A report of the Comptroller and Auditor General of India (CAG) has brought out this glaring omission and says that a company called Cosmos Spinning Ltd which had a unit at Dera Bassi near Chandigarh was extended a loan of Rs 30 lakh and Rs 10.35 lakh from PSIDC during April and May in 1988. The unit had also obtained a loan of Rs 22 lakh during June 1987 to March 1988 from PFC.

However, in view of default, the unit was taken over in October 1994 and the value of assets in November 1994 was assessed. The unit was advertised for sale in December 1994 and the highest bid received, that of New Delhi-based SAS International for Rs 131 lakh against a recoverable amount of Rs 63.54 lakh to PSIDC and Rs 30.75 lakh to PFC (including interest) was found to be beneficial.

Surprisingly, the agenda prepared for getting approval from the board of directors though placed before them on 9 January 1995 could not be considered "due to paucity of time". The audit report points out that actually no efforts were made to obtain the approval of the board of directors by circulating the matter, keeping in view the financial interest of the PSIDC and PFC. After waiting for more than one month, the bidder withdrew the offer on 28 January, 1995 and thus the unit could not be sold.

Interestingly, the PSIDC decided in June 1995 to re-advertise for the sale of the unit but the secretary, industries asked in June 1995 for a representation of the promoter of Cosmos Spinning Limited to Punjab chief minister in March 1995. He said that the "unit may not be sold and advised the PSIDC to ask the unit to submit a rehabilitation plan". However, the promoters of Cosmos Spinning Ltd engaged in the manufacture of shoddy yarn, and "neither paid any upfront money not submitted any rehabilitation plan as promised".

Consequently, the unit was re-advertised for sale in November 1995 but it was not sold as the only offer received for Rs 65 lakh was considered low. The unit was ultimately sold for Rs 91.50 lakh in March 1998. The share of PSIDC in this sale came to Rs 62.41 lakh as against a recoverable amount of Rs 111.31 lakh upto July 1998, thereby resulting in loss of Rs 48.90 lakh and Rs 28.35 lakh to the PFC. The audit report of CAG says that these facts were admitted in February, April and July 1999 by the PSIDC and the Punjab government.