Alarmed over the disturbing trend of corporates to avoid loan repayment, financial institutions recently decided to block the sale of the Torrent Power's stake in Gujarat Torrent Energy Corporation to PowerGen of the UK. The reason is that the Torrent group company owes around Rs 20 crore to institutions. Instead of paying up the funds, the Torrent firm is taking shelter under the BIFR cover, upsetting the institutions.

AB Corp Ltd (formerly Amitabh Bachchan Corporation Ltd) is another company which has taken shelter under the BIFR for avoiding loan repayment. Canara Bank is planning to approach the BIFR to deny shelter to AB Corp under the guise of a sick company. The bank feels that the company does not fall under the category of sick company as it does not meet the BIFR guidelines on sick companies.

The Parasrampuria Synthetics case is another classic example of taking shelter under thecourts and BIFR to avoid loan repayment. ICICI had even filed a case against the company which owes over Rs 600 crore to institutions. The company made huge losses and the entire networth was wiped out two years ago. Institutions are yet to recover funds from the company.``In many cases, we notice that such company mismanages the funds and projects. They siphon off funds under doubtful provisions. Interest free loans are extended to private subsidiaries floated by the same promoters and these loans are never paid back,'' institutional sources said. A company will have to be referred to the BIFR if its net worth (equity plus reserves) is wiped out by accumulated losses. This is mandatory as per Section 3(1)(O) of the Sick Industrial Companies (Special Provisions) Act 1985.

However, it has become a practice among companies to misuse public funds, show losses and then run to BIFR for protection. The BIFR procedure takes its own time and these `sick' companies take advantage of the laws to avoid repaying publicfunds. Take the case of Paam Pharmaceuticals which was declared sick by BIFR ignoring the allegations raised by banks and institutions about certain doubtful provisions made by the company. FIs questioned provisions relating to Rs 43.89 crore of bad debts and booking of Rs 16.55 crore due to expired and soiled goods.

``From the nature of exceptional loss or provision shown by the company in one account period, it appeared an attempt by the company to avoid suits filed or likely to be filed against them,'' the report prepared by IDBI and and Punjab National Bank to the BIFR pointed out. However, Paam Pharma which made a loss of Rs 127 crore got away with the `sick' company status from the BIFR. In fact, as corporate sources point out, an investigation into the affairs of a large of companies going to the BIFR for sick status will reveal massive fund diversion, mismanagement and stripping of assets.BIFR itself had pulled up the the promoters of Nova Udyog Ltd for ``their acts of malfeasance and non-complianceof directions. ``The promoters and management of Nova Udyog are guilty of negligence and have acted in a manner contrary to prudent business practices. Each abandoned the project without taking adequate safety measures,'' the IDBI said in its representation to the BIFR. At least four banks have filed suits against Nova Udyog for recovery of Rs 42.77 crore from the company.

Even institutions were also pulled up for their lackadaisical approach in tackling the `sick' companies. In the case of Chemox Laboratories (which was declared sick), BIFR said instead of taking any effective action, ICICI withdrew its nominee director and did not raise any objection to the balance sheet for 8 to 9 months giving an impression that its was not able to handle such situations.

Of late, institutions have seen through the game of companies. In the case of Torrent, institutions have decided to get tough for loan recovery by blocking the sale of a group company. The reason: non-performing assets (NPAs) of financialinstitutions have gone through the roof. While IFCI has been downgraded by ICRA, CRISIL (another rating agency) had warned about the poor asset quality of ICICI and IDBI. Institutions are worried over the fact that they are also answerable to their shareholders for the drop in profits and rise in NPAs.