CHAPTER6shodhganga.inflibnet.ac.in/bitstream/10603/16637/13/13_chapter 6.pdf · "Industrial Dispute" means any dispute or difference between ... governed by bipartite/tripartite

CHAPTER6

LABOUR RESTRUCTURING IN INDIA

6.1 Employment Scenario

The total workforce in India, as per NSSO 1997 was around 355 millions, of

which 269 millions was in rural areas and 86 millions was in the urban areas. Total

workforce in the organized sector was 27 millions, of which 20 million was in

Government and 7 million in the Private sector. Total workforce in Central Public

Sector Undertakings (CPSEs) was less than 2 million. Investment supporting

retention of this workforce (as on 31.3.02) was around Rs.3,24,632 crores. Despite

these investments and no privatization until 1999, the number of workers in CPSEs

has been declining. Central Public Sector employment has reduced from 2.3 million

to 1.3 million during the last ten years, without any privatization or strategic

d. . f . d 1 . 114 Th Ismvestments, on account o economic pressures an vo untary retirements . e

growth rate of employment fell from 2.7 per cent a year in 1983-94 to 1.07 per cent a

year in 1994-2000, partly due to a decline in the labour intensity of production and

poor agricultural growth. In the private sector, employment remained around 86.5

lakh during 1998-2002. Increasing competition at home and abroad has forced

Corporate India to rationalize workforce and cut costs. Organised manufacturing

accounts for 1.5% of total employment and 16.5% of the total manufacturing

employment. Organized manufacturing sector employment has not grown at the rate

at which the labour force is growing. Employment elasticity of output has gone

114. Public Enterprise Survey 2001-02

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down from 0.52 during 1983-84 to 1993-94 to 0.16 during 1993-94 to 1999-2000115.

One of the major fears of privatization is the potential loss of present and

future employment. The relative decline of employment in the private sector and the

growth of public service employment in the 1970s and 1980s may have further

strengthened the notion that jobs in the public sector are more secure. Public sector

employment accounts for nearly two-thirds of the 7 per cent formal sector

employment in India, which has virtually stagnated in relative terms over the past two

decades. In the wake of liberalization public sector employment has actually showed

a negative rate of growth. The report of the Fifth Central Pay Commission 116 and

other reports prepared by the Task Forces headed by GeethaKrishnan 117, Rakesh

Mohan118 and Montek Singh Ahluwalia119 on government employment, railways and

employment policy respectively, have pointed out the need to reduce redundant

workforce in government, railways and public sector enterprises. During

disinvestment of public sector units, most private bidders are seeking permission to

reduce workforce. The government is insisting on assurances on job security for one

year from the date of Privatization and on 'liberal' compensation for voluntary/early

retirement, which, in the private sector is not always known to be all that voluntary.

115. The Financial Express, 28.1.04: Employment generation remains a challenge 116. Report of the Fifth Central Pay Commission (1997): Ministry of Finance, Government of

India, New Delhi. 117.Reports of the Expenditure Reforms Commission headed by Shri Geethakrishnan (July 2000-

September 2001)- Ministry of Finance, Government oflndia, New Delhi. 118. Report of the Expert Group on Railways headed by Shri Rakesh Mohan (August 2001)

Planning Commission, New Delhi. 119.Report of the Task Force on Employment Opportunities headed by Shri MSAhluwalia (July

2001)- Planning Commission, New Delhi.

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6.2 Employee Protection

A number of protections are available to the employees under various labour

laws. These labour laws are applicable to the company irrespective of whether it is in

the Public Sector or in the Private Sector. Besides this, employee protection can be

ensured by incorporating suitable clauses in the Shareholders' Agreement

6.2.1 Applicability of Industrial Disputes Act 194i20

The provisions oflndustrial Disputes Act, 1947 are applicable to a company

even after disinvestment. Under the Industrial Disputes Act, "Industrial establishment or

undertaking" has been defined under Section 2(Ka) according to which an "Industrial

establishment or undertaking" means an establishment or undertaking in which any industry

is carried on:

Provided that where several activities are carried on in an establishment or undertaking

and only one or some of such activities is or are an industry or industries, then,-

(a)If any unit of such establishment or undertaking carrying on any activity, being an

industry, is severable from the other unit or units of such establishment or undertaking

such, unit shall be deemed to be a separate industrial establishment or undertaking;

If the predominant activity or each of the predominant activity carried on in

such establishment or undertaking or any unit thereof is an industry and the other activity

or each of the other activities carried on in such establishment or undertaking or unit

thereof is not severable from and is, for the purpose of carrying on, or aiding the carrying

on of, such predominant activity or activities, the entire establishment or undertaking or,

as the case may be, unit thereof shall be deemed to be an industrial establishment or

undertaking.

120. Industrial Disputes Act, 1947- Ministry of Commerce and Industry, Government of India, New Delhi.

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In view of the above definition, the company will remain an industrial establishment

even after the disinvestment and all the provisions of Industrial Disputes Act will

automatically apply to the company. Trade unions may be apprehensive that workers of a

PSU enjoy more protection under the law of the land than those in the private sector. As a

matter of fact, so long a venture is "Industrial establishment", the provisions of Industrial

Disputes Act are applicable to that venture, irrespective of it being in public sector or private

sector.

6.2.2 Provisions governing service conditions

The companies normally have "Certified Standing Orders" for their workmen. The

Standing Orders have been certified under the Industrial Employment (Standing Orders) Act,

1946121. The service conditions of the workmen of the company are normally governed by

the said "Certified Standing Orders". If, after disinvestment, the prospective buyer proposes

to make any change in the service conditions applicable to the workmen, he has to give a

notice in the prescribed manner under Section 9-A of the Industrial Disputes Act. Section 9-

A of the Industrial Disputes Act reads as follows:

Section 9-A

Notice of Change

No employer, who proposes to affect any change in the conditions of service

applicable to any workman in respect of any matter specified in the Fourth Schedule,

shall affect such change-

(a) without giving to the workmen likely to be affected by such change a notice in

the prescribed manner of the nature of change proposed to be affected; or

(b) Within twenty-one days of giving such notice

121. Industrial Employment (Standing Orders) Act, 1946- Ministry of Commerce and Industry, Government of India, New Delhi.

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Provided that no notice shall be required for affecting any such change-

(a) Where the change is affected in pursuance of any settlement or award; or

(b) Where the workmen likely to be affected by the change are persons to whom the

Fundamental and supplementary Rules, Civil Services (Classification, Control

and Appeal) Rules, Civil Service (Temporary Service) Rules, Revised Leave

Rules, Civil Service Regulations, Civilians in Defence Services (Classification,

Control and Appeal) Rules, or the Indian Railway Establishment Code or any

other rules or regulations that may be notified in this behalf by the appropriate

Government in the official Gazette, apply.

The Fourth Schedule as mentioned in the above definition is being reproduced below:

THE FOURTH SCHEDULE

(See Section 9-A)

CONDITION OF SERVICE FOR CHANGE OF WHICH NOTICE IS GIVEN

1. Wages, including the period and mode of payment;

2. Contribution paid, or payable, by the employer to any provident fund or

pension fund or for the benefit or the workmen under any law for the

time being in force;

3. Compensatory and other allowance;

4. Hours of work and rest intervals;

5. Leave with wages and holidays;

6. Starting, alteration or discontinuance of shift working otherwise than in

accordance with standing orders;

7. Classification by grades;

8. Withdrawal of any customary concession or privilege or change in usage;

9. Introduction of new rules of discipline, or alteration in existing rules,

except inn so far as they are provided in standing orders;

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10. Rationalization, standardization or improvement or plant or technique,

which is likely to lead to retrenchment or workmen;

11. Any increase or reduction (other than casual) in the number of persons

employed or to be employed in any occupation or processes or

department of shift (not occasioned by circumstances over which the

employer has no control).

Thus under the provisions of Industrial Disputes Act, 1947, read with the provisions

of Industrial Employment (Standing Orders) Act, 1946, any change in the service conditions

ofthe workmen will be governed by the provisions of the law of the land as applicable in the

company prior to the disinvestment. That is not to say that Certified Standing Orders cannot

be changed even prior to the disinvestment by the company management. But as law

prescribes, a notice has to be given by the management to the workmen, which does not

necessarily mean that just by giving a notice, service conditions may be changed in a manner

detrimental to the interest of the workers. If the workers find that the notice envisages change

in working conditions detrimental to their interests, they can immediately raise an "Industrial

Dispute" before the Appropriate Authorities defined under the Act. The "Industrial Dispute"

has been defined under Section 2K of the Industrial Disputes Act, which reads as follows:

"Industrial Dispute" means any dispute or difference between employers and

employees, or between employers and workmen, or between workmen and workmen, which

is connected with the employment or non-employment or the terms of employment or with

the conditions of labour of any person;"

Chapter II of the Industrial Disputes Act deals with Authorities under the Act and

subsequent chapters lay down procedures etc. with regard to the redressal of Industrial

Disputes. Hence, under the existing provisions of Industrial Disputes Act, 194 7, the interests

of the workmen will remain protected as much as these are protected now under the present

dispensation.

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In an organized sector, the Jssues of job security, wag structure, perks, welfare

facilities, etc. of the workers are governed by bipartite/tripartite agreements. These

agreements are in the nature of "settlement" as defined under Section 2 and as protected

under various provisions of the Act. Even after the disinvestment, the company management

will be required to enter into bipartite/tripartite agreements with the workmen through

Unions, and the terms and conditions in the agreement would be always governed by the

practices and procedures applicable under collective bargaining. It is a fact that any

agreement between two or more parties is based on the principles of mutual consent. Hence,

the consent of the management to better service conditions, etc. would certainly depend on

the achievement of the productivity and production targets by the workers from time to time.

6.2.3 Protection against arbitrary/closure of an undertaking

Regarding protection against arbitrary closure of any establishment of the Company,

it may be mentioned that "closure" of an Industrial Establishment is governed by Section

25(0) of the Industrial Dispute Act. Section 25(0) reads as follows:

(1) Am employer who intends to close down an undertaking of an industrial

establishment to which this chapter applies shall, in the prescribed manner, apply,

for prior permission at least ninety days before the date on which the intended

closure is to become effective, to the appropriate Government, stating clearly the

reasons for the intended closure of the undertaking and a copy of such

applications shall also be served simultaneously on the representatives of the

workmen in the prescribed manner:

Provided that nothing in this sub-section shall apply to an undertaking set up for

the construction of buildings, bridges, roads, canals, dams or for other

construction work.

(2) Where an application for permission has been made under sub-section (1 ), the

appropriate Government, after making such enquiry as it things fit and after

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giving a reasonable opportunity of being heard to the employer, the workmen and

the person interested in such closure may, having regard to the genuineness' and

adequacy ofthe reasons stated by the employer, the interests of the general public

and all other relevant factors, by order and for reasons to be recorded in writing,

grant or refuse to grant such permission and a copy of such other order shall be

communicated to the employer and the workmen.

(3) Where an application has been made under sub-section (1) and the appropriate

Government does not communicate the order granting or refusing to grant

permission to the employer within a period of sixty days from the date on which

such application is made, the permission applied for, shall be deemed to have

been granted on the expiration of the said period of sixty days.

( 4) An order of the appropriate Government granting or refusing to grant permission

shall, subject to the provision of sub-section (5), be final and binding on all the

parties and shall remain in force for one year from the date of such order.

(5) The appropriate Government may, either on its own motion or on the application

made by the employer, or any workman, review its order granting or refusing to

grant permission under sub-section (2) or refer the matter to a Tribunal for

adjudication:

Provided that where a reference has been made to a Tribunal under this sub-section, it

shall pass an award within a period of thirty days from the date of such reference.

(6) Where no application for permission under sub-section (1) is made within a

period specified therein, or where the permission for closure has been refused,

the closure of the undertaking shall be deemed to be illegal from the date of

closure and the workmen shall be entitled to all the benefits under any law for the

time being in force as if undertaking had not been closed down.

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(7) Notwithstanding anything contained in the foregoing provisions of this section,

the appropriate Government may, if it is satisfied that owing to such exceptional

circumstances as accident in the undertaking or death of the employer or the like,

it is necessary so to do, by order, direct that the provisions of sub-section (1)

shall not apply in relation to such undertaking for such period as may be

specified in the order.

(8) Where an undertaking is permitted to be closed down under sub section (2) or

where permission for closure is deemed to be granted under sub-section (3) every

workman who is employed in that undertaking immediately before the date of

application for permission under this section, shall be entitled to receive

compensation which shall be equivalent to fifteen days' average pay for every

completed year of continuous service or any part thereof in excess of six months.

