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Sanctions, fear of losing legal battle sparked Maruti 'sellout'

The Atal Bihari Vajpayee government opted for an out of court settlement with the Suzuki Motor Corporation for fear of losing the legal battle in the International Court of Arbitration and straining India's relationship with an investor-friendly nation like Japan.

According to a report from the government's attorney general placed before the Prime Minister's Office two weeks back, the Indian government -- a 50 per cent shareholder in the MUL -- was on a weak wicket in the case against SMC before the ICA in London.

The legal opinion was that a ruling from the ICA would be "binding and final" to both parties even if the government challenged the verdict in Indian courts. Though it is not mandatory on the government's part to abide by an ICA verdict, international rules require the country to obey the apex arbitration body's decision.

Suzuki had contested before ICA the Indian government's decision to appoint R S S L N Bhaskarudu as MUL managing director arguing that it contravened certain key clauses of the 1982 shareholders's agreement. The agreement states that the MD will be appointed through "mutual consultation and discussion."

But the Union industry ministry argued that the 1982 agreement had been superseded by a new joint venture agreement in 1992 which empowers the partners to appoint their nominees as the managing director for five-year terms alternatively.

While the case was being initiated in ICA, Prime Minister Vajpayee last month asked the attorney general for a legal opinion on the case.

Confronted with the negative legal opinion, the Vajpayee government felt a failure in ICA over MUL would lead to a terrible loss of face for India globally, especially in the wake of international sanctions against the country after its nuclear explosions on May 11 and 13.

Sources said this fear coupled with the government's anxiousness to send a conciliatory signal to the Japanese government forced Vajpayee to ask Industry Minister Sikander Bakht to mediate with Suzuki officials and settle the row.

"The prime minister wanted to ensure that by settling the controversial case of the successful Maruti venture the government send the right signals to foreign investors," an official at the industry ministry told Rediff On The NeT.

He said by resolving the contentious issues with SMC, the government also sought to send an investor-friendly message to Japan which has invested Rs 62.09 billion in various projects across India since 1992. Annual trade between India and Japan is around $ 3.24 billion.

Ever since India exploded the nuclear bombs in May, Japan along with the United States and Britain has heaped severe criticism on the country. Japan, which suspended all new loans to India, also cancelled $ 26 million in annual grants.

"Japan has been India's largest aid donor since 1986. The Vajpayee government did not want to vitiate its relationship with the country over the tussle for control in Maruti," the official added.

Sources said the Vajpayee government was also not happy with some of Bhaskarudu's key decisions.

The industry ministry last month questioned Bhaskarudu's decision to restrict the number of Maruti dealerships to its current strength of about 125 as against sales of about 357,000. Its closest competitor Daewoo Motors has already set up over 120 dealers though its annual sales is only 50,000 cars a year.

SMC -- for which Maruti has been one of the most profitable ventures across the world -- is also alleged to have cultivated a number of BJP leaders to settle the row.

SMC picked up 50 per cent stake in 1992 to become an equal partner with the Indian government in MUL.

In 1993, the Japanese firm put forward a bold proposal -- it wanted to pump in fresh funds as equity to finance MUL's Rs 23.71 billion expansion plan.

While the then Congress government viewed the SMC proposal sceptically, the United Front regime rejected any fresh equity from the Japanese auto-maker.

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The Maruti controversy