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Journalism of Courage
It was only last week that the Finance Ministry is understood to have cleared certain amendments which will make debt recovery easier for banks and financial institutions (FIs). The decision followed a long pending complaint by banks that most of their non-performing assets (NPAs), which have now burgeoned to a massive Rs 58,000 crore are due to weak debt recovery laws.
The bank unions, of course, pooh-pooh this claim and the following example of Parag Bosimi Synthetics Ltd (PBSL) seems to prove them right. Parag Bosimi, is not one of the big beleaguered steel groups which I have written about extensively over the last year. It does not even fall into the category of companies/ groups which are too big to fail, or would create such huge NPAs in the books of the banks and FIs that it would affect their own credit rating and future borrowing. If anything, PBSL was already classified as an NPA by the FIs since March 1995 according to Reserve Bank guidelines prevalent then.
A convenient relaxation in the RBI guidelines for NPA classification on May 18, 1999 breathed fresh life into the PBSL project. The account is now being treated as a standard loan based on an assumption that it would achieve a cash break even soon after additional loans are sanctioned. The RBI has of course cleared the re-classification and the finance ministry is working hard on behalf of the company.
The efforts to get PBSL going have been on even before the RBI’s NPA notification. At a 1998 meeting of FI chiefs, it was decided to grant an additional Rs 19.55 crore to the project to help completion by January 2000. The story gets interesting at this stage.On October 21, 1999, a Joint Secretary in the Banking Division of the Finance Ministry summoned a meeting of the FIs and banks to "ensure early completion of the project of PBSL without further delay". Here is what he asked the banks and FIs to do.
State Bank of India (SBI) was ordered to sanction up to 40 per cent of PBSL’s working capital requirement and to "convert irregularities into working capital term loan for which FIs would cede pari passu charge and initiate immediate steps to withdraw the suit filed against the company." All the institutions – UTI, LIC, GIC, ICICI, IFCI (which is itself making losses), were all ordered to sanction and disburse their loans to PBSL by November 1999.
Allahabad Bank and Punjab & Sindh Bank were asked to clear 60 per cent of the working capital as had been agreed by them earlier and the promoter Hemant Vyas was asked to arrange margin money. It is another matter that by December 1999 PBSL was complaining that the FIs had not disbursed the additional funds ordered by the Joint Secretary, nor was the project anywhere near the expected completion by January 2000. So what is this company that has attracted such detailed attention from the highest levels of the government?
Parag Bosimi’s chairman Hemant Vyas last hit the headlines in connection with the Securities scam. He also had substantial funds of PBSL invested in the beleaguered Fairgrowth Financial Services Ltd. He was also the Chairman of the Metropolitan Cooperative Bank which was liquidated along with Bank of Karad in 1992. Over the last seven years, Vyas has been discharged in most of the scam related cases but his funds remain blocked in Fairgrowth Securities case.
The FIs’ meeting on December 17, 1999 simply glosses over the reasons for the delay in completing the project with passing reference to – disturbances in Assam because of terrorist activities, non-receipt of funds from joint venture partners, blockage of funds in the securities scam and delay in making rights issue of equity shares. But terrorism was a threat and a serious risk factor even as the project was conceived, the rights issue had no takers and that PBSL had no business parking its funds in Fairgrowth.
When PBSL was conceived in 1991, it was a Rs 164 crore project to make partially oriented yarn and polyester filament yarn (15,000 tpa then, which has now been increased to 25,000 tpa) to be set up at Sipajhar in Assam. It was a joint project between Hemant Vyas’s Bombay Silk Mills and the Assam Industrial Development Corporation (AIDC). When FIs met on December 17, 1999 to review the affairs of the company and "grant reliefs", its interest overdues were already Rs 354 crore and outstandings at Rs 313 crore (on September 30, 1999).
Just a year earlier, in September 1998, the FIs had cleared a revision of the project cost to a huge Rs 745 crore (there is no updation of that figure since). They concluded that a deferment of interest of a whopping Rs 389 crore and the sanction of an additional Rs 19.5 crore of funds would do the trick along with a waiver of penal and compound interest until March 1999 and help complete the project. Clearly the main escalation in costs is due to interest and overdues.
The reliefs offered to it include – a waiver of compound interest of Rs 108 crore, conversion of Rs 351 crore of interest overdue and accumulated dividend into Redeemable Cumulative Convertible Preference Shares (RCCPS), regularisation of a further interest overdue of Rs 110 crore accruing until March 2000, conversion of Rs 80 crore of dividend and interest on the RCCPS mentioned above to zero coupon debentures redeemable after April 2002 in 48 instalments, conversion of another Rs 70 crore of simple interest to 15 per cent RCPS, even while dividend on an earlier issue of 14 per cent CCPS issue subscribed to by FIs was only to be paid "when there is adequacy of profits" and simple interest of Rs 187 crore to be deferred at zero rate and repaid in 48 instalments after April 2001. That is not all. Dividend on RCCPs of Rs 28 crore has been reduced 3.5 per cent and various other loans and non-convertible debentures rescheduled to April 2002.
Given that waivers alone run into several hundred crores, it is ironical that a mere Rs 19.55 crore was projected as able to save the project. Even if it is argued that the viability of the project had improved dramatically after the special incentives announced for the North-East, the largesse shown to this project seems excessive. The fact that FIs are dragging their feet makes it clear that they are not very happy at the arm-twisting.
The note does not discuss why the joint venture partner AIDC did not cough up its share of funds and seems no longer in the picture. If such are the incentives and arm-twisting with respect to a relatively unknown company like PBSL, how serious is the Finance Minister when he has us believe that amendments to the debt recovery rules will reduce NPAs. This case suggests that the problem lies elsewhere.
Author’s email: suchetadalal@yahoo.com