From the above definition, it is clear that the company management before or

after disinvestment is not free to close down any part of the company at their sweet

will. The closure is governed by the law of land and so for the existing provisions of

Industrial Disputes Act are concerned, "genuineness and adequacy of the reasons

stated by the employer" and "the interests of the general public and all other relevant

factors", have to be examined by the appropriate Government and, for doing that the

Government has to give a reasonable opportunity of hearing to the employer and

workmen and the persons interested in such closure. It means that unless and until the

appropriate Government grants permission, the company management will not be

competent to close down any undertaking of the company even after disinvestment.

So there are protections available under the Act against arbitrary closure of any

undertaking of the company after disinvestment.

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At times, some trade unions demand assurances regarding post-disinvestment

peripheral development which are being enjoyed by the villages adjoining the plant.

Contract labourers also demand regularization of their jobs before the disinvestment.

Under the law, no employer can be forced to make investment in peripheral

development. However, as a prudent management practice, bigger companies invest

substantially in the development of the areas around them. It is expected that the

successor management will consider this issue favourably. So far the regularization

of contract labour is concerned, PSE or no PSE, an industrial undertaking in this

regard is governed by the provisions of Contract Labour (Regulation and Prohibition)

Act, 1970 and Rules made there under. Hence, the contract labourers and unions

representing their interest may take recourse to the said Act and Rules after the

disinvestment and may pursue the matter in furtherance of their demand.

Regarding functional Directors, provisions are made in the Share Purchase

Agreement that they shall be deemed to be nominees of the buyer. However, the

buyer has been given an option to remove them. But, in that case, they may be given

a notice of six months or pay in lieu thereof. The Government of India may also take

steps to relocate them in case of Strategic Partner not retaining them. In any case,

functional Directors are contractual appointees and after termination of the contract,

they are entitled to terminal benefits, leave encashment, gratuity etc. as per the rules

of the company.

6.2.4 Provisions in the Shareholders' Agreement

Shareholders' Agreement generally incorporates the concerns of the

Government regarding employee protection. Normally, the following clauses are

kept in the Shareholders' Agreement:

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1. The parties envision that all employees of the company on the date hereof

shall continue in the employment of the company. (If there are surpluses, the

Government tries to give Voluntary Retirement Scheme (VRS)Noluntary

Separation of Service (VSS) before disinvestment).

2. The Company shall not retrench any part of its labour force for a stipulated

period from the closing date other than any dismissal or termination of

employees of the Company from their employment in accordance with the

applicable staff regulations and standing orders of the Company or applicable

Law.

3. Typically the agreements include a recital stating that the strategic partner

recognizes that the Government in relation to its employment policies

follows certain principles for the benefit of the members of the Scheduled

Caste/Scheduled Tribes, Physically Handicapped persons and other socially

disadvantaged sections of the society and that the strategic partner shall use

its best efforts to cause the company to provide adequate job opportunities

for such persons. Further, in the event of any reduction in the strength of the

employees of the company, the strategic partner shall use its efforts to ensure

that the physically handicapped persons are retrenched at the end.

4. Subject to the above Clauses, any restructuring of the labour force of the

Company shall be implemented in the manner recommended by the Board

any in accordance with all applicable laws. The strategic partner in the event

of any reduction of the strength of its employees shall, ensure that the

Company offer its employees an option to voluntarily retire on terms that are

in any manner, less favourable than the voluntary retirement scheme offered

by the Company on the date of the agreement.

Source: Ministry ofDisinvestment (2001): Disinvestment: Policy & Procedures, pages 81-86.

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6.3 Employment Implication of Privatization

The relation between job loss and Privatization is often incidental and not

imperative. The fact is that job loss and jobless growth occur more due to technology

and trade than due to Privatization. In India, even without privatization, employment

situation has been very critical and rather gloomy.

According to Kaur (2002) 122, the Rates of growth of employment in the PSEs,

divested PSEs and non-divested PSEs were 5.15 per cent, 19.16 per cent and 11.3 per

cent respectively for the period 1981 to 1991. The corresponding figures for the post-

reform period (1991-2000) were minus 17.5 per cent, minus 17.8 per cent and minus

17.4 per cent respectively. This implies that the decline in employment in the post-

reform period was almost the same for the three categories. Moreover the share of

. employment in divested PSEs to total PSEs employment remained at 27 per cent in

1991 to 2000 period thus indicating that even though the absolute number of

employees in disinvested PSEs decreased, it may have nothing to do with

disinvestment policy per se. A study on the impact of market structure on

employment Naib (2003) 123 divided the disinvested PSEs till 1999-2000 into two

groups: those which are operating in competitive environment (25 enterprises) and

those which are functioning in monopoly environment (13 enterprises). It was found

that the employment declined in the post-divestiture period for the complete sample

of 38 enterprises, as well as for the enterprises operating in competitive environment.

As post-liberalisation pressure increased on PSEs, a number of them resorted to VRS.

122. Kaur (2002): The Employment Implication of Divestiture: The Indian Experience; Vision, 6(1): 59-72

123. Naib (2003): Partial Divestiture and Performance of Indian Public Sector Enterprises, Economic and Political Weekly, :XXXviii(29): 3088-3093 (19th July)

340


The surprising result was that in monopoly enterprises there was an mcrease m

average employment during this period.

Post-disinvestment employment position in nme disinvested PSEs, 12

dis invested ITDC hotels and a unit of Hotel Corporation of India, shows that from an

initial employee strength of 43,433 at the time of disinvestment, 4390 employees

separation have taken place. Of these, 2996 were on account of VRS and 731 due to

retirement. During the same period, 1050 fresh appointments have also taken place

resulting in a net reduction in work force by 3340, which is around 7.69 per cent of

the employees' strength at the time of disinvestment. In CMC, employment has

increased from 3119 at the time of disinvestment to 3544 due to fresh recruitments.

BALCO with a net reduction of 1425 and Modern Food Industries Ltd. with a net

reduction of 889 account for 69 per cent of the overall net reduction in employment.

Details of pre-and post-disinvestment changes in employment in respect of these

enterprises are given in Annexure 6.1.

These changes have to be viewed in light of the fact that there has been a

uniform decline in employment amongst all SOEs irrespective of whether the same

has been disinvested or not.

6.4 Reasons for Labour Redundancy

Industrial sickness is one of the long-standing reasons for a high level of

labour redundancy in the country. For various reasons, long before the reforms

process, industrial sickness was rapidly growing in India. A contribution reason for

this was the policy restriction which the government placed on the companies in

matters of retrenching surplus labour in the event of restructuring and reorientation of

industrial, or for coping with new technology and changed demand structure. In fact,

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in many instances the government took over sick and overmanned industries in order

to pay the wages of workers from the state exchequer.

In course of time, the financial support to sick industries in these and other

forms like tax concessions and deferments became so many that it was impossible to

ascertain the cost which the nation was bearing for protecting jobs in these sick

industries. To quote an example, the wage costs of sick textile units were 63 per cent

higher than the wage costs of healthy units in this sector during 1970-90 suggesting

an excess labour of 30 to 50 per cent. Likewise, the wage costs of sick engineering

units were 28 per cent higher than the wage costs of healthy units in this sector during

1970-90.

The protection which the private sector guaranteed to its workers during this

period was some kind of a quid pro quo for protection the government afforded to

these industries in the form of quotas, tariff, policy loans, licences, etc. Such an

arrangement had a telling effect of wage productivity ratio, leading to excess holding

of labour in the period that followed.

6.5 Extent of Redundancy

It is true that PSEs are overstaffed. One could, however, differ on the extent

of redundancy. Various methodologies have been adopted for estimating redundancy.

Gupta (1998) 124 mentions some ofthese methodologies. One ofthem is to assume a

124. Gupta, S.P. Dr (1998): The Role of National Renewal Fund in Economic Restructuring pages 183 to 184 in National Renewal Fund- A Look Ahead (ed.) M.L. Nandrajog, ILO, New Delhi.

342


20% level of redundancy in companies for which BIFR had sanctioned rehabilitation

schemes and 100% level of redundancy in companies for which BIFR had ordered to

be wound up. If we adopt this method, then the following results follow:-

Between May 15, 1987 and March 31, 1998, the BIFR received 2145 cases,

including that of 65 Central PSEs and 87 state PSEs. In the process, 12,92,915

workers came within the ambit of the BIFR. The regional distribution of these

workers were as follows: 4,54,625 from the eastern region, 3,13,670 from the western

region, 3,10,394 from the southern and 2,14,226 from the northern.

The average number of workers per sick unit was 602 (on the basis of

12,92,915 employed in 145 companies registered with the BIFR). Out of the 2145

cases, 425 were dismissed as non-maintainable, 491 remained pending for enquiry

under SICA, and 25 were discharged due to their networth becoming positive. The

remaining 1204 companies were ones for whom either schemes were sanctioned or

they just wound up. Again, out of these 1204 sick units, 329 units had rehabilitation

schemes sanctioned during 1.1.95 to 31.3.98. Assuming a 20 per cent downsizing of

workforce in these companies the number of workers requiring measures under VRS

is 20 per cent of329x602, companies, that is 39,612 workers. Out of 1204 sick units,

296 units were wound up. In this case, the number of workers to be covered under

VRS is 100 per cent, namely 296x602 = 1,78,192. Therefore, the total number of

redundant workers in the BIFR sector as per the above estimate is 2, 17,804 workers.

Assuming that 50 per cent of them have made their own arrangements, the

backlog since 1.1.95 is 1,08,900-1,10,000. This may be termed as the supply-side of

labour related aspect of industrial sickness.

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Yet another estimate125 puts redundancy in CPSEs at 18.2 per cent. This

estimate is based on the premise that the employment in the 58 chronically loss

making Central PSEs is redundant. These 58 units accounted for 18.2 per cent of

manpower employed in the Central PSEs (approximately 80-90 lakh workers) in the

year 1988-89.

The International Labour Organisation (ILO) estimated126 labour redundancy

in India as follows:

(1) Central Government 0.610 million.

(2) State Government 1.273 million.

(3) Quasi Government Org. 1.114 million.

(4) Local Bodies 0.414 million

(5) Total redundant workers 4.403 million

ofwhich Public Sector) 3 .411 million

Private Sector) 0.992 million

This estimate treats as redundant that proportion of employment which is in the sick

public and private sector industries. This estimate presumes that the proportion of

redundancy in direct employment of the Central and State Government and Local

bodies is the same as the ratio of employment in sick industries to the total industrial

employment.

Industrial sickness leading to redundancy of labour poses major challenges

to the government in devising schemes that will ameliorate the socio-economic

125. Ibid, page 184 126. Ibid, page 184-185.

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problems of the displaced workers. In the social context, retrenchment poses a

serious threat to the social equilibrium. Discontentment emerging from the

employment scene could threaten the very social fabric of the country. That being the

case, the government is best advised to strengthen the social security system, as also

create adequate retraining facilities for the displaced workers, to ensure their future

redeployment. Retraining of workers is indeed the key to success in industrial

restructuring.

With the onset of globalization, the concept of education for employment has

changed quite significantly. One-time education and one-time employment have

become somewhat archaic. Further, any corporate restructuring will involve

restructuring of labour to reduce costs per unit of output and to increase productivity

and efficiency. Introduction of new technology will involve use of new skills. This

results in the loss of some types of jobs and the creation of some other types of jobs,

mostly requiring knowledge of new processes. Blue collar workers are replaced by

knowledge workers. In the short run, as has already been stated, more jobs are lost

than those created. In the medium and long run, economic growth via improved

technology, better use of resources and capital accumulation, lead to creation of more

jobs. To cope with the fast changing technology base, however, training and

redeployment of the labour force on a continuous basis has become a necessity.

6.6 Retraining

A sample survey127 conducted in 1994 of 1400 NTC workers availing of VRS

showed that only 10 per cent of the workers expressed a need for retraining and

127. ibid, pages 186, 187.

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redeployment, 50 per cent desired to be self-employed; about 40 per cent wished to

retire.

In another instance, a survey of labour status of 817 workers of Gujarat

Textile Corporation (GSTC) mills conducted by the Gandhi Labour Institute in 1994

indicated that 42 per cent of surveyed workers were in self-employment, 22 per cent

in jobs, 21 per cent remained unemployed, and 13 per cent took retirement or were

too ill to work.

