There was a background to this petition. In 1986, an MP had wanted his firm to be given part of the contract for moving CKD kits from Kandla to Delhi and the minister of state for heavy industries had wanted him to be accommodated. This contract had already been awarded in 1984, and Maruti was of the view that splitting the transportation contract would not be in the company’s interests. Therefore, Maruti had not been able to accept the request. This MP was one of the signatories to the petition. At that time, I had also been informed that much of the ‘information’ on the basis of which the petition had been prepared had possibly been supplied by a senior officer in Maruti who had been asked to resign because he was harassing a female employee working with him, and had also acquired a reputation of doubtful integrity. This type of situation developing is not unusual in public sector companies, and is one of the reasons why senior officers are reluctant to take disciplinary action against errant officers.
One of the MPs who had signed the petition was the late Chandrashekhar, who had briefly been the Prime Minister in 1990-91. I met him later to clarify the matters in the petition and he told me that he had signed because an MP had informed him that wrong things were being done in Maruti and he had not gone into the evidence or merits of the allegations. Since the petition was from MPs, it was referred to the Central Bureau of Investigation (CBI), for making preliminary inquiries.
Soon after the petition was submitted three Parliamentary questions were asked about the progress of the enquiries. The government had replied that the various allegations were being looked into. The Assurance Committee of the Rajya Sabha treated the reply given by the government as assurances and periodically sought progress reports. The heavy industries ministry had been seeking more time. Nothing much happened till the end of 1994. Things changed in 1995, especially after differences developed between the government and the Maruti management and the issues received media publicity. The Assurance Committee now asked the government to show more urgency in making the enquiries and also asked why the ministry had not filled the post of chairman. This led to the ministry nominating Prasad as chairman in January 1996, exercising the option that it was given in 1992 but had not used. The decision was obviously taken to convey a message that I no longer had the confidence of the ministry, and that the government would be taking an active role in managing the company. The confrontation between SMC and the government had come into the open.
In January 1996, the Assurance Committee asked the director, CBI, and a representative from the department of company affairs (DCA) to appear before it. The DCA representative was asked to process my removal as managing director, using the Companies Act. The director, CBI, told the committee that two cases had already been filed against me and some more would be filed shortly. In fact, only one more was filed.
In the context of the hearings before the Assurance Committee, Prasad also wrote to SMC, but Suzuki refused to remove me. In a detailed reply, he wrote:
Maruti is a private company, equally shared by the Government of India and Suzuki Motor Corporation and appointment of the Board of Directors and their positions in the corporate organization are determined after agreement between both shareholders. The Managing Director is to be elected alternately from the Board Members nominated by both shareholders. In reality, it was common understanding that election of the Managing Director of Maruti was virtually conducted in accordance with the agreement of the representatives of both shareholders. Based on such agreement, Prime Minister H.E. Mr Narasimha Rao, representing the Government of India and myself representing the Suzuki Motor Corporation agreed to elect Mr R.C. Bhargava as Managing Director in June 1992. A Managing Director who is elected should not be relieved at the sole discretion of either party or your sole judgement, without having mutual consent of both shareholders.
The DCA took advice from the law ministry as to whether I could be removed under Section 388(B) of the Companies Act. The law ministry, in turn, sought the views of the then Attorney-General, Milon Banerjee, who said that I could not be removed on the basis of unproven charges. The heavy industries ministry announced that I would not be removed. This view was apparently not acceptable to the Assurance Committee, and the ministry was asked to reconsider the matter.
The industry ministry again referred the matter to the law ministry. The Attorney-General had changed and the new incumbent, Ashok Desai, advised that the DCA could file a petition for my removal under Section 388(B) as there were ‘circumstances suggesting’ that the business of the company had not been conducted on sound business principles. This was despite the fact that Maruti had been increasing its market share and profits every year and in 1995-96 the profit had jumped to Rs. 652 crore from Rs. 263 crore in the previous year. The Attorney-General did not specify in what way the business of Maruti was not being conducted properly. He did not think it fit to consider the views of the board or the other equal partner in the company. Nor did he go into the evidence. The judicial decisions which came later in the proceedings before the Company Law Board (CLB) and the special judges hearing the CBI cases showed that the allegations were without substance. Following the Attorney-General’s advice, the DCA made a reference to the Company Law Board.
