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Research Internship Papers 2001 Centre for Civil Society1

Modern Foods Industries Limited: A Case Study

Nandita Markandan & H B Soumya

A brief historyModern Foods India Limited was set up under the Colombo assistance plan. It waswholly a Central Government owned PSU. Prior to disinvestment the authorisedcapital of the company was Rs. 15.00 crore and the paid up capital was Rs.13.01crore. In its diversification programme, the following operations wereundertaken:- Transfer of the Fruit Juice Bottling plant at Delhi.- Transfer of solvent extraction plant at Ujjain.- Transfer of maize mill at Faridabad.- Launching of '77 Cola, '77 Orange and Lime Lemon Tingles.- Proposal to set up pineapple juice concentrate plant at Silchar.- Fruit and Vegetable pulping plant at Bhagalpur.

However, huge losses were incurred in these activities. The company's earningswere eaten away by these activities. E.g. the plant at Bhagalpur mainly focussed onmango pulping but was located far away from the mango producing orchards. Theexcess expenditure on transporting mangoes to the plant had made the entiresystem unfeasible.

Hence, an exercise for reconstruction of its operations was undertaken, whichconstituted the following:- Shutting down of the solvent plant at Ujjain.- Abandoning of the pineapple juice concentrate plant at Silchar- Reconstruction of the fruit juice bottling plant at Delhi to make Rasika.- Conversion of the maize mill into a roller mill.- Conversion of the plant at Bhagalpur to manufacture energy foods.- Ancilliaration was adopted where the company needed extra capacity to meetmarket demands over and above the production capacity of the company's plants.- Franchising of small-scale industries that put up bakery units under their brandname was adopted, provided a royalty of 1.5% of the turnover was paid

Reason behind privatisation100% disinvestment was recommended by the disinvestment commission, as MFILwas not a core industry. Further, its production facilities were being underutilised.A large labour force, relatively low labour productivity and limited flexibility indecision making were other reasons for concern.

However only 50% 0f the disinvestment was approved by the cabinet in itsmeeting. An inter ministerial group consisting of representatives of theadministrative department, department of public enterprises and department ofeconomic affairs and the chief executive of MFIL was appointed and ANZ

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Grindlays bank was selected as the global advisor.

It was found that 50% disinvestment would not have got an attractive offer.Evaluation of the company at 50% would be substantially lower. Therefore, thegovernment decided disinvestment of 74% of the company.

The reasons for privatisation were as follows:1. Continuing operations under the existing scenario, the costs would have

tremendous costs.2. A Net worth erosion by 20% in a year.3. An investment of Rs. 80 crore in machinery would be required to turn the

company around.4. Management skills would have to be changed which would be very difficult.5. Taxpayer money would be removed from a very volatile business.6. Taxpayers would gain Rs. 109 crore.7. MFIL would not become a BIFR company.

Method of selectionA committee comprising of the following was set up:1. Joint secretary (DEA)2. Joint secretary (DPE)3. Joint secretary (FPI)4. Director (FPI)5. Representative of ANZ6. Representative of AS & FA (FPI) as its chairman

The following accounts were taken into account:1. Assessment report of ANZ2. Valuation report of MFIL by ANZ3. Valuation report of MFIL by independent valuer4. Draft share purchase5. Shareholders agreement6. Performance report by MFIL

Different methods of valuations may be used to value a company at the time ofprivatisation. For MFIL the discounting capital flow method was used. The NetAssets method would not be appropriate in this case as it is used only when theassets of the company are being liquidated.

Method of evaluationThe entire company was valued by ANZ Grindleys (which was the Government'svaluer) at 78.55 crore while HLL's valuer, ICICI investments estimated the same at165.47-15.95 crore (net of external debt). On January 31, 2000, HLL paid Rs. 105.45crore for 74% of the shares along with an agreement to invest a further Rs. 20 crorein MFIL. However, it seems that the only bidder for MFIL was HLL. (Nestleinitially seems to have shown interest, and had even valued MFIL at 65 crore butlater backed out.) MFIL seems to have sold for more than the valuer's price.

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Protection from asset strippingEven though only 26% of the shares would be owned by the Government (74% hasbeen privatised), it would keep the veto power with itself. For any large-scale saleof land or other assets the Government 's approval would still be required. This hasbeen done to prevent asset stripping. If and when the government decided to sellits 26% an agreement was to be worked out whereby no real estate deal could takeplace for a specified period of time.