The above surveys show a not so high degree of willingness on the part of the

workers to get retrained and pursue jobs thereafter. A high percentage among them

sought self-employment. Perhaps, the root of the problem lay not just in creating

adequate training facilities, but also in providing proper counseling to the displaced

workers on the importance of retraining and redeployment. Counselling thus attains

significant importance in the realm of labour retraining and redeployment schemes

6.7 National Renewal Fund

The concept of National Renewal Fund (NRF) was announced by the Finance

Minister Dr.Manmohan Singh in his budget speech for 1991-92. This was along the

lines of the New Industrial Policy of July 24, 1991, and the envisaged objective was

to protect the interests of the workers likely to be affected by the processes of

technological upgradation and modernization in the Indian industry. The overall aim

of the NRF was to provide a social safety net for labour.

The government had then announced that it "will fully protect the interests of

labour, enhance their welfare and equip them in all respects to deal with the

inevitability of technological change." It further stated that "Government believes that

no small section of society can corner the gains of growth, leaving workers to bear its

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pains. Labour will be made an equal partner in progress and prosperity. Workers'

participation in management will be promoted. Workers' cooperatives will be

encouraged to participate in packages designed to turnaround sick companies.

Intensive training, skill development and upgradation programmes will be

1 h d ,!28 aunc e .

Against this background, the Government formally established the NRF by a

Resolution on February 3, 1992. The objectives of the NRF were envisaged as

follows:

(1) To provide assistance to cover the costs of retraining and redeployment of

employees arising as a result of modernization, technology up gradation and industrial

restructuring;

(2) To provide funds where necessary for compensation of employees affected by

restructuring or closure of industrial units, both in the public and private sectors; and

(3) To provide funds for employment generation schemes both in the organized

and unorganized sectors in order to provide a social safety net for labour needs arising

from the consequence of industrial restructuring.

From the organizations' viewpoint, the Fund was to

(1) Provide insurance against future sickness, caused by upgrading and

modernization;

(2) Bear the costs of retraining, redeployment, and retrenchment in weak units

which can only avoid closure by restructuring; and

128. Budget Speech 1991-92, Ministry of Finance, Government oflndia, New Delhi.

347


(3) Care for near-sick units awaiting overhaul, technically and

administratively.

The NRF was to ensure that the cost of technological changes and

modernization would not excessively burden the workers.

The two constituents of the NRF were the National Renewal Grant Fund

(NRGF) and the Employment Generation Fund (EGF). Details in respect of these are

as follows:-

6.7.1 National Renewal Grant Fund (NRGF)

This deals with the revival or closure of sick units. The funds are disbursed

m the form of grants for funding approved schemes relating to retraining,

redeployment, counseling and placement services of employees affected by

technology upgradation, modernization, restructuring and revival of industrial

undertakings. These funds are also envisaged to be utilized for compensation

payments to employees affected by rationalization in industrial undertakings, etc.

Such payments may be made in the following circumstances:

(1) When industrial undertakings or parts thereof are to be closed as a

consequence ofsickness as recommended by BIFR. These payments may

include the payment of legal dues and those under voluntary retirement

schemes (VRS).

(2) When there is a programme for labour rationalization resulting from

rehabilitation schemes for sic unit as ordered by the BIFR, including VRS.

(3) For VRS in operation in public sector units, not necessarily requiring

BIFR orders.

348


(4) Payment of compensation to workers affected by closure of units already

under liquidation as may be sponsored by state governments in approved

schemes.

The NRGF was also to provide resources for interest subsidies to enable financial

institutions to provide soft loans for funding labour rationalization, if required,

resulting from the industrial restructuring of weak units.

6.7.2 Employment Generation Fund (EGF)

The EGF was to be disbursed in the form of grants for approved employment

generation schemes for both the organized and unorganized sectors. These include:

(1) Special programme designed to regenerate employment opportunities in

areas affected by industrial restructuring.

(2) Employment generation schemes for the unorganized sector in defined

areas.

Both the NRGF and the EGF were to be operational for a period of ten years

from its inception, after which the NRF would be replaced by a self-financing

mechanism. This has been conceptualized as the Insurance Fund for the Employed

(IFE). The IFE corpus would consist of contributions from the employers and

employees, with pay-outs being made in the event of redundancies.

6.8 Shortcomings of NRF

The NRF was being maintained in the public account. Funds placed in the

public account do not lapse at the end of the financial year and the available for use

once Parliamentary sanction has been obtained. The allocations and expenditure

under NRF were as follows:

349


Table 6.1 Financing and Allocation of National Renewal Fund

( Rs. Crores) Year Budget Transfer Actual Expenditure Percentage Reserve

Allocation* to Expenditure* on VRS* Expenditure Builtup* Public on non-VRS Ale*

Col.l Col. Col.3 Col.4 Col5. Col.6 Col.7 1992- 829.66 829.66 688.72 566.72 17.7 140.94 93 1993- 1020.00 700.00 539.23 478.06 11.3 301.71 94 1994- 500.00 100.00 251.90 250.81 0.4 149.81 9 1995- 140.00 140.00 217.00 209.81 3.3 72.81 96 1996- 250.00 150.00 195.63 18.00 3.9 27.18 97 1997- 245.91 306.91 330.45 326.67 1.1 3.64 98 1998- 300.00 278.00 99 Total 2985.57 2226.57 2222.93 2020.07 9.1 Source: Gupta, S.P. Dr (1998): The Role ofNatwnal Renewal Fund m Economic Restructurmg page 196 ( ed.) M.L. Nandrajog, ILO, New Delhi.

Between 1992-93 and 1997-98, the budget allocation for the Fund was

Rs.2985.57 crore of which the amount transferred to the public account was

Rs.2226.57 crore and the actuals spent over this period was Rs.2222.93 crore. Thus,

it is observed, (Col 7. of the table) that, although in the initial two years, the Fund

tried to build up a reserve, by 1997-98 it was almost exhausted. The main reason for

this is that in the first two years of its operation, 82.7 per cent was transferred to the

public account and 66 per cent was actually spent. It is clear that from the third year

itself, the Fund allocation to the NRF came to be neglected. The reserve that was

built up to be order ofRs.301.71 crore in 1993-94, came down to Rs.3.64 crore by the

year 1997-98. In 1998-99, the transfer is around Rs.278 crore which is much less

350


than the annual average of the last six years. This shows that no serious thought had

been given to the real needs of the Fund. Other than the objective of executing a

Voluntary Retirement Scheme (VRS), all other activities of the firms under review

have been completely neglected.

One of the major objectives of the Fund viz. that of promising to provide

funds for employment generation to both the organized and unorganized sectors of

the economy, has not been touched so far. The Fund had spent Rs.2020 crore or

VRS, while only Rs.21 0 crore (1 0 per cent of the Funds actual expenditure) has been

directed for non-VRS activities between 1992-93 and 1997-98. More interesting to

record is that the non-VRS allocation went down from 17 per cent in the first year to

11 per cent in the second year and then came down even to 0.4 per cent in one year.

Thus, it is most unfortunate to see that the key objective, as set out in the NRF

document, viz. to allocate funds for re-training and re-deployment of displaced

labour, has almost been by-passed.

Till 1997-98, a total number of 1,17,339 workers had been covered under

VRS; that means an allocation average ofRs.1,71,293 per worker. This seems to be

too small a sum specially when we notice that 9.50 per cent of the workers who opt

for VRS are below 5 years and need alternate job opportunity after availing of VRS.

However, there has been almost no financial provision in the Fund for their retraining

and redeployment to qualify them for appropriate skill needed in future.

The number of workers covered under the scheme were abysmally small. It is

as small as 6 per cent of the redundant labour force in the organized public sector.

This shows how small the coverage of the NRF is for it to have any visible effect and

351


provide meaningful help in the restructuring process. The money allocated per

worker under VRS in 1992-93 was as small as 1.7lakhs in 1992-93, and though it has

raised to 3.6 lakhs in 1997-98, i.e., a growth of 6.8 per cent in real terms, it is still

very small; when it is known that a major proportion has been appropriated by retired

management staff. Much higher amount will be needed in future to cover the

increasing wages and cost of living. The consumer price index at present has started

increasing by more than 10 per cent per annum, and given the many infrastructure

bottlenecks and slow pace of technology, the price buildup may further aggravate.

This clearly shows that the amount transferred to the public account of Rs.278 crore

in 1998-99 is too small and will cover only around 7722 workers. Of all the workers

covered between 1992-93 and 1997-98 under VRS, nearly 80 per cent are in the

textile, steel, heavy industry and mining sectors. Such workers are hardly 3-6 per cent

of the total estimated number of workers redundant in the public sector129. The

labour force in the 'public sector services' is vastly untouched, though everyone

knows that there is sizeable over-manning in this sector; the same goes for workers in

the various departments of government administration. This shows that the NRF

operations are half hearted measl!res, just scratching the surface of labour problems in

the restructuring process. Trade Unions like INTUC have criticized the NRF for

ignoring the retraining and redeployment of labour. CITU in fact calls it the National

Retrenchment Fund. It has therefore demanded a fund for revival of sick units

instead of paying compensation to the workers who fall victim to the Exit Policy.

129. ibid, pages 199-200.

352


Similarly, AITUC is of the view that the NRF should actually be used to

modernize and revive sick units.

Training in multiple skilling and redeployment are suggested as alternative

means of dealing with the problem of surplus labour. However, HMS maintains that

, multi-skilling may increase the powers of the employees, but at the same time it will

add to their work-load. For this, there should be proper compensation.

The main thrust of the NRF should be on skill upgradation on the lines of

Singapore's Skill Development Fund. This is necessary to ensure that the working

population does not fall into retirement prematurely.

In the normal course, after a worker receives a lump sum payment,

complacency is bound to set in. In other counties like the US, unemployment benefit

is not a lump sum payment, but a payment starting at 50-70 per cent of the last wage

and tapering off gradually in about 2 years.

When the clock ticks on the unemployment benefit, the worker himself makes

serious effort at retraining and looking for a new job. The NRF should, therefore,

finance an unemployment benefit on the pattern of the USA in the public sector,

instead of giving lump sum payment. Fifteen days wages for a service span of say 20

years, would be sufficient to pay a tapering off unemployment benefit for two years.

Many of sick industries in India's public sector have been sick for decades. Most of

the voluntary retirees had 5-l 0 years of service left before they chose to retire. The

legally admissible severance compensations should therefore be considered

reasonable to support a monthly flow of funds for two years to provide subsistence

during the period the worker makes all out efforts for his rehabilitation.

353


The NRF stands to be criticized on the grounds that the state PSEs and private

enterprises still do not figure in its ambit, though industrial sickness and labour

retrenchment in these sectors is of a high order. Unless, all these sectors are viewed

together, an integrated approach to multi-skilling and re-deployment is hard to

evolve.

From 1992-93 till 31.3.2001, when this scheme started, around 55,000

employees were retrained of which around 19,000 were re-deployed. An amount of

Rs.2627.36 crores was incurred under NRF. NRF funds were placed at the disposal of

12 nodal agencies having 66 Employee Assistance Centres scattered all over the

country for providing training. The Scheme was given up as the results of

rehabilitation efforts under NRF had not been very encouraging130.

6.9 Labour Welfare Measure

One important aspect of the Privatization Process now under way in India

relates to the importance given to labour welfare measures. The Government has

realized that the privatization process could not succeed without the willing

cooperation of the labour/employees of enterprises. Hence, the Government has

adopted the strategy of guaranteeing the continuance of labour under the new

management of the privatized enterprise for a period of one year. Shareholder

agreements specifically deal with this aspect. Experience has shown that, in recent

cases ofprivatisation, the new management has retained all the labour/employees

130. Department of Public Enterprises (2004): Information Collected personally

354


and entered into new wage agreements, which have given the employees substantial

increases in pay packets and other perks. It is also noteworthy that a large number of

workers have opted to take advantage of the Voluntary Retirement Scheme, in view

of the handsome compensation package that was on offer.

6.10 Supreme Court decision

The Government's hands were strengthened considerably by the judgement of

the Supreme Court131 n the case ofBALCO. Here, workers went on strike against the

privatisation move for 67 days. The opposition political parties sought to gain a lot of

political mileage by supporting the cause of the trade unions. However, the Supreme

Court ruled that employees did not have the right to choose their employer. Workers,

therefore, could not oppose privatisation moves of the Government. However,

Government was expected to take into consideration, the interests of workers before

deciding to sell an enterprise.