SMC decided that it should become a party to the proceedings and the CLB allowed its request. Even earlier, Suzuki had written to the Prime Minister requesting the enquiries to be closed as he was of the view that the allegations had no merit and that the board had looked at several of them. He also opposed my removal before the CLB. Several hearings were held and ultimately the CLB gave a judgement on 15 December 1997 which was completely in my favour. In its order, the CLB noted that the government had been in control of the company during the entire period when the alleged wrongdoing was taking place. Why, it asked, did the government not take action when the various transactions came to its notice then? What was the reason for the delay in filing this petition till a few months before I was due to retire? It specifically mentioned the Kandla transportation case and said that the government itself had enquired into it. Why ‘stale cases, some of which had been enquired into departmentally or otherwise, have been reopened by initiating criminal cases and starting a case under Section 388B by the instant application after a lapse of five to thirteen years?’ The CLB stated that the government had not explained why the CBI enquiries were initiated after such a long delay. Despite these strong words from the CLB, the CBI filed a revision in the Delhi High Court after the Kandla case was dismissed by the special judge.
Soon after the January 1996 hearing of the Assurance Committee, the chairman announced to the press that the committee had recommended that I be removed from my post of managing director. I had been judged guilty by the committee without being given a chance to be heard and without any evidence being examined. The press gave wide publicity to the so-called charges and I had no way of putting across my point of view or seeking a fair hearing. The exoneration by the CLB and the courts came many years later and received scant attention. The CBI itself came to the conclusion that there was no evidence to prosecute me in respect of several of the allegations which were before the Assurance Committee and on the basis of which my removal from the board was recommended. These allegations included unduly favouring the late Lalit Suri, by awarding Subros Ltd (a company started by him and his brother Ramesh Suri in 1985 as a joint venture between the Suri Brothers, Denso Corporation and SMC for the manufacture of automobile air-conditioning systems) a onetime contract for the purchase of 10,000 air-conditioners and giving an advance to Subros. Enquiries showed that I had done nothing wrong. Another allegation was about appointing Suri as a dealer in Ghaziabad, going against the decision of the board (in which Krishnamurthy was also named). The fact was that no dealers, including Suri, were appointed except after selection by the board.
The enquiries by the CBI into the over one dozen allegations contained in the petition led to two charge sheets being filed in January 1994, while a third relating to the Kandla transport contract was filed in December 1996. The first case related to the sale of twelve cars under the manufacturer’s quota at pre-budget prices in 1991. It was alleged that the twelve people who got the car were unduly favoured, that excise duty was evaded and that the company suffered a huge loss. Initially, the CBI did not even name me in the first information report, but the general manager in charge of marketing and sales and two of his subordinates were named. I did not at first take the case seriously as not only was it evident that the entire transaction had been done according to the prescribed procedure and no loss was caused to anyone, but it seemed funny that a company selling over a 100,000 cars a year should be accused of wrongdoing in respect of twelve cars. The additional director of CBI had called me and I had conveyed my view that there was nothing wrong in the entire transaction. I followed this up with a letter detailing each transaction and arguing that there was no violation of any rule or procedure and the sales were correctly made. I also explained how there was no evasion of excise (the department of excise did not claim that any excise was evaded) and the company did not suffer any loss.
The CBI officer apparently did not like my attitude or the explanation. I suddenly found that I had become an accused in the charge sheet, even though I had not been named in the FIR. The general manager, D.S. Gupta, who was named in the FIR, and was directly responsible for sales, was given a clean chit. In his statement before the CBI he did not strongly put forward the position that nothing wrong had been done by his subordinates.
