The government is trying for an out-of-court settlement to patch up differences with its estranged partner.

By Rajeev Dubey

This government is dropping quickly into reverse gear in order to avoid Judgement Day.

On June 20, 1998, in a courtroom at Belgrave Square, London, the chairman of the International Court of Arbitratration, L. Yves Fortier, will deliver his verdict on the two-year-old dispute between the two parents, the $13.34-billion Suzuki Motor Co. (SMC) and the Government of India (GOI), of the Rs 8,454-crore Maruti Udyog.

As that fateful Saturday fast approaches, both shareholders in Maruti Udyog seem keen on a pre-court settlement to the contentious issue of the GOI's appointment in August, 1997, of R.S.S.L.N. Bhaskarudu as Maruti Udyog's managing director.

At one level, the Atal Bihari Vajpayee Administration is pushing for an early resolution of this fratricidal fight. Soon after the government was formed on March 23, 1998, the Union Minister for Industry, Sikander Bakht, 80, directed the Minister of State, S.S. Badal, 35, and the heavy industries secretary, P. Shankar, 55, to hold informal meetings with SMC's representatives in India.

By the end of April, 1998, a compromise had been worked out: SMC would withdraw its case from the International Court of Arbitration. And the GOI would retire Bhaskarudu in July, 1998, soon after he had turned 58. And his successor at Maruti Udyog would be chosen in consultation with SMC.

Predictably, Bhaskarudu -- whose five-year term as managing director lapses in August, 2002 -- expressed his unhappiness about the formula to the leader of the Telugu Desam Party, Chandra Babu Naidu, as well as the All India Anna Dravida Munnetra Kazagham leader, J. Jayalalitha. Given that the survival of the Vajpayee Administration depends entirely on the support from Naidu and Jayalalitha, their support for Bhaskarudu killed the compromise just as it was about to be announced.

In any case, this route appears to be sealed now with the Vajpayee Government announcing that the retirement age for Central government employees will be increased by two years, from 58 to 60. This move is likely to be extended to public sector companies. Bhaskarudu -- who has also sought support from Maruti Udyog's 120-strong vendor lobby -- did not speak to BT, claiming that ''since the matter referred to by you involves the two shareholders (GOI and SMC), and since the matter is still sub judice before the International Court of Arbitration, I have no comments to offer in this matter.''

In any case, Bhaskarudu's lobbying forced Badal to explore other options. He then suggested that, in return for SMC allowing Bhaskarudu to complete half his original term -- that is, till February, 2000 -- it could get to appoint a new chairman for the next five-year period as is its right according to the joint-venture agreement. But a longer term for Bhaskarudu is unacceptable to SMC; the Japanese company said that it would rather await the verdict of the courts.

So, Badal next suggested that Maruti Udyog could immediately have a new managing director but from outside the company. While he is hoping to appoint a non-controversial bureaucrat in the hot seat -- Prabir Sengupta, who had been appointed as an interim chairman by the GOI, has also resigned -- this too was unacceptable to SMC. In any case, such a move would require changing the Memorandum of Understanding between them. For, Section 5.2 of the Subscription & Amendment Agreement clearly states: ''Any nominee as managing director shall be the person who has an experience of work for Maruti Udyog as employee and or/full time officer for not less than three consecutive years before the nomination.''

Since then, the conciliatory efforts have run out of fuel, with both companies unable to find a middle path. Unfortunately, the GOI has more to lose if Fortier delivers his verdict, be it favourable or not. Suppose, for the sake of argument, that he squashes SMC's application, and upholds the GOI's decision to appoint Bhaskarudu. Then, SMC's representative, Y. Saito, will take over as Maruti Udyog's chairman, and the GOI and SMC will have five directors each on the company's 11-member board. However, with the chairman's casting vote with SMC, it will always have the last word in the functioning of the company; at least, for the next five years.

Moreover, in such a situation, SMC's chairman and president, Osamu Suzuki, 68, may prefer to withhold technology transfers -- and new models -- to Maruti Udyog. And the government will find it difficult to explain the new Rs 1,625-crore plant that is coming up at Gurgaon (Haryana). As it is likely to be ready by June, 1999, the absence of new models, coupled with the interest burden on the company's freshly-acquired debt, will hurt Maruti Udyog's bottomline.

Moreover, Maruti Udyog must upgrade the Maruti-800 by 2000. Even in its current avatar, the popular small car does not meet the strict emission norms to come. On the streets, TELCO's Mint, Hyundai Motor's Santro, and Daewoo Motors' Matiz -- all scheduled for launch around late 1998 -- as well as General Motor's Corsa (scheduled launch: early 1999) will seriously challenge Maruti Udyog's dominant position in the domestic small car market.

Warns Maruti Udyog's former CEO, R.C. Bhargava, 64: ''Maruti Udyog badly needs model upgradation. If it doesn't do anything in the next two years, by the third year, it will lose its pre-eminent position. And it is only momentum, more than anything else, that will carry it through the next 12-18 months.'' Of course, the GOI can always shop around for technology.

Legally, Maruti Udyog can continue to sell its existing models using the Maruti brandname. However, the gear-boxes of all its models are imported from SMC since the Japanese company, repeatedly, rejected Maruti Udyog's proposals to indigenise this component during the last decade. Fortunately, most joint venture agreements stipulate that a foreign partner must supply critical components for upto a year after deciding to pull out of the venture.

On the other hand, what happens if Fortier accepts SMC's plea, and declares the GOI's unilateral appointment of Bhaskarudu void? Well, Bhaskarudu will be forced to quit, and a new managing director must be appointed in consultation with SMC. That can be humiliating for the Vajpayee Administration, as well as for the bureaucracy, which has, over the past two years, advised three previous governments to take on SMC.

What is worrying is that the GOI's reply to SMC's petition before the International Court of Arbitration is lukewarm. Its central argument is that ''the principal issues raised by SMC are matters of Indian Company Law, and are reserved for the Indian Courts.'' But it also denies that the GOI was under any obligation to consult, or agree with, SMC on the appointment of the new managing director. And the GOI claims that Bhaskarudu's appointment was discussed before being carried at the board meeting. Although Saito dissented, which was recorded in the minutes of the meeting, no formal vote was sought and, hence, no vote was taken. The reply also states: ''Except when expressly agreed to, or admitted, all the allegations and claims of SMC are rejected and denied.'' SMC, obviously, disagrees.

Apparently, the company even sought an opinion from P.N. Bhagwati, the former chief justice of the Supreme Court. BT learns that Bhagwati felt that the GOI should have consulted SMC before Bhaskarudu's appointment, basing his opinion on Article 5.4 of the Joint Venture Agreement, which provides for the concurrence and consultation of both partners on any major corporate decision. When contacted by BT, Bhagwati confirmed that he had been approached by SMC although he refused to comment on what had transpired.

All this will cease to matter on June 20, 1998. Aware that the GOI has more to lose, either way, the search is on for a solution although the political pulls-and-pressures have made this more difficult. Now, Pramod Mahajan, the advisor to the prime minister, has been deputed to find an acceptable (read: face-saving) solution. That's easier said than done when both sides represent nations that are prickly about national honour. Perhaps the GOI and SMC need to be reminded that Maruti Udyog itself is in grave danger of driving into disaster.

Issue Contents  Write to us  Subscriptions