6.11 Voluntary Retirement Scheme

A Voluntary Retirement Scheme (VRS) 132 was announced by the Government

on 5th October, 1988. Enterprises which are financially sound and can sustain the

scheme of VRS on their own surplus resources are allowed to devise and implement

variants of the existing VRS. However the compensation shall not exceed 60 days

salary for each completed year of service or the salary for the number of months

service left, whichever is less.

131. Supreme Court Judgment, lOth December 2001: Balco Employees Union vs. Union of India and others, Transferred Case (Civil) No.8 of2001 with T.C.(C) Nos.9 & 10 of2001 and W.P. ©No. 194 of2001 132. Department of Public Enterprises, Ministry of Heavy Industry and Public Enterprises Government ofindia (2004): Information collected personally.

355


Enterprises that make marginal profits or loss making enterprises may adopt

the revised scheme of VRS which is modeled on the scheme that exists in the State of

Gujarat. Under the scheme, compensation of salary of 35 days for every completed

year of service and 25 days for the balance of service left until superannuation. The

compensation will be subject to a minimum of Rs.25,000 or 250 days salary

whichever is higher. However, this compensation shall not exceed the sum of the

salary that the employee would draw at the level for the balance of the period left

before superannuation. However, it was clarified that salary for purpose of VRS will

consist of basic pay and DA only ; arrears of wages due to revision etc. will not be

included in computing the eligible amount, and payment of bonus should conform to

the provisions in the Bonus Act; Casual Leave may be encashed in proportionate

measure upto the date of VRS.

For sick and unviable units, the (Voluntary Separation Scheme) VSS package

of Department of Heavy Industry will be adopted. As a corollary, the VSS scheme

may be modeled on Gujarat pattern and be made applicable as in above paragraph.

However, employees would have to opt for VSS within three months from the date

of offer failing which they would be eligible only for retrenchment

compensation. Under the scheme, an employee would be entitled to an ex-gratia

payment equivalent to 45 days emoluments (Pay+DA) for each completed year of

service or the monthly emolument at the time of retirement multiplied by the balance

months of service left before the normal date of retirement, whichever is less; and all

those who have completed not less than 30 years of service, will be eligible for a

maximum of sixty months salary/wage as compensation. This will be subject to the

356


amount not exceeding the salary/wage for the balance period of service left (at the

rate of monthly salary/wage at the time of voluntary retirement).

The amount spent on VRS upto 31-2-2002 was Rs 9307 crore and 4.24 lakh

employees were separated under VRS.

6.12 Counselling, Retraining and Redeployment (CRR)

A new scheme133 was introduced by the Government only for rationalized

employees of CPSUs to provide them counseling, retraining and redeployment after

separation on account of VRS/VSS.

6.12.1 Objective of the Scheme

The objective and scope of the scheme is to provide opportunities of

counseling, retraining and redeployment to the rationalized employees of Central

Public Sector Enterprises rendered redundant as a result of modernization, technology

upgradation and manpower restructuring in the Central PSEs. The aim of retraining of

the employees is to reorient them through short duration training programmes to

enable them to adjust to the new environment and adopt new avocations after

separation due to VRS/VSS or retrenchment due to closure of the enterprise. Though

there is no surety that the employees so restructured or retrenched would be provided

with alternative employment, it is nevertheless desirable to reorient such employees

so that they may engage themselves in income generating activities and take

advantage of available opportunities of the self employment. The counseling and

training programmes are planned in order to equip them with skills and orientation to

engage themselves in self employment activities and rejoin the productive process

133. ibid

357


even after their separation from the CPSEs.

6.12.2 Salient Features of the Programme

The programme consists of the following three main elements:-

6.12.2 (i) Counseling

Counseling is the basis pre requisite of the rehabilitation programme of the

displaced employee. The displaced employee needs the physiological counseling to

absorb the trauma of loss of assured livelihood and to face the new challenges both

for himself and for the member of his family who may continue to depend upon him.

He also needs support to plan investment of his compensation amount and other

financial benefit he receives from the CPSU due to his separation, so that his limited

funds are managed prudently and not wasted on immediate consumption of non

productive expenditure. Thirdly, he needs to be made aware of the new environment

of market opportunities so that he may, depending upon his aptitude and expertise,

take up economic activities and continue to be in the production process

6.12.2(ii) Retraining

The objective of such training IS to help the rationalized employees for

rehabilitation. The trainees will be helped to acquire necessary

skills/expertise/orientation to start new avocation and re-enter the productive process

after loss of their jobs. These training programmes are short duration programmes

ranging between one month and two months depending on the trade or activity as

decided.

6.12.2 (iii) Redeployment

It will be the endeavor to redeploy such rationalized employees in the

production process through the counseling and retraining efforts. At the end of the

358


programme, they should be able to engage themselves in alternate vocations of self

employment.

For caring out the CRR activities, initially 17 reputed training agencies were

selected during 2001-2002. Presently, 34 agencies having around 90 employees

assistance centre have been associated with CRR scheme. During 2001-02, 8423

persons were covered under the scheme and during 2002-03, 12066 persons were

covered. For CRR programme, a plan fund of Rs.8 crore was allocated for 2001-02

and this amount has been increased to Rs.1 0 crore each for the year 2002-03 & 2003-

04. as per instant norms, 10% of the total budget allocation is year marked for North

Eastern Region. For the year 2004-05, it is expected that a fund of Rs.30 crores will

be allocated in view of wide spectrum and growing demand of the scheme.

The following five public sector companies, which were privatized in India

during the year 2000-2001, have been selected for detailed study on the social

implications of labour restructuring:

1) Modem Foods Industries (India) Limited (MFIL)

2) Bharat Aluminium Company Limited (BALCO)

3) Paradeep Phosphates Limited (PPL)

4) Videsh Sanchar Nigam Limited (VSNL)

5) Indian Petro Chemicals Limited (IPCL)

Since some time has elapsed since their privatization, and some of them were loss

making and some profit-making prior to privatization, they represent a good sample

of privatized cases for this study.

359


CASE STUDY 1

Modern Foods Industries (India) Limited (MFIL)

Evolution

The company was incorporated on 1st October, 1965 as Modern Bakeries

India Limited (MBIL) with the main objective of popularizing wheat consumption

and to set up model bread production facilities with emphasis on hygiene and

nutrition. It started its commercial production in 1968 with plants at Bombay,

Madras, Ahmedabad, Cochin and Delhi. The company had fourteen units and 22

franchisee outlets spread all across the country. It is one of the largest manufacturing

bread manufacturers in Asia.

In 1979, MBIL started manufacturing non-bakery products with the setting up

of Rolling Flour Mill at Faridabad, Haryana. In 1980, Food Corporation of India

(FCI) handed over the solvent extraction plant at Ujjain and Government of India

(Goi) its Fruit Juice Bottling Plant at Delhi to MBIL. With these diverse operations

under its wings and in order to reflect the changed nature of its operations, the name

of the company was changed as Modern Food Industries (India) Limited (MFIL) in

1982.

2. Performance

In 1985, MFIL set up a Mango Pulping facility at Bhagalpur and a Pineapple

Pulping facility at Silchar. Later in nineties, MFIL started supplying energy foods/

extruded foods/ care foods under the various Social Welfare Programmes of various

State Governments and under the aegis of World Food Programme. It earns over

Rs.50 lakhs annually from its franchisees. It had 2042 permanent employees as on

31st October, 2000 with another 4000 working as casuals or with contractors or

360


franchises. MFIL went through minor restructuring during 1991-94 when its Ujjain

Plant was closed, the Silchar project was abandoned and production of the Rasika

drink was curtailed. The company's case was referred to the Disinvestment

Commission in 1996.

At the time of disinvestment, the following four plants out of 19 were lying

closed:- (a)Bhagalpur (Energy Food) since 1998; (b) Silchar (Fruit Processing)

established in 1991, never started; (c) Ujjain (Solvent Extraction) since 1994; and (d)

Kirtinagar, Delhi since 1999.

Table 6.2 Financial results of MFIL from 1995-96 to 1999-2000

(Rs. in Crores). 1995-96 1996-97 1997-98 1998-99 1999-2000

Sales-Bread 95.0 104.0 103.5 89.0 Energy Food/ Non-Bakery 45.2 62.8 78.0 71.0 Operations Total 140.2 166.8 181.5 160.0 Net Profit/Loss + 11.52(#) +16.45(#) +7.65(#) -7.00 Source: Annual Reports of the company for relevant years. Note:(*) Provisions in the accounts made at the end of the year- Rs.35 Cr. towards

*Old out standings from State Governments *Central Sales Tax claim from Haryana *Gratuity to employees *Arrears of salaries and wages

These provisions were not made in the accounts of earlier years.

#

78.0

71.0

149.0

-48.00(*)

# MFIL was allotted wheat at subsidized rate (from October 1994 up to 31.10.1996 for manufacture of bread and up to 31.10.1997 for manufacture of SNF), which resulted in the growth of sales and profitability. #After withdrawal of the allocation of subsidized wheat, the performance of MFIL started declining

because the higher input prices could not be fully passed on to consumers. #Thus, the performance of the Company during this period of 'subsidized wheat allocation' reflects a

growth in sales and profitability which was in part artificial.

361


At the time of disinvestment, there was a steep decline in bread sales. There

was also a steep decline in profitability due to: i) withdrawal of special wheat subsidy

given to Modern Food Industries (India) Limited; ii) very high overheads of Rs.1.9

per loaf versus industry norm of Rs.0.9 per loaf; and iii) mounting arrears from State

Governments. The quality of bread was deteriorating because of (i) very old plant

and machinery (imported in 1965), needing modernization and urgent repairs; and (ii)

poor safety and hygiene in plants.

3. Disinvestment

In February, 1997 the Disinvestment Commission recommended 1 00%

disinvestment of Government equity in MFIL due to the following reasons:-

1. MFIL is a non-core sector company.

2. Production facilities are being under-utilized.

3. It has a large workforce and relatively low labour productivity m

comparison to its competitors.

4. It has limited flexibility in decision making to respond to market

changes in a highly competitive and low margin bakery industry.

The Government decided initially to disinvest 50% equity in September 1997,

which later on was raised to 74% in December, 1998 in order to realize higher value.

M/s. Hindustan Lever Limited was selected as Strategic Partner on 31st

January, 2000 with 74% equity control and the deal was closed on 31st January 2000.

MFIL was the first PSE owned and managed bythe Government of India to have

been privatized in the real sense. The Government of India sold 74 percent of its

stake in MFIL for Rs.1.05 billion while HLL agreed to invest another Rs.200 million.

The agreement between HLL and the Government of India provided for five directors

362


(including the Chairperson) for HLL and two for the Government of India. HLL can

offer a VRS, but cannot retrench any employee for one year.

4. Post-Disinvestment Scenario

The following data provides a comparative picture of the situation at the time

of disinvestment and one year after disinvestment:

Table 6.3 Modern Food Industries (India) Ltd.

At the time of disinvestment !.Authorized share capital Rs.15 .00 cr. ·Paid up capital Rs.13.01 cr.

Losses 1998-99 Rs.6.87 cr. Losses 1999-2000 Rs.48.23 cr.

*(inclusive of Rs.35 .19 cr. towards provision made for previous years) Number of employees 2000

2.Net worth (and total expected realization) as per DPE Survey 1998-99 Rs.28.51 cr. Value of assets as on 31.3.99 Accounts: Gross Rs.38.76 cr.

Net Rs.18.99 cr. Market value of land and Building as per government Valuer (unrestricted use) Rs.109.00 cr.

3.Valuation of 100% equity by different methods- as Rs.30 cr. to Rs.70 crore done by global advisors.

One year after disinvestment 1. 74% of the shares sold for Rs.105.45 cr. and further Rs.20 cr. invested by HLL in the company. 2.Thus, the government gained by selling Rs.1 000 shares for Rs.11 ,490 i.e. more than II times the face value & 5.24 times the book value. 3.HLL's share value went up from Rs.2138 on 30 Dec. (prior to sale) to Rs.3247 on 25 Feb. (post sale). 4.The employees of a loss incurring company became employees of a fast growing and profit earning HLL. 5. The shareholders agreement envisages:"The parties envision that all employees of the company on the date hereofwill continue in the employment ofthe company." The bakery sales nearly doubled.

Source: Department of Disinvestment, Annual Report 2002 .. 03

4.1 Impact of Disinvestment on Company's Products

Government sold 74% of its stake in Modem Foods Limited on 31 51 January

2000. Before privatization, the company suffered a loss ofRs.48.2 crores, main)y due

to Government dues, non-performing assets and sub-standard performance. The

quality of bread produced in the company's plants were not on par with products of

other local companies.