Share purchase agreementWithin 90 days following 31.01.2000, MFIL had to have its accounts audited for theperiod 1.04.1999- 31.01.2000 by an auditing firm listed on the C & AG's approvalpanel selected jointly by the Government of India and HLL.According to the agreement, if the net working capital on the closing date begreater than the net working capital in the year 1999, then HLL would have to paythe Government of India the difference multiplied by 0.74. If the working capital inthe year 2000 be lesser than that in the year 1999, then the Government of Indiawould pay HLL the difference multiplied by 0.74.

In case of debt amount, if the closing date debt amount be greater than the 1999year's debt amount, then the Government of India would pay HLL the 0.74 timesthe difference and if the closing date debt amount be lesser than the 1999 year debtamount, then HLL would pay the Government of India 0.74 times the difference.

Provisions made for the workersProvisions were made in the share purchase agreement and shareholdersagreement between the government, HLL, and MFIL.

Workers would enjoy protection under the industrial disputes act, 1947.Retrenchment of workers would be according to the provisions of the IndustrialDisputes Act (IDA) 1947, which also includes a clause on the process ofretrenchment in the case of transfer of ownership or management. For this thefollowing would be mandatory: Prior notice Government approval Adequate compensationHowever this clause would apply only during complete transfer of ownership.(The Government has privatised only 74% of MFIL, but has still assured that anyretrenchment will be only under the clauses of the IDA).The Hind Mazdoor Sabha has been handling the case of the workers of MFIL. MrNagpal, the General Secretary verified that not a single worker had beenretrenched by HLL and that they did not have any complaints against HLL tilldate.

HLL's plan for MFIL1. HLL also initiated a scheme for revival of MFIL, which consisting of:2. Using HLL's strengths in wheat procurement etc. to aid MFIL

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3. HLL has also invested Rs. 20 crore in the revival package.4. Using superior marketing techniques5. Improvements in quality and distribution.6. Improvements in communication and treasury

Latest developmentsIn February 2001, HLL was referred to Board of Industrial and FinancialReconstruction (BIFR). This came as a complete surprise as MFIL had nearlydoubled its sales in the period after privatisation. No reasons were given by HLLfor this action. The BIFR also refused to divulge the reasons on grounds ofpreserving confidentiality in this matter.

A Company may be referred to the BIFR under the provisions of the Sick IndustrialCompanies Act (SICA). Clause 22 of this act specifies the conditions under which

legal proceedings, contracts etc. may be suspended.The act states that " the Board may declare with respect to the sick industrialcompany concerned that the operation of all or any of the contracts, assurances ofproperty, agreements, settlements, awards, standing orders or other instruments inforce, to which such sick company is a party or which may be applicable to suchsick industrial company immediately before the date of such order, shall remainsuspended or that all or any of the rights, privileges, obligations and liabilitiesaccruing or arising thereunder before the said date, shall remain suspended or shallbe enforceable with such adoptions and in such a manner as may be specified bythe Board."

In case of a loss of 50% of net worth a company may be referred to the BIFR. TheBIFR has the authority to approve the scheme of revival in case it is put forth. TheBoard has yet to submit its report. In the meantime one can only hypothesise aboutthe reasons for the submission of MFIL to BIFR and their subsequent action on it.

Lack of transparencyOne of the main grievances of the Hind Mazdoor Sabha was the excessive secrecysurrounding this matter both on part of HLL as well as on part of the GovernmentMr. Nagpal, the General Secretary of the HMS said that he had written repeatedly

to the Disinvestment Commission of GOI to request for a copy of the shareholdersagreement but to no avail. The Government has withheld information on the sameand to date do not have a copy of the shareholders agreement. This delay inobtaining the shareholders' agreement reflects the inherent lack of transparency.

With the Government refusing to reveal as much as the shareholders' agreement,speculations about the fate of MFIL continue to spread. The HLL now claims thatthe assets that it received from the Government after the agreement fell short by Rs.30 - 40 crore and hence it desires compensation for this shortfall. Others seem tothink that this allegation is a ploy on the part of HLL to acquire the remaining 26%

of the shares from the Government. Another line of thought is that since HLLmaybe keen on shutting down a few unfeasible plants, but is not authorised to doso, it might be taking shelter under the BIFR umbrella to serve its ends.

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Whatever may be the case, in the end, improper implementation of privatisationseems to be the bane of the idea. Issues of valuation, transparency and workerscauses need to be addressed in a way satisfactory to all parties in the deal.

References

1. Malvika Goel, India Today2. Nagpal, General Secretary, Hind Mazdoor Sabha

Documents

2002 hul