The country's largest carmaker Maruti Suzuki India's board has approved a contract manufacturing agreement for a period of up to 30 years proposed to be signed with an arm of parent Suzuki Motor Corp (SMC) for the upcoming plant in Gujarat.

The country’s largest carmaker Maruti Suzuki India’s board has approved a contract manufacturing agreement for a period of up to 30 years proposed to be signed with an arm of parent Suzuki Motor Corp (SMC) for the upcoming plant in Gujarat.

The agreement is proposed to be signed between Maruti Suzuki India (MSIL) and Suzuki Motor Gujarat (SMG), a wholly-owned subsidiary of SMC, which will implement the Gujarat project, subject to regulatory and minority shareholder approvals.

“The board of directors of the company at its meeting held on October 1, 2015, has approved the contract manufacturing agreement and the lease deed proposed to be signed by the company with Suzuki Motor Gujarat (P) Ltd subject to this arrangement being approved by the minority shareholders of MSIL and regulatory approvals, if any,” MSIL said in a BSE filing.

“The contract manufacturing agreement shall continue for a period of 15 years to be automatically extended for a further period of 15 years at the end of the initial period without any further action or documentation on the part of either party, unless terminated by the parties by mutual agreement”, as per the new proposed agreement.

“After the expiry of an aggregate period of 30 years from the commencement date, MSIL and SMG may mutually discuss and agree to extend the period of this agreement,” the contract agreement document said.

MSIL is expected to soon go for the much-delayed minority shareholders’ voting on allowing parent Suzuki to own and invest in the Gujarat plant although it has not fixed a time for the same.

MSI had initially planned to set up a new plant in Gujarat, its third, to meet growing demand. However, In January last year, parent Suzuki Motor Corporation announced that it would invest USD 488 million to build the Gujarat plant.

Opposing the move, Maruti’s institutional investors approached capital markets regulator Sebi, seeking its intervention to safeguard the interests of minority shareholders. Private sector mutual funds and insurance companies, which own almost 7 per cent of the company, led the opposition.

Later, under pressure from institutional investors, Maruti decided to seek the approval of minority shareholders after tweaking some of the earlier proposals for the Gujarat plant, which SMC had decided to take over.

The Gujarat plant is envisaged to have a total installed capacity of 7.5 lakh units annually. It is expected to be operational by May 2017. At present, MSIL’s two facilities at Gurgaon and Manesar have a total production capacity of 1.5 million units annually.

Under the new agreement, SMG shall operate on a no-profit and no-loss principle, manufacture and sell the products to MSIL in consideration for the price of the products in accordance with the order from Maruti.

Moreover, SMG shall not directly supply or assign the products to any other third party in any manner.

If at the end of a financial year, SMG retains profits, such profits as well as any interest earned thereon shall be utilised by SMG for reducing the consideration for the immediately following financial year, it said.

On the other hand, “if at the end of a financial year, SMG retains losses, as per the audited financial statements for such financial year, the consideration for the immediately following financial year shall be correspondingly increased to offset such losses”, the contract manufacturing agreement document added.

On the payment of royalty, it said the use of intellectual property shall be done “in accordance with the terms of the contractual agreements between SMC and MSIL”.

“It is further agreed that the parties and SMC shall enter into suitable documentation and arrangements for effectuating such royalty payments,” it added.

In the case of termination of the agreement, “for any reason whatsoever, MSIL shall at its option purchase all, but not part of, the outstanding shares of SMG as a going concern entity, subject to the applicable laws and the applicable pricing guidelines issued by RBI at the time”, it said.

MSIL shall enter into appropriate and customary legal documentation with SMC to record the sale and transfer of the shares of SMG to MSIL, which shall take effect within a period of 90 days from the date of termination of the agreement or within such other period as may be mutually agreed to between MSIL and SMC, it added.