363


Post Privatisation, sale has increased from Rs 78 crores to Rs.l 02 crores in the

first year and the by nearly 100% in the second year. Availability of bread has

increased considerably.

4.2 Impact of Disinvestment on Workers

Workers have benefited to the extent of Rs.l600 per month per employee. There

has been retrenchment and surplus employees have been given VRS on attractive

terms. The management has allowed 65 days' salary for every year of service for

VRS, instead of 45 days salary allowed under VRS in other Public Sector companies.

This has prompted a large number of employees to take VRS and thus solve the

problem of surplus labour to some extent.

4.3 Impact of Disinvestment on Finances of the Company

A dramatic reduction in losses has already been achieved by the new

management, as will be observed from the following Table:

Sales- Bread Energy Food

Total

Net Profit/Loss

Table 6.4 Performance of MFIL

1998-99 1999-2000

89.0 78.0 71.0 71.0

160.0 149.0

-7.0 -48.0 .. .. Source: Mm1stry ofD1smvestment, Government oflnd1a

(Rs.Cr). 2000-2001

102.0 66.0

168.0

-20.0(*)

(*)Includes Rs.l Crore towards increase in wages for settlement andRs.9 Crores towards repairs & maintenance of plant & equipment,safety/hygiene and market development.

• The decline in sales of Modem Bread, which continued till the

beginning of2000, has been arrested. Weekly sales in December 2000

364


were around 44 lakhs SL, which is a 100 per cent increase over the

sales figure for April 2000.

• As on 31.12.2000, HLL extended secured e;orporate loans to MFIL to

the extent of Rs.l6.5 crore for meeting its requirement of funds for

working capital and capital expenditure.

• HLL has provided a corporate guarantee to MFIL's banker, namely

Punjab National Bank, which has helped the company in getting the

interest rate reduced by 3-4 per cent of its earlier borrowing cost.

• Steps have been taken to improve the quality of the bread, and its

packaging and marketing with trade-promotion activities besides

training the manpower in quality control systems.

4.4 Impact of Disinvestment on Productivity

Since the agreement between Government of India and HLL provided for not

reducing manpower in the first year of privatization, HLL management focused on

improving performance and profits with the existing staff. It did not and could not

outsource bread manufacture as Britannia did and keep the employees idle for a year

as this move would have been met with greater resistance from employees as well as

the government. Also, the move would have had adverse implications for work

culture and profitability. Therefore the company felt that the only option it had in the

immediate short term was to survive through higher productivity and compete with

other low-cost manufacturers in the organized and unorganized sectors. Demand

being a constraint, the management set for itself the target of doubling production.

This was to enable the company to reduce overheads in relative terms and get a

reasonable margin to reduce, if not wipe out the losses, if any.

365


During the first year of its privatization, MFIL achieved its target of doubling

production. The company did not retrench any worker any worker during this period.

Instead, it offered incentives for higher production and productivity.

A comparative picture of MFIL's performance, pre disinvestment and post-

disinvestment is given in Annexure 6.2.

5. Reference to BIFR

As a PSE, MFIL had not made a provisiOn for outstanding recovenes

exceeding five years. Once under HLL's control, the new management of MFIL

made provisions for all outstanding recoveries over three years old in strict

application of accounting principles. Thus prepared, the accounts for the year 1999-

2000, showed an accumulated loss of Rs.3099.97 lakh. With this, company's net

worth of Rs.20 1.45 lakh showed an erosion of more than 50 per cent of its peak net

worth (Rs.176. 79 lakh) during the immediately preceding four financial years. MFIL,

therefore, had to file a report with the BIFR in accordance with the requirements of

the Sick Industrial Companies (Special Provisions) Act, 1985134

6. Employee Issues Some union leaders were apprehensive that even if part of the land belonging

to the company in one of its several production sites in major metropolis was sold, the

management would more than fully recover the money it had paid to the government

as consideration for the acquisition of ownership and control over MFIL.

Just before the company was privatized, the unions were able to persuade the

government to sign as MoU on 21 January 2000 for wage revision for a period of four

134. Sick Industrial Companies Act, 19885- Ministry of Finance, Government of India. New Delhi.

366


years covering the period 1 January 1977 to 31st December 2001. By then,

government policy was to have a 1 0-year wage agreement. Still, the government

yielded to union pressure because it had already decided to hand over majority stake

and management to a private company. The new management led by HLL, however,

did not accept the MoU on wage revision on the grounds that the government had not

approved the same as on the date of transfer of majority stake and management to

HLL. After protracted negotiations, a new wage agreement was signed in July 2001

for a period of two years from 1st February 2000 to 28th February 2001. It was further

agreed that if and when the government endorsed the MoU signed on 21 January

2000, i.e. 10 days before privatization, the company would pay the benefits for the

period 1 January 1997 to 31 January 2000.

A few weeks later, MFIL introduced the VRS. The unions signed an

agreement (Annexure 6.3), but some alleged that such packages usually entail an

element of coercion and are therefore tantamount to retrenchment. Initially, about 60

in the bread unit and 40 in the beverages unit opted for the VRS. Employee strength

which was 2037 at the time of disinvestment in January 2000 has been reduced to

1148. When there were complaints and newspaper reports about the VRS being

compulsory, the managing director of the company said that there was no coercion,

and that workers who felt that they had been coerced into resigning but wanted to

return to work could do so. This option was extended to the bread unit only. When

the workers wanted as assurance that they would· be taken back in the same unit,

location and position, the management observed that transfer was a condition of

service as per the letters of appointment and the MoU with the union. The Managing

367


Director reportedly observed 135 that transfers are not ruled out. "It is embodied in

their appointment letter and the MoU we signed with unions. How can we give it in

writing that they will not be transferred? We cannot have factories where people

don't work or just hang around. Whenever rationalization of workers' strength takes

place, we might have to transfer surplus workers. We are not a charitable

organization."

It may be noted here that the workers and the unions should normally be

happy because HLL is a fast-growing subsidiary of Anglo-Dutch multinational

Uniliver, which has an enviable track record of acquisitions, growth and profits. The

company's track record with Tomeo, Kissan and Kwality has shown that it can turn

around sick companies (HLL has plans to enhance the contribution from foods to

almost 50 per cent of its turnover in 10 years).

Notwithstanding this, the workers were unhappy because they were not

consulted either by the Disinvestment Commission of the Government before it took

the decision about outright sale of majority stake. Their representation to the prime

minister was largely theoretical. When their protests did not meet with any response,

the workers moved the Delhi High Court, but in vain. The workers' and unions signed

a wage agreement which gave them higher wages and benefits. They sought and got

a VRS through an agreement, even though in public some union leaders were critical

about multinationals- including HLL- forcing workers take the VRS.

135. The Times of India, 20th July 2001: Article entitled "Workers who return would not be victimized."

368


Government subsequently sold its remaining 26% stake in MFIL under the

"put" option in November 2002 for Rs.44 crores. With this, MFIL is now a 100%

privately owned and managed company.

7. Conclusions

1. MFIL is destined to grow. It would perhaps be one of the few companies with a

potential for employment growth too in the foreseeable future if both workers and

management realize that they need each other to exploit the opportunities that the

market provides and leverage and synergize the inherent strength of both MFIL and

HLL.

2. MFIL has inherited the very popular brand "Modem Bread" - brand which, at

one time, was synonymous with good quality. With its aggressive production and

marketing skills and additional investment in plant and machinery, MFIL has already

increased production and its products have shown remarkable improvement.

3. Consumers of bread have experienced greater availability and better quality

without any increases in price.

4. Workers, who were surplus, have benefited from increased VRS compensation

payments.

5. Workers, who were retained, have benefited from wage increases and better safety

devices.

6. Government benefited from disinvestment of loss making PSE by garnering

receipts ofRs.l49.45 crores.

Thus, it could be safely concluded that privatization and labour restructuring has

been beneficial for all interested parties.

369


Annexure 6.1 Details of Employment Pattern- Pre- and Post-Disinvestment

PSE Disinvested in Employees at Attrition Fresh Net Present the Time of Recruits Change Position

Disinvestment Retirement VRS Others Total ~

MFIL Jan 2000 2037 79 853 932 43 -889 1148 BALCO Mar 2001 6436 361 1099 159 1619 194 -1425 5011 CMC Oct 2001 3119 11 122 133 558 425 3544 HTL Oct 2001 1138 134 77 211 I -210 928 VSNL Feb 2002 2902 49 85 134 1 -133 2769 IBP Feb 2002 2200 2 2 4 -4 2196 PPL Feb 2002 1149 16 137 22 175 3 -172 977 HZL Apr 2002 8322 8 177 34 219 41 -178 8144 IPCL May 2002 13536 62 79 141 6 -135 13401 ITDC 2001-02 1798 9 730 81 820 178 -642 1156 ( 10 hotels) HCI Apr 2002 796 2 2 25 23 819 (Centaur Mumbai) Total 43433 731 2996 663 4390 1050 -3340 40093

Source: Reply of Minister of Disinvestment to Rajya Sabha Starred Question No.418, 10 April2003 as quoted in Sudhir Naib (2004): Disinvestment in India: Policies, Procedures, Practices, Sage Publications, New Delhi.

370


Annexure 6.2 Position Pre Disinvestment and Post Disinvestment in Modern Foods Limited

Aspect History

Investment I

Production facilities

Technology Sales

Sales outlets

Employee development

Wages

Profit/loss

Pre-disinvestment Established in 1965

No fresh investment for modernization over the past three decades

19 own units and 24 franchisees. Four of these 19 non functional units are closed since 1991.

Poor process and quality control. High operational costs. Plant and machinery 30 years old 1.9 million Slices a week Value of sales Rs.77.9 crore in 1999-00, down from Rs.88.7 crore the previous year. 35,000 outlets in 110 towns with a population of over one million each. Access to 65% of bread consuming population Neglected VRS benefit. Compensation was 45 days per completed year of service

Rs.48.2 crore in 1999-2000

Implications for Net drain due to losses and subsidies government

Implications for workers

Implications for consumers

Post-disinvestment Government sold 74% share to Hindust Lever Limited on 31 January 2000 Bought 74% share with Rs.l25.45 cror Took responsibility for liabilities of Rs.17. crore Getting modernized

Significant improvement m process a quality control. Operational costs in check.

Invested Rs.6 crores on modernization. 4.4 million slices a week. More than doubl< in less than 18 months.

Number of outlets increased to 60,000.

Emphasis on training and involvement i restructuring. VRS introduced at the instanc of unions provides for 65 days compensatio per year of service. Increased by Rs.l600 per month per employe through an agreement in June 2001. Referred to BIFR since net worth was erode at the time of disinvestment, but not reflecte( m accounts at that time due to windov dressing. But expects to make profits in i

couple of years. Reduction in government spending since it i~ no longer required to cover cash losses anc offer subsidies. High morale, pride of being part of a growin~ company. No longer need to be afraid of jot and income security if they continue to b< productive. Assured quality uninterrupted supply nev. variants in products giving more choice.

Source: As quoted m C.S.Venkataratnam and DPA Na~du (2002): (ed). PnvatJzatwn and Labour, pages 125 & 126, South Asia Multi Disciplinary Advisory Team, ILO, New Delhi.

371


Annexure 6.3

Memorandum of Understanding Reached Between the Management of Modern

Food Industries (I) Limited and All India Modern Bakeries Workers Federation

and National Federation of Modern Food Industries Employees Based on

Discussions Held on 15th and 16th June 2001.

1. The Management and the Federations/Workers leaders have been meeting

periodically to review the progress achieved in operations after the Company

became a Joint Venture in February 2000. In the meetings held on 27th April

2001 and 17th May 2001, steps to be taken for achieving further progress, with

special reference to the matters relating to workmen were discussed.

2. It was felt by both parties that there was a need and also a desire to focus on cost

consciousness and cost reduction, keeping in view the viability of the Company.

The Federation and the Management expressed mutual satisfaction of

cooperation and emphasized the need to continue to work closely together for the

revival of the Company.

3. In the discussions, the Federations stated that since 1999 the Company had not

brought out any Voluntary Retirement Scheme for helping those workmen who

are desirous of leaving the Organization. They further stated that there were a

considerable number of workmen who are sick and/or have put in a substantial

number of years of service and are feeling the effects of old age. They therefore

expressed a need for the Management to introduce a reasonably voluntary

Retirement Scheme so that such needy and desirous workmen can honorably and

gracefully leave the Organization and well be able to meet their important social

obligations.

