Maruti to pay royalty to Suzuki on new models in rupee

New Delhi: Maruti Suzuki India will start paying royalty to its parent Suzuki in rupee instead of yen for all new models starting with a compact SUV to be launched early next year.

The move, aimed at insulating the company from foreign exchange fluctuations, is likely to result in an average royalty rate of 5 percent of net sales as compared to 5.6 to 6 percent for the existing models, which are paid in yen.

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"All future contracts on royalty will be in rupee terms...The first product to be based on this agreement will be the compact sports utility vehicle (SUV) to be launched early next year," Maruti Suzuki India (MSI) Chairman R C Bhargava told reporters here.

He further said the rates for specific models will vary depending on contribution from Maruti in the development of the products but higher the contribution, lesser will be the rate.

For instance, the rate on the compact SUV will be around 4 percent, he added.

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MSI has been ramping up its R&D centre in Manesar in order to play a bigger role in product development done in collaboration with Suzuki.

Bhargava also brushed aside a recent statement by an investment advisory firm which stated that the royalty rate paid by Maruti to Suzuki is extortive, saying "royalty is just one of the input costs of production, like components" and picking on just one item is an unfair assessment.

"(It is) picking on one item, because it looks very sensational, it has nothing to do with shareholder voting or anything. It is just a person's opinion on what he thinks about...," Bhargava said.

He said Maruti should be judged by its financial performance and the returns that its stocks give to shareholders.

"If you judge by results, Maruti's stock prices command probably the best multiple in India," he added.

According to him, for the existing models, from the Alto800 to the newest Baleno, the royalty will be paid in yen as it was based on the old agreement.

When asked if the old models could also come under the new system, he replied in the negative.

MSI CFO Ajay Seth said the royalty contract tenure for a model is around 10 years and the company hasn't discussed in details as yet on the possibility of changing from yen to rupee payment for the existing vehicles when a full model change is effected.