The board has appointed the Industrial Development Bank of India (IDBI) as the operating agency (OA) and asked it to prepare a viability report. The company's promoters have been asked to give IDBI a "comprehensive and fully tied up" revival scheme by June 11.

IDBI will submit its report to BIFR in another four to six weeks after scrutinising the scheme.

The BIFR has also appointed a special director - N R Hota - on the board of the company. He will look after its financial and other interests. The board has instructed the promoters not to dispose of any fixed assets without its prior approval.

The BIFR had earlier given the Hyderabad-based company a March 31 deadline to get into an equity partnership and inject the much-needed funds. Failing that, BIFR registered it as a sick company on Monday. The financial institutions and bankers, including State Bank ofHyderabad, State Bank of India, State Bank of Mysore, Vijaya Bank and Syndicate Bank had no objection to the company being declared "sick".

Palco's rescue plan hinges on an infusion of fresh equity by new co-promoters. After going in the red last fiscal, the company chalked out a restructuring plan, offering management control to prospective buyers who could bring in fresh equity.

Having decided to hive off sheets and conductors into separate divisions, Palco was reportedly in talks with a clutch of domestic companies, including Hindalco, Sterlite, Indal, Nalco and even some international majors like Alcoa, Alumax and Reynolds for equity partnership in its sheets business. But discussions with most companies did not progress beyond the preliminary stage.

However, Palco is believed to be close to an agreement with Hindalco. The latter has reportedly evinced interest in buying out the entire promoters' stake of 12.89 per cent in the Rs 162-crore Palco. Sources say Hindalco may have waited for BIFR todeclare Palco sick, so that it could merge it with Hindalco and get a tax benefit.

In that case, Palco shareholders will get Hindalco shares as per the swap ratio that is worked out. About 30 per cent shares in Palco are held by the public. Alternately, Hindalco may also turn Palco into a subsidiary to avoid over-capitalisation.

For its conductor division, Palco had offered equity to US major Southwire, with whom Palco had signed a memorandum of understanding last year. But Southwire reportedly developed cold feet due to the fluid industrial and political scenario.

The financial institutions together hold 25.68 per cent in Palco. While UTI has a 15.32 per cent stake, IDBI holds 4.80 per cent, ICICI has 1.24 and SFC 2.81 per cent.

The company's accumulated losses have mounted to Rs 93.10 crore. This has completely wiped out the networth of the company, consisting of paid-up share capital of Rs 58.72 crore and free reserves of Rs 12.49 crore.Palco was incorporated in September, 1989, and startedcommercial production in December, 1993. It is one of the largest producers of aluminum sheets and conductors in the downstream sector.

The promoters have claimed that the company's two plants in Nagpur are ``most modern with the fastest and widest aluminum rolling facilities in the country''. It does not suffer from any weaknesses, except financial problems caused due to the general slowdown in economy, they maintain.Citing the main reason for the company's sickness, the promoters have contended that while setting up the project, they were ``conscious of the impending liberalisation, but the extent and impact of the same was not anticipated''.

The steep fall in import duty during the first two years of Palco plant's commissioning, and the resultant slack demand in the domestic market and sharp increase in power charges were the main factors that forced Palco to go to the BIFR.

When the project was conceived, the import duty was 105 per cent on aluminum rolled sheets. But by the time the project tookoff in 1993-94, it was slashed to 40 per cent. In the next two years, the duty came down to 20 per cent.

Thus, the market was flooded with cheaper imports of aluminum strips and conductors and their prices fell. The steep increase in power tariffs made the operations of the company unviable.

An 8 per cent to 12 per cent growth in demand was expected, but the demand had actually gone down by 2 per cent in last six to seven years as user industries had shown a declining trend, promoters have stated. Last year, the customs duty on aluminum was doubled, making the raw material costlier. This had squeezed Palco's margins. On many items, margins went down by 8 per cent to 10 per cent as against an assumption of 20 per cent. It even became zero on many items. Hence, there was a total erosion in the company's networth and it had not even been able to meet the interest costs in last 2.5 years, promoters submitted.

During fiscal 1996-97, when Palco extended its accounting period by six months up to September 30,1997, it manufactured and marketed only 19,117 ton of rolled products and 6,312 ton conductors, achieving a dismal capacity utilisation of 42 per cent and 41 per cent, respectively.

However, though the company's overall performance was dismal, its income from exports stands at Rs 90 crore.