372


4. The Management appreciated the need of the workmen as brought out by the

representatives of the Federations and, in the meeting on May 17, 2001, offered

to bring out a VRS for workmen at closed units, where there is no production for

the past several years, e.g., Bhagalpur, DBU-II, etc. The Federation

leaders/worker leaders present at the meeting, expressed their inability to accept

such a restricted VRS and stated that in line with the views/sentiments of their

members (unions/workmen), the Management should work out a VRS applicable

to all units of MFIL across the country, and only such an all-India VRS would be

acceptable. The Management expressed their reluctance to consider such an all

India VRS, as workers of desired skills and commitment are required to run the

various factories which are in operation, an all-India VRS could lead to shortage

of skilled workers at the various manufacturing locations. However, the meeting

of May 17 concluded by both parties agreeing to meet again, after reviews by

both sides.

5. The next meeting was scheduled on June 15 & 16 and at this meeting, after long

deliberations and discussions, both the Federations and the Management

mutually arrived at the following understanding, today, i.e. l61h June 2001:

(i) That a Voluntary Retirement Scheme as given below in this MOU will

be introduced and made applicable to the workmen of all the factories

and offices as follows

(a) Workmen of already closed units: Bhagalpur DBU-II and

Silchar.

(b) Workmen at all other units/locations who are surplus.

(ii) The scheme will provide for payment of ex-gratia payment equivalent to

emoluments (Pay+DA) for 65 days for each completed year of service of

the monthly emoluments (Pay+DA) at the time of retirement multiplied

373


by the balance months of service left before normal date of retirement

whichever is less. Full details of the Scheme will be notified separately.

(iii) The scheme will be purely voluntary and the workmen can decide based

on their individual need, choice and personal situation apply for the

benefits under the Scheme. Equally the Management will have the right

to accept or reject any request for voluntary retirement/separation

depending on their assessment of the workmen's skill and ability and

whether the worker position is surplus or not. Workmen at closed units

and surplus workmen at other units/locations, who do not desire to avail

of the benefits of the VRS, will be considered for transfer to a suitable

unit depending on their skill and ability, at the discretion of the

Management. Such transfer will be essentially within the zone.

(iv) In units where there are no surplus workmen, if a workman is declared

medically unfit as such by a medical board; or is a habitual absentee ' or

is unable to perform his duties due to ageing, the Management will

consider his application for separation under the VRS Scheme

sympathetically as per rules of the Scheme.

(v) Where an employee is transferred from one unit to another due to his

being surplus, etc., his seniority (in the new location) will be dealt with

as per the rules of the Company and in consultation with General

Secretary of the Federation.

Source: C.S.Venkataratnam & D.P.A. Naidu (2002) (ed.) Privatization and Labour pages 88 to 90,

SAAT, ILO, New Delhi.

374


CASE STUDY2

Bharat Aluminium Co. Ltd. (BALCO)

Evolution

Bharat Aluminium Co. Ltd. (BALCO) was set up in November, 1965 in

collaboration with the former USSR and Hungary at Korba in Madhya Pradesh for

the manufacture and sale of Aluminium metal including wire rods and semi

fabricated products such as Extrusions, Sheets/Coils and Foils. Subsequently, the

company was asked to take over a sick unit in Bidhanbag (West Bengal) in 1984,

which added to the downstream facilities in sheets, foils and alloy rods.

BALCO is now a fully integrated aluminium manufacturing company with its

own captive mines, an alumina refinery an aluminium smelter, a captive power plant,

and down stream fabrication facilities.

The refining capacity of BALCO is 2 lac tonnes per year. It has also set up a

40,000 tonnes hot and cold rolling mill at the plant. It employed around 7134 persons

in March 2000 and its annual wage bill was around Rs.144 crore. It has a fully built

up township spread over 6000 hectares.

The Company was incorporated in November, 1965. The Authorized Capital

as on March 31,2000 was Rs.500 Crores. The Paid-up Capital as on March 31,2000

was Rs.244 Crores. The Government Equity Holding was 100% and the Employee

Strength was 7000 (approx.)

2. Performance

At the time of disinvestment; BALCO was facing constraints such as high

power costs due to old technology & inadequate captive power, high employee costs,

reliance on outsourced bauxite ore, lower operating margins, declining profitability,

375

LABOUR RESTRUCTURJNG IN INDIA

lack of autonomy, inefficient unit at Bidhanbag, declining market share and need for

funds for capital expansion.

2.1 Comparative Costs -1999-2000 On comparison with other aluminium producing companies viz., NALCO and

HINDALCO, it was found that the production cost and employee cost were high,

productivity and profit were very low as the following table shows:

Table 6.5 Comparative Peformance Major Indian Aluminium Manufacturers in 1999-

2000 BALCO

Production (Tonnes) 94,345 Power and fuel cost per tonne (Rs./tonne) 25,386 Production Cost per tonne (Rs ./tonne) 63,204 Employee Cost/Gross Sales 16.6% Earning before interest, Tax And Depreciation/Net Sales 14.0% Total Gross Sales (Rs. Cr.) 897 Profit After Tax 56 Profit After Tax/Gross Sales 6.2% .. . . Source: Mm1stry ofD1smvestment, Policy and Procedures, 2003-04. * excludes extraordinary items

3. Disinvestment Commission's Recommendations

NALCO HINDALCO 212,663 248,930

16,764 13,393

43,294 38,686 7.5% 6.1%

47.0% 46.0% 2,142 2,308

512 635* 23.9% 27.5%

In the year 1997, the Disinvestment Commission advised the Government to

sell 40% of its equity stake in BALCO to a strategic partner and within two years

make a public offer in the domestic market of further shares to institutions, small

investors, and employees thereby bringing down its holding to 26% and and finally

off-load the balance 26% through this route at appropriate time.

In the year 1998, the Chairman, Disinvestment Commission advised that the

Government offer 51% or more to the strategic buyer along with transfer of

376


management, in order to get a better value. This recommendation was accepted by the

Government.

The government thereupon appointed Jardine Fleming as adviser to assist in

the sale of its 51 per cent stake to a strategic buyer. Simultaneously, it was brought to

the attention of the government that BALCO had a bloated equity of Rs.489 crore and

large unutilized free reserves to the tune of Rs.424 crore. The government attempted

financial restructuring by withdrawing about half the cash surplus (Rs.244 crore) and

reduced BALCO's equity by 50 percent prior to disinvestment.

4. Privatization

Government sold 51% of its equity in BALCO to Mls Sterilte Industries Ltd.

for Rs.551.50 crores. This corresponded to Rs.1081.4 crores for 100% equity.

Government had taken out Rs.244 crore of cash surplus from the company last year,

and also Rs.31 crore dividend tax on this transaction. Government of India thus got

Rs.551.5 + 244.0 + 31.0 = Rs.826.5 Cr. from BALCO, by divesting 51% ofits equity.

5. Workers' Agitation

Eight Unions formed a coalition Balco Bachao Sangharsh Samiti and went on

strike a day after privatization. They received widespread support locally and

nationally but not from the workers in the JK Nagar unit in West Bengal. The unions

even refused an invitation to attend the BALCO board meeting to talk things over.

Meetings with the Central Government representative, S Patwa, were fruitless

because the government said that the privatisation decision was irreversible and not

open to negotiation.

377


The BJP-led NDA Government took the decision to privatize BALCO. All

parties opposed to the BJP-led coalition opposed the sale and launched a stir in

Parliament.

The Chief Minister of the state objected to the privatization of BALCO. He

supported the striking workers offer to buy controlling stake in BALCO and even pay

wages to workers during the strike period. He got State Government officials to issue

notices to the Disinvestment Minister and others asking them to appear before a local

court to explain how they could use tribal land in violation of Section 5 (2) of

Schedule V of the Constitution of India. The Central Government dealt with the

matter as a routine legal issue. The Supreme Court intervened and ordered the Chief

Minister to maintain law and order. Neither the Supreme Court nor the Central

Government took the Chief Minister's offer to buy the controlling stake in BALCO

seriously. The state's finances were in bad shape with fiscal deficit crossing Rs.660

crores. The chief minister could not pay wages to striking workers an amount around

Rs.l40 crore per annum not only because the state did not have the means but also

because it did not have the authority to pay wages to workers of a company that it did

not own. The Congress party too advised the Chief Minister to relent. Thereafter the

Chief Minister extended moral support for a while and finally told the workers that

the strike would be declared illegal, ifthey did not call it off immediately.

The Central Government toughened its stand in dealing with the resistance to

BALCO's privatisation because the workers agitation cost the company dearly and

attracted wide and unwanted publicity, adversely impinging on the Central

Government's future privatization agenda.

378


Both State and Central Governments had moved the Supreme Court on the

issue of privatisation. The State Government's contention about the propriety of

handling over the mineral wealth in tribal areas to outsiders may not be correct

because it would mean that the State Government was shunning private investment

in the state (including Essar steel and Daewoo to which its has assigned tribal land in

the part ). The valuation of shares, after a point becomes a more subjective interest

issue than a rights issue, which is best tackled through negotiation rather than

adjudication by the court. In any case, the Government of India followed procedures

and by its own admission and as per its requirement, the relevant documents had been

submitted to the Comptroller an Auditor General oflndia for scrutiny.

5.1 Labour Protection Measures

Regarding employees, the Government's stand is that adequate provisions

have been made in Shareholders' agreement as follows:

Recital H Subject to Clause 7.2, the Parties envision that all employees of the Company on the date hereof shall continue in the employment ofthe Company.

Clause 7.2 (e) Notwithstanding anything to the contrary in this Agreement, it shall not retrench any part of labour force of the Company for a period of one year from the Closing Date other than any dismissal or termination of employees of the Company from their employment in accordance with the applicable staff regulations and standing orders of the Company or applicable laws.

Clause 7.2(f) Notwithstanding anything to the contrary in this Agreement, but subject to sub-clause (e) above, any restructuring of the labour force of the· Company shall be implemented in the manner recommended by the Board and in accordance with all applicable laws.

Clause 7.2(g) Notwithstanding anything to the contrary in this Agreement, but subject to sub-clause (e) above, in the event of any reduction of the strength of the Company's employees, the Strategic Partner (SP) shall ensure that the Company offers its employees, an option to voluntarily retire on terms that are not, in any manner, less favourable than the voluntary retirement scheme offered by the Company which is referred to in Schedule 7.4 of the Share Purchase Agreement.

Recital J The SP recognizes that the Government in relation to its employment policies

379


follows certain principles for the benefit of the members of the SC/ST, physically handicapped persons and other socially disadvantaged categories. The SP shall use its best efforts to cause the Company to provide adequate job opportunities for such persons. Further, in the event of any reduction in the strength of the employees of the Company, the SP shall use its best efforts to ensure that the physically handicapped persons are retrenched at the end.

Source: Ministry of Disinvestment, Policy and Procedures, 2003-04.

6. Supreme Court Decision

Three writ petitions-two in Delhi High Court and one in Chhatisgarh High

Court were filed against disinvestment in BALCO in February, 2001. Since the

issuese involved in all three cases were similar, a transfer petition was filed by the

Ministry of Disinvestment in the Supreme Court. The Supreme Court considered the

petition, stayed the proceedings in the High Courts and transferred all the three

petitions for hearing to itself. A three-judge bench in the Supreme Court heard the

case and concluded 136 as follows:-

"In a democracy, it is the prerogative of each selected Government to follow its own

policy. Often a change in Government may result in the shift in focus or change in economic

policies. Any such change may result in adversely affecting some vested interests. Unless

any illegality is committed in the execution of the policy or the same is contrary to law or

mala fide, a decision bringing about change cannot per se be interfered with by the Court.

Wisdom and advisability of economic policies are ordinarily not amenable to judicial

review unless it can be demonstrated that the policy is contrary to any statutory provision or

the Constitution. In other words, it is not for the Courts to consider relative merits of

different economic policies and consider whether a wiser or better one can be evolved. For

testing the correctness of a policy, the appropriate forum is the Parliament and not the Courts.

Here the policy was tested and the Motion defeated in the Lok Sabha on 1st March 2001.

136. Supreme Court Judgement, lOth December 2001.

380


Thus, apart from the fact that the policy of disinvestment cannot be questioned as

such, the facts herein show that fair, just and equitable procedure has been followed in

carrying out this disinvestment. The allegations of lack of transparency or that the decision

was taken in a hurry or there has been an arbitrary exercise of power is without any basis. It

is a matter of regret that on behalf of State of Chhattisgarh such allegations against the Union

of India have been made without any basis. We strongly deprecate such unfounded

averments, which have been made by an offer of the said State.