The CBI filed a charge sheet against the two junior officers and me. I was not charged with having committed any substantive offence but only accused of conspiring with the two junior officers named in the FIR. No allegation was made that any of the accused, including me, derived any benefit from any of the recipients of the cars. The CBI evidence showed that the recipients were not even known to us, most of them being NRIs. The CBI charge sheet did not allege that I and the other officers had any motive to commit this crime.
I did not take the case very seriously because it was very clear that the sales had been made in a perfectly regular manner. It seems that our lawyer also thought that this was a frivolous case and would be closed by the judge. He did not prepare his arguments well and the result was that the CBI special judge framed charges against all three of us. The two junior officers filed a revision in the Delhi High Court for quashing the charges. The hearings took a long time, but ultimately the judge quashed the charges holding that there was no evidence whatsoever to send the case to trial and doing so would be a miscarriage of justice and a waste of judicial time. We were all discharged. The CBI did not file any revision in this case.
In the second case Krishnamurthy and I were charged with conspiracy and abuse of position in the matter of awarding a contract to Chennai-based Hydraulics Ltd to supply shock absorbers to Maruti. We were also accused of favouring Hydraulics while fixing the prices for the shock absorbers and determining the share of their business with Maruti. Again, the CBI did not allege that I derived any financial or any other form of gain from Hydraulics. The CBI also ignored the fact that the process followed in this case in respect of all the impugned transactions was identical to the processes followed for well over 250 Maruti vendors. It also overlooked the fact that only a very few matters relating to dealings with vendors came to me for approval, most matters being decided at lower levels. What did come to me were proposals approved by a committee of officers from different departments and in no case had I ever changed the recommendations in favour of the vendor. It took the special court seven years to discharge this case without framing charges, because it was held that no evidence existed to show that any criminal act had been committed. Again, the CBI did not file a revision petition.
The third case related to a contract for the transport of CKD kits from Kandla port. That contract had been awarded after Krishnamurthy had given his approval and the whole transaction had been discussed and approved in the board and had resulted in saving a large amount of money for Maruti. The CAG had also looked into the transaction and dropped it from his report because he found nothing wrong in it. The minister of state for heavy industries had in 1986 decided to conduct a departmental enquiry into this contract and other allegations against me. The enquiry, carried out by three senior officers of the ministry, could not establish any wrongdoing in respect of any of the allegations. However, the enquiry concluded ‘that the sanctity of the tendering process was not followed’. The officers conducting the enquiry failed to record that the contract had been approved by the board or had saved money.
My two-year term as managing director had ended in 1987 and the extension was kept pending till the departmental enquiry report was examined, though I continued to work in that capacity without a formal extension. After a few months, the appointments committee of the Cabinet approved a further term of five years till 1992. This showed that at the highest level the government was satisfied that none of the allegations had any validity. One can only guess at the reasons for this enquiry. As it happened, there were differences over various issues between me and the minister of state.
Besides charge-sheeting Mathur and me in this case, the CBI also included V.K. Dewan, who was the senior manager of shipping and transport and directly responsible for this area of business when the contract was given. When the charge sheet was filed, he was serving as the CEO of a public sector undertaking. The government refused permission for his prosecution on the grounds that this was a normal business transaction and no criminality was involved. Soon thereafter he was also promoted to an even larger and more important PSU. Despite all these facts, the CBI went ahead with the charge sheet against Mathur and me. After many years, the special court discharged both of us without framing charges, holding that no evidence existed of any criminal acts by either of us. The CBI then decided to file a revision in the Delhi High Court, where the case has been pending for some years.
Meanwhile, the government wanted to assert its authority in the affairs of Maruti, and this could be best done in the board. This required that all the government-nominated directors, including the four who were executive directors and had full-time responsibilities, should follow the ministry line. The first matter where this came to a test was the issue of a new four-valve engine for the 800.
