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Santanu Saikia
New Delhi, Aug 6: Prime Minister Atal Behari Vajpayee's caretaker cabinet set aside objections raised by the department of expenditure (DOE) in the ministry of finance--the nodal approval wing for all PSU restructuring proposals--while approving a massive bailout plan for the ailing Bihar-based Hindustan Steel Works Construction Ltd (HSCL).
According to documents available with The Financial Express, the DOE had opposed all aspects of the bailout plan. What is more, it had accused the management of the company of gross violations of DPE guidelines for unilaterally awarding its employees higher wages as a result of which "the cost of closure had doubled".
"The new wage levels have been granted despite the fact that they had not been approved by the board of HSCL. The board had advised the management that these be implemented only after approval is obtained from the administrative ministry. A reference was made by the HSCL management to the administrative ministry, but before a reply could be recieved, the new wage levels were granted. This has increased the cost of closure (to nearly Rs 700 crore) and severely impacted its cash flow," an internal note of DOE, which has been acquired from the ministry of steel, claimed.
The DOE's comments were solicited for a cabinet note moved by the ministry of steel (MOS) seeking a bailout for HSCL. Because of strident opposition from DOE, the note was marginally modified by the MOS without incorporating the substantive points raised by the DOE. The cabinet cleared it on July 6.
The original cabinet note had sought a non-plan loan of Rs 141.35 crore to meet statutory liabilities and cash losses: Rs 75.33 crore for payment of liabilities upto March, 1998 and another Rs 66 crore, equivalent to the cash loss during 1998-99 (essentially on account of salary). The modified proposal which was okayed by the cabinet allowed for a non-plan loan of Rs 79.33 crore, leaving out the outstandings of 1998-99.
The DOE's comment to this proposal was that "DPE guidelines clearly state that the government has no liability for paying either wage arrears or increased liability on account of pay revision. HSCL must find resources from within to the discharge liability," the DOE went on to add.
The MOS had asked for the following additional concessions for implementing the bailout plan for HSCL :
The DOE made the following comments on the above proposal : "There is little point in discussing the balance-sheet unless the company comes up with a realistic plan to improve operational performance." The DOE also opposed the increase in the share capital, claiming that "with a net block of under Rs 40 crore, the share capital cannot be increased to Rs 117 crore as has been proposed by the MOS".
Pertinently, the cabinet did modify the above-mentioned package put up by MOS, but only marginally. The outstanding interest had been waived. A moratorium on repayment and interest holiday for 10 years had been approved. The conversion of Rs 99.10 crore of plan loan into equity had been pushed through. And there would be no corporate tax on balance-sheet profits. Another MOS proposal, which formed part of the bailout plan, was for the extension of bank guarantee of Rs 112 crore for cash credit facility and for a Rs 60 crore facility in favour of SBI till HSCL turned around and a waiver of the guarantee commission of one per cent.
According to DOE, the working capital funds were grossly misused by HSCL. In 1995-96, for example, sundry debtor amounts stood at Rs 278 crore as against receipts of Rs 406 crore, in 1996-97, the amounts were Rs 369.18 crore and Rs 410.11 crore respectively and in 1997-98, the figures stood at Rs 410.64 crore and Rs 318.24 crore respectively. Sundry debts as percentage of reciepts stood at 68.33 per cent, 90.02 per cent and 129.03 per cent respectively in the three aforementioned years.
"Over the last two years, the amount of working capital tied up with sundry debtors increased by Rs 132 crore. It is possibly the only PSU whose sundry debts exceed turnover by almost 35 per cent. Unless HSCL improves its working capital management practices, there is little point in extending government guarantees for meeting its working capital requirements," the DOE noted.
The final chapter of the MOS bailout plan was funding of Rs 338.46 crore from the National Renewal Fund for support of the voluntary retirement scheme of the company over a period of four years. The VRS will help ease out 6,400 employees.
The DOE had opposed the move. "The proposal can be agreed upon only after HSCL comes up with a realistic plan to hive off the chronically loss-making units. The actual amount will be known only after such a plan is prepared. The overall revival plan is unrealistic and cannot be agreed upon," the DOE claimed.
The MOS proposal on VRS was modified subsequently. The banks would now fork out the loans instead of the NRF. Ultimately, though, the liability would remain with the government as it would be a guarantor of these loans. It had undertaken to guarantee the interest on the VRS loan that HSCL would be seeking.
Clearly, the Union cabinet decided to approve the HSCL package despite opposition from the DOE. Sources said that political considerations played a major part in the sanctioning the bailout plan for the Bihar-based outfit. For, they claim, companies which were in far better health that HSCL had been forced to wind up by the government. A surprising exception was made with HSCL.
The company was set up in 1964 to build integrated steel plants. In the first 13 years, average profit was Rs 70 lakh per annum. During the next 20 years (till 1997-98) it made losses (except for one year), now totalling up to a whopping Rs 1,114 crore on an equity base of Rs 20 crore. Its net worth had been negative since 1980-81. Because construction is not listed in the first schedule of the Industres Development & Regulation Act, the company never came up before the BIFR. Interestingly, the government had time and again recommended closure of HSCL. As early as 1998, the financials were reviewed and closure recommended but the cabinet in 1986 kept winding up operations in abeyance. In 1994, a committee of secretaries also wanted the company to close shop. Among the reasons given by it on why HSCL should be shut down were:
But closure was delayed for some reason or other. The result was that losses mounted in the last three years: Rs 114.62 crore, Rs 132.57 crore and Rs 222.95 crore (1997-98). In March, 1998, the finance ministry informed MOS that there was no scope for revival and the Cabinet Committee on Economic Affairs should be moved for closure. Instead, the MOS ended up submitting a fresh revival plan, which, in a modified format, elicited the nod of the cabinet last month.
The BJP government saw merit in keeping a company alive, which successive governments over the last 15 years had wanted to close down on grounds of gross inefficiency.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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