The offer of the highest bidder has been accepted. This was more than the reserve

price, which was arrived at by a method, which is well recognized, and, therefore, we have

not examined the details in the matter of arriving at the valuation figure. Moreover, valuation

is question of fact and the Court will not interfere in matters of valuation unless the

methodology adopted is arbitrary {see Duncans Industries Ltd. V s. State of U.P. and Others,

(2ooo) 1 sec 633)} .

The ratio of the decision in Samatha's case (supra) is inapplicable here as the legal

provisions here are different. The land was validly given to BALCO a number of years ago

and today it is not open to the State of Chhattisgarh to take a summersault and challenge the

correctness of it's own action. Furthermore even with the change in management the land

remains with BALCO to whom it had been validly given on lease.

Judicial interference by way of PIL is available if there is injury to public because of

dereliction of Constitutional or statutory obligations on the part of the government. Here it is

not so and in the sphere of economic policy or reform the Court is not the appropriate forum.

Every matter of public interest or curiosity cannot be the subject matter of PIL. Courts are

not intended to any nor should they conduct the administration of the country. Courts will

interfere only if there is a clear violation of Constitutional or statutory provisions or non

compliance by the State with it's Constitutional or statutory duties. None of these

contingencies arise in this present case.

381


In the case of a policy decision on economic matters, the Courts should be very

circumspect in conducting any enquiry or investigation and must be most reluctant to impugn

the judgement of the experts who may have arrived at a conclusion unless the Court is

satisfied that there is illegality in the decision itself.

Lastly, no ex-parte relief by way of injunction or stay especially with respect to

public projects and schemes or economic policies or schemes should be granted. It is only

when the Court is satisfied for good and valid reasons, that there will be irreparable and

irretrievable damage, can an injection be issued after hearing all the parties. Even then the

Petitioner should be put on appropriate terms such as providing an indemnity or an adequate

undertaking to make good the loss or damage in the event the PIL filed is dismissed.

It is in public interest that there should be early disposal of cases. Public interest

Litigation should, therefore, be disposed of at the earliest as any delay will be contrary to

public interest and thus become counter-productive.

For the aforesaid reasons stated in this judgment, we hold that the disinvestment by

the Government in BALCO was not invalid."

This Judgement has set at rest the question whether privatization can be

challenged by workers merely because there is a change of ownership. It also lays

down the principle of non-interference in what is essentially a commercial transaction

between Government and a private firm, on selling equity of a public enterprise,

subject to various checks and balances present in the system of Government ,

Parliament and other Institutions, unless some grave injustice or damage is being

caused by the Government decision.

7. Impact of Disinvestment

7 .1 On Production

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Various efforts have been made to improve productivity viz. total control on

quality of raw material, strict shop floor discipline and stringent house keeping

practices.

Total Bauxite requirement is catered by in house mining. Outside sourcing has

been completely stopped, resulting in saving of Rs 2 crore per year. Mining cost has

been reduced to Rs 75/ton, saving Rs 4.50 crores per year. Power consumption has

been reduced by more than 25%. Entry tax has been reduced by the Chattisgarh

Government from 10% to 1.5%. Central Sales Tax has been reduced from 4% to 2%,

thus increasing ex-factory sales. Balco achieved highest ever production record of

17625 MT during August 2002.

7.2 On Human Resources Development

Workers were apprehensive about the continuance of their jobs and protection

of their pay and privileges under privatized management. At that time of going on

strike, BALCO employed around 6,500 regular employees and about 3,000 contract

workers. Besides, there were thousands of employees of subsidiaries/service

providers who were also going to be affected by privatization process in BALCO.

The economy of Chattisgarh depended on whether BALCO was doing well or not. As

such, stakes in BALCO were very high, even for the State Government and the

people of the region.

The employees' strike in BALCO was utilized by trade unions as a test case

against privatization policy of the Government. Hence, labour leaders from all over

India traveled to Korba (the headquarters of BALCO) to exhort the employees to stay

firm on their resolve to strike. However, an agreement was reached between

383


Government of India, BALCO management and the workers and the strike was called

off after 67 days. A copy of the agreement is placed at Annexure No.6.4

The enthusiasm of the workers to resume work saw the plant being

recommissioned within 15 days, instead of one month, usual in smelter plants.

Interviews held with the workers and management revealed that the strike

meant a loss of Rs.l 00 crores for the company, as well as losses to others whose

livelihood dependent on BALCO, such as ancillary industries, service providers,

tradesmen etc. The general secretary of the BALCO mazdoor unions led the strike,

has stated that the strike was a terrible mistake (Outlook, 25th March 2002). The new

management had assured labour that there would be no retrenchment in the company

and surplus workers would be given VRS on attractive terms. There has been no

retrenchment of workers in the company after disinvestment.

7.3 On Investment

Even before Privatisation, Government had expressed its inability to provide

funds for modernization of the plants. Old technologies had whittled away what was

once a very profitable concern. No funds were also available for expansion of

capacity. The new management is planning a major modernization programme to

increase output to 4 lakh tones a year from the current level of 1.30 lakh tones. Thus,

the investment constraint has been overcome. Efforts to increase sale· in both

domestic and foreign markets are being made.

7.4. On Morale

Post- Privatisation, the employees themselves feel that there is greater

discipline in the company than before-whether it is in wearing uniforms or using

safety devices, improvement in punctuality or increase in workers' productivity. The

384


Managing Director has been found to be in the factory premises very often and this,

in itself, has meant greater discipline among the workers,. Previously, all senior

officers were stationed in Delhi and even the Managing Director used to come to the

factory once in a while and the plant officials did not have the powers to take

decisions. Now the new management has stationed the Managing Director in the

factory itself. Hence, decisions affecting the plant are now being promptly taken on

the spot. Overtime has been stopped and workers are now achieving their targets

within normal working hours. Efficiency is being recognized and rewarded. Working

conditions such as substitution of typewriters with computers has increased

efficiency.

7.5. On Wages

Wage Revision was finalized in August 2001. This was pending since April

1997. This has meant more than 20% increase in emoluments for workers.

7.6 On employee strength

Voluntary Retirement to workmen and female staff of regional office has been

granted. At the time of privatization, BALCO had 6,436 employees. Presently the

strength is around 5000.

7. 7 On Productivity

The Company's 270 Megawatt (MW) captive power plant (4 units of 67.5

MW) which was being managed by nearly 250 National Thermal Power Corporation

(NTPC) employees before privatization is now being operated by 40-odd sterilite

employees; mainly engineers and technicians, while secondary and tertiary jobs have

been outsourced. This shows how productivity of employees have improved after

385


privatization (Business Standard 30.4.2004 titled "Balco power plant runs of fewer

staff)

7. 8 On Future Expansion

The operations of Balco are proposed to be expanded from the current 1 lakh

to 4 lakh tones per annum at an estimated investment ofRs 6000 crores.

8. Conclusions

BALCO's privatization was important because it set at rest, once for all,

several litigations on the policy of disinvestment. It also proved to the public that

Government was serious about implementing the disinvestment policy. Government

also gained through receipts from disinvestment. Workers who were retained by

BALCO management gained substantially through increases in wages etc. Those

who were given VRS are poorly off due to lack of entrepreneurship training or other

suitable counseling. The continued functioning of BALCO has meant a great boost to

the regional and State economy. Thousands of poor people in the region depend

indirectly on BALCO's success. In that sense, the distributional and welfare

objectives of disinvestment have been met.

386


Annexure 6.4

Bharat Aluminium Company Limited

Settlement Memorandum Dated gth May 2001

BALCO Bhachao Sanyukt Abhiyan Simiti wrote a letter to Superintendent of Police

on 5.5.2001 regarding their 25 demands. In view of this letter a meeting was organized on

BALCO Sanyukt Abhiyan Simiti attended this meeting and they discussed all the points in

detail. Hence they agreed on these 25 points on 8.5.001 as per below:

1. To cancel the Share Sale Agreement is not covered m the jurisdiction of

Management.

2. High Level Judicial inquiry regarding disinvestments of BALCO is not covered

in the jurisdiction of Management.

3. We will take back Shri A M Ansari who was terminated during anti-

disinvestment movement and we will also stop disciplinary action against other

workmen, if workmen come on duty on 9th May, 2001 in the first shift.

4. As per order of hon'ble High Court dated 1.5.2000, Management will give two

months pay (take home) as advance to the workmen. Management also accept

continuity of their service to maintain good relation.

5. We will settle Wage Revision within three months which 1s pending smce

1.4.1999.

6. Present service conditions will continue intact and we will not retrench any

workmen.

7. Social Welfare Scheme (i.e., Medical, LTC, Canteen facility, LTE, Housing

facility, etc.) will continue as before.

8. Present Voluntary Retirement Scheme (VRS) (Two months pay of each

completed year) will continue as before and will open this scheme on time to

time. Will offer VRS to employees in July, 2001.

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LABOUR RESTRUCTURlNG IN INDIA

9. The dependents of Employees will get employment as before in case of death of

an employee during his service.

10. We will also give employment to Contract Labour as per present terms and we

will also compliance all rules and regulations of Government of India in this

regard.

11. Workmen/Officers will not be transferred to other units for one year and after

that they will be transferred to other units as per the requirement of the work.

12. The present promotion policy of employees will continue as before as when

required it will improved after discussion with representative union.

13. Employees will be awarded as per company policy.

14. Modernization and expansion is required in Plant. We will prepare a plan to

expand the plant capacity to 2.50 lac tonne per year with three year and required

capital will be arranged on appropriate time.

15. We will continue Bonus Act and Best Performance reward in future.

16. We cannot give government of semi-government status to employees as this is

not comes in the jurisdiction of Management.

17. The proposal to take counter guarantee from Government of India is t of

jurisdiction of Management.

18. We will follow the rules regarding protected employees.

19. Proposal regarding Hazard Allowance (employees working in areas where heat

and dust exist) - we will see this matter at the time of pay revision. Revised

Incentive Scheme was implemented after discussion with recognized Union. We

will review this Scheme on appropriate time.

20. 60 years is a retirement age as per present service condition and it will remain

same in future also.

388


21. We will increase the workmen participation in management through proper

implementation of various committees. We will put up the proposal of

appointment of Workers' Director to Government oflndia.

22. We will allot proper fund for the development of area and to 1mprove the

education facilities in this area ·after seeing the economic condition of the

Company.

23. Company will give proper help for the development of nearby village of

BALCO.

24. Unavailable of proper Bauxite reserves and on the completion of mining lease in

these mines, we are unable to start mining work these. When Government will

give us mining leases we can start these mines. We will also require IBM tore-

survey these mines within a month.

25. It is not possible to take counter guarantees from Central and State Governments.

Above stated settlement will only be effective if the agitating workmen return on duty on

9th May, 2001 in the first shift on their respective assignments and as before they should

work with total sincerity and dedication. Also, these settlements are subject to the

direction of the Hon'ble High Court.

Union has agreed that the workmen will adhere for smooth functioning and attain the

goal of the company. The workmen will attain maximum level of productivity/. They

will maintain discipline and they will contribute to create cordial atmosphere.

Management will not take any vindictive action against the workmen.

Signed on 8th May 2001.

Source: C.S.Venkataratnam and DPA Naidu(200): (ed): Privatization and Labour, pages 97 to 99, SAAT, ILO, New Delhi.

389


1. Evolution

CASE STUDY3

Paradeep Phosphates Limited

Paradeep Phosphates Limited (PPL) was incorporated on 24 December 1981

in Bhubaneswar, Orissa. The company was set up with the objective to develop

additional capacity of phosphatic fertilizer in the country to meet the progressive

increase in demand of phosphatic fertilizers. The company was entrusted with the

task of setting up the Asia's largest DAP (Di-ammonium Phosphate) fertilizer plant

along with the Sulphuric acid plant (SAP), Phosphatic acid plant (PAP) and Captive

Power Plant (CCP). The entire project was its offsite facilities with an annual

capacity of 7,20,000 tonnes. The company's initial paid up capital was Rs.331.65

crores comprising of Rs.214 crore of equity and Rs.117 .65 crore of preference share

capital. It was 100% owned by Gol. Initially, the company was set as a 51:49 joint

venture between the Government of India and Government of Nauru respectively.

However, in June 1993, the Government oflndia acquires the entire shareholding of

its joint venture partner.