Khattar and Kumar, who were directors, were told, in writing, to vote according to the government directives. They were also summoned to meet Karunakaran, who told them that as they were government nominees, they would have to do what the government wanted. Both of them were of the view that the new engine should be introduced and the course of action being suggested by the government would only delay matters and cause loss to Maruti. Bhaskarudu and Halasyam, on the other hand, preferred to follow the government line. Halasyam was a finance man with little understanding of technology, and decided he should go along with the government since he was its nominee. Bhaskarudu took the same line. He was keen that the government should nominate him for the post of managing director.
In the board meeting, Prasad, as chairman, told the government directors that they must vote according to his directions. I protested and said that directors have a fiduciary duty to the company and must act according to what they think is in its best interests. A shareholder should not tell a director how to function in the boardroom. After the board meeting I even made a reference to the DCA seeking a clarification on the issue of whether a director should act in the interests of the company or do what a shareholder asks him to do. The response from the DCA did not give any clear answer to my question. However, even before the matter could be decided in the board, both Khattar and Kumar were removed as directors in June 1996. This was obviously because Prasad thought they might vote against the government. Though Karunakaran had, according to press reports, approved the removal of these two directors in January 1996, the orders were not issued till the late Murasoli Maran became minister in June 1996 in the new United Front government.
My belief is that Karunakaran realized the unfairness of the order of removal and did not really want to implement it. They were replaced by two officials of the heavy industries ministry—Anup Mukherji and Dr E.A.S Sarma, the additional secretary and the financial advisor. Perhaps an additional reason for removing Khattar was that if he was not a director, his chances of becoming managing director were effectively scuttled. There was little that could be done. Khattar and Kumar were nominees of the government—one of the two shareholders in the company and entitled to nominate half the board members—and could be withdrawn any time.
I had met Maran one evening at Tamil Nadu Bhavan in New Delhi, where he was staying, soon after he took over as the industry minister. We discussed Maruti’s performance, about which Maran seemed very pleased, and its future direction. This included expansion of capacity, export of cars, and modernization of the facilities. Maran appeared to be genuinely interested in the growth of Maruti and I came away with the impression that we would have a good working relationship.
However, things began to go wrong. I am certain that this was the result of Maran being briefed that SMC was trying to take over control of Maruti by proposing investments which were not really necessary so that there would be a need to increase the equity investment in Maruti. Since the government was not inclined to invest more money in Maruti but SMC was willing to do so, it would mean that SMC’s share of equity would increase to beyond 50 per cent.
Maran was perhaps told that I was helping SMC in achieving this objective, was disregarding national interest and both Khattar and Kumar were also siding with SMC and not toeing the government line. Such an understanding of the motives of SMC and my alleged role would understandably result in the minister wanting to protect ‘national’ interests and view proposals from the Maruti management with a degree of suspicion. The insistence on expanding production in Gurgaon, instead of establishing a plant in the south, may also have been used to create a bias against me, Kumar and Khattar, who were all from the north. It is otherwise hard to understand why Maran’s attitude changed so fast and why he did not discuss any of these issues with me directly.
A point of no return was reached when Suzuki wrote a letter to Maran, pointing out that decisions on a large number of important issues were being delayed and that SMC would find it difficult to give further support to Maruti in such a situation. That riled Maran and he summoned me. He was very worked up and said Suzuki was forgetting that he was dealing with a sovereign country. He threatened to throw SMC out of Maruti. I apologized on behalf of Suzuki for any offence caused and tried to explain that Suzuki’s intentions were only to ensure the progress of Maruti. Maran asked me to convey his feelings to Suzuki, which I did. Later, Suzuki did write a very conciliatory letter to Maran, pointing out that it was not his intention to challenge the government’s sovereignty, but only to promote Maruti. But the damage had been done. The next two years proved to be the most acrimonious in the history of Maruti-government relations.