2. Capacity Utilization

The DAP plant has an installed capacity of 7.2 lakh tones and was

commissioned before schedule in February 1986. Capacity utilization over the last

decade has been erratic. The primary reason for this drop in capacity utilization was

due to shortfall in supply of raw materials. Import of phosphoric acid was earlier

regulated by the Department of Fertilizers and the coordinating agencies were IFFCO

for phosphoric acid and RCF for ammonia. In late eighties, the task was entrusted to

SIC and MMTC. The phase II plant comprising of SAP and PAP were

390


commissioned in 1990 but suffered technical problems. SAP was finally shutdown

for a whole year in 1993-94, for overhaul, which further aggravated the problem due

to corrosion in plant equipment.

3. Financial Restructuring

In 1992-93, the company's net worth was almost wiped out and PPL was on

the verge of being declared sick. The Government oflndia stepped in with a financial

restructuring package which involved conversion of government loan to equity and

preference shares. Interest and repayment holiday was extended for a period of 3

years. Due to the implementation of Financial Restructuring package, equity share

capital of the company was increased from Rs.l20 crore to Rs.214 crore, and

preference share capital went up to Rs.l17 .65 crore. The accumulated losses of PPL

was at 31st March 1994 come down to Rs.l45.54 crore.

PPL has been a loss making Company and the Balance sheet profits during

1993-94, 1994-95, 1995-96 and 1999-00 are due to waiver of interest on GOI loans

and interest holidays. PPL has not paid interest or principal amount due to

Government on account of Go I loans since inception. The High Court of Orissa, in a

public Interest Litigation, passed orders on 11th January 2002 directed the company to

stop production after 15.2.2002 until the company takes all steps for controlling

pollution as per the directions of the Orissa State Pollution Control Board. There

have been three financial restructuring as under:

391


Table No.6.6 D t "I f F" . l R t t . PPL e a1 so man em es rue urmg m

Date of effect Conversion Write off Waiver Total relif into equity

1st (i)Rs.90 crore Rs.l46.39 ---- Rs.354 Restructuring into equity crores

(ii)Rs.ll7.65 31.3.1994 crore

converted into Preference Capital

2n!l ---- Rs.l29.72 ---- Rs.l29.72 Restructuring crores crores 31.3.2000 3r!l Rs.85 crores ---- ---- Rs.85 crores Restructuring 31.3.2001 Total Rs.568.72

crores ..

Source: Disinvestment CommissiOn, Report No.X, pages 38 to 40 and mformat10n collected personally from PPL.

4. Financial Performance

As a PSE, PPL suffered very poor financial health and had to face many

problems. The Union Government had invested over Rs.600 crores in PPL and the

Company had never made an actual profit during its entire period of existence (since

1983). PPL has steadily losing huge sums of money over the years and it lost as

much as Rs.230 crores in the year 2001-02. The Company owed over Rs.550 crores

to overseas suppliers and its net worth had become zero.

The authorized capital as on 31-3-2001 was Rs.467 .65 crores and the paid up

capital on that date as Rs.432.65 crores. Accumulated losses as on 31st March, 2001

were Rs.431.50 crores. Net worth as on 31 51 March, 2001 was Rs.1.15 crores.

Estimated loss in 2001-02 was expected to be Rs.l20 crores but actual audited figures

turned out to be Rs.220 crores. After financial restructuring, total Government loan

392


due as on 31.3.2001 was Rs.200 crores. Outstanding liability on account of payment

due to OCP of Morocco, GCT of Tunisia and to MMTC was Rs.856.34 crores.

The key financials for the last few years are as follows:

Table 6.7 Financial Performance of PPL from 1997-98 to 2001-02

Year Sales Net profit Dividend Earnings Book value (Rs.crores) (Rs.crores) paid to Gol (Rs.) per per share

share 1997-98 1171.35 (-)105.52 Nil Negative Negative 1998-99 1005.41 (-) 57.95 Nil Negative Negative 1999-00 887.77 23.96 Nil 109.42* Negative 2000-01 703.82 (-)141.03 Nil Ne_gative Negative 2001-02** 797.20 (-)259.43 Nil Negative Negative .. Source: D1smvestment Comm1sswn Report No.X, pages 38-39 and mformatwn collected personally from PPL. Note: (*) on account of financial restructuring

(**)FY ending 30.9.2002 (18 months)

5. Problems at PPL

Some of the major problems included low capacity utilization of plant owing

to irregular supply of raw materials as well as poor maintenance of existing

equipment. The acid plants could not be run to full capacity, resulting in almost total

dependence on costly imported acid. Other problems included frequent break-downs,

resulting in scarcity of spare parts and sub-standard maintenance, mismatch in plant

capacities, excessive manpower leading to industrial relations problems and

disruptions; lack of clear-cut policies and unproductive interference from other

agencies; inter department rivalries and poor team work; poor discipline; abuse of

overtime, low employee morale,; erratic availability of products in marketing areas

leading to marketing problems and financial constraints.


PPL was referred to the Disinvestment Commission in July 1998. The

Disinvestment Commission in its lOth Report (June 1999) had classified PPL as non-

393


core and recommended inter alia for strategic sale of not less than 51%. The Cabinet

Committee on Disinvestment (CCD) on 18.11.2000 decided to disinvest of 74%

equity through strategic sale.

7. Privatization

M/s Tata Chemicals Limited, M/s Zuari Industries Limited, M/s Rashtriya

Chemicals & Fertilizers and M/s Oswal Fertilizers & Chemicals Limited lodged their

Expression of Interest. All the 4 were found qualified to participate. All the 4 parties

completed their due diligence including visits to the Plant. Based on the frozen

transaction documents, technical and financial bids were invited. Two parties

namely, M/s Tata Chemicals Limited and M/s Zuari Industries Limited attended the

bid submission event. M/s Tata Chemicals Limited indicated its decision not to

submit the financial bid. M/s Zuari Industries Limited submitted their financial bid.

The Cabinet Committee on Disinvestment decided to accept the bid of Rs.l51. 70

crores of M/s Zuari Maroc Phosphates Private Limited.

The Government of India divested 74% of its shareholding in favour of M/s

Zuari Maroc Phosphates Private Limited (ZMPPL) on 28th February, 2002.

Shareholders' and Share Purchase Agreements were executed on 28th February, 2002

between the Government of India, Strategic Partner (ZMPPL), the company (PPL),

Zuari Industries Ltd., (Principal) and Maroc Phosphore, S.A. (Principal).

In pursuant to right issue of equity shares of Rs.280 crores, ZMPPL has

subscribed and paid Rs.3570 lakh and 357000 equity shares of Rs.l 000/- each have

been allotted in their favour. Consequently, the shareholding ratio as on 30.9.2002 of

ZMPPL and the Govt. of India is 76:24 respectively. Zuari Maroc Phosphates Private

Limited had to take over a liability of over Rs.l ,000 crores when it acquired PPL.

394


Amount due to M/s OCP and Maroc Phosphore, S.A. Morocco as on 28.2.2002 for

raw material supplies amounting to Rs.303.84 crores has been grouped under

unsecured loan as the payment of this amount is deferred until2004-05. Government

of India have undertaken to settle the dispute with M/s MMTC on account of claims

and counter claims in respect of delayed payment towards supply of raw-materials in

earlier years.

8. Post-Privatization Performance

The turnaround story of PPL after disinvestment on February 28, 2002 can be

truly described as a success story of privatization. In the past one year since the

Company was taken over by Zuari Maroc Phosphates Private Limited, the following

achievements have been made:-

• Sales have almost trebled in 2002-03 from 2001-02 level (from 250,000

tonnes to almost 750,00Q.1Q!lm~~) ------------~-----------

• Production achieved in 2002-03 has been nearly 800,000 tonnes, which is

well over three times the previous year's (200 1-02) level.

• Losses are down from Rs.230 crores in 2001-02 to below Rs.60 crores in

2002-03.

• Production of finished products have increased from 20% of rated capacity in

110% ofrated capacity.

• Production of intermediates such as Sulphuric Acid and Phosphoric Acid

have increased from a mere 5% of rated capacity to over 70% of rated

capacity.

395


• As against only three products manufactured by the Company over the past

20 years, three additional new products were introduced in the market in the

last six months.

• Salaries and wages were increased by 30% because of implementation of

wage revision pending for over five years,

• Perquisites such as leave travel concession, issue of uniforms etc. that were

stopped in the past have been restored.

• Absenteeism is down by 60%.

• Overtime is down from 22% to less than 5%.

• Not a single 'man day' lost due to any industrial action,

• The workers are participating with the management of suggest ways and

means to improve profitability.

Discussions, held with the MD, and his team of officers revealed that drastic

changes in outlook after privatization, proper networking or various inputs and proper

sales strategy has resulted in considerable improvements in production and sale.

In the next two years, PPL proposed to increase DiAmmonium Phosphate (DAP)

installed capacity from its present 720,000 tonnes to over one million tones at its

existing plant through investments to modernize equipment and achieve optimum

capacity utilization. Investments for optimum utilization of the phosphoric acid and

sulphuric acid plants will enable PPL to meet 65% of its demand for phosphoric acid

in-house, thus radically reducing the cost of production. The company is on course to

achieve break-even by the end of financial year 2003-04.

396

LABOUR RESTRUCTURlNG IN INDIA

9. Employee Issues

An employee friendly outlook led to implementation of wage-revision in less

than thirty days after take over as per assurances made at takeover. Wages were

increased by as much as 30% with retrospective effect from 1st January, 1997 adding

Rs.3.5 crore to the annual wage bill. Workers have benefited by Rs.9611- per month

at the minimum and Rs.2234/- per month at the maximum. Executive salaries have

also been revised with effect from 1st January 1997. Substantial arrear payments of

wages totaling Rs.20 crore has also been committed and over Rs.6 crore has been

paid this year (2002-03). Re-deployment of surplus work force, after proper training

in areas such as sales and marketing has also been initiated to open up new

opportunities for employees. Training programmes, such as computer training, have

also been instituted in order to improve employees skills towards multi-tasking.

At the time of Privatization, there were 1150 regular employees and 1600

contract labour in PPL. Thanks to a VRS floated by the new management, a total of

140 regular employees have taken VRS. This includes 54 executives and 86 non

executives (including 2 security guards). The shareholders' agreement provided for

retention of workers for one year after privatization. The new management closed

down the MD's office in Delhi and offered VRS to the staff who were transferred to

other destinations. Worker's wishing to apply for VRS have the following options:

Scheme A:-

(a) A compensation amount consisting of salary for 35 days for every completed

year of service and 25 days for the balance of service left until normal retirement.

The compensation shall be subject to a minimum of Rs.25,000/- or 250 days

salary, whichever is higher.

397


(b) However, this compensation amount shall not exceed the sum of the salary that

the employee would draw at the prevailing level for the balance period of service

left before normal retirement.

(c) The compensation, in no case shall exceed 60(sixty) days for each completed

year of service.

Scheme B:-

(a) A compensation amount equivalent to 45 days salary for each completed year of

service or the monthly salary at the time of Voluntary Retirement multiplied by

the balance months of service left before the normal date of retirement,

whichever is less.

(b) All those who have completed not less than 30 years of service, will be eligible

for a maximum of 60(sixty) months salary/wages as compensation. This will be

subject to the amount not exceeding the salary/wages for the balance period of

service left (at the rate of monthly salary/wages at the time of Voluntary

Retirement).

(c) The compensation, in no case shall exceed 60(sixty) days salary for each

completed year of service.

Further downsizing is expected due to a second round of VRS. At present there 1150

regular employees and 1597 contract labour. According to the management, around

50% of the contract labour is surplus to the retirement. There has been no reduction

in the number of contract labour so far, but the company is confident of reducing their

numbers substantially by holding negotiations.

Discussions held with the trade unions revealed that they were unhappy with

their reduced role in negotiations. The Management strategy of issuing circulars to

announce various welfare measures for employees has cut into the influence of trade

398


unions. Trade unions were also critical of the Management's claim of having revised

wages of labour since, according to them, these decisions were taken earlier but could

not be implemented. They were also critical of new incentive scheme announced by

the Management, since targets were harder to achieve. Workers are being forced to

take VRS by re-deploying them in lesser jobs. Most of those who took VRS are

eking their living precariously. For example, BB Chhetri security guard is selling

vegetables and getting a very small income. His wife had a kidney transplant and he

had seven years more to go when he was forced to take VRS. Manager (HR),

however, clarified that Shri Chhetri was in the habit of submitting false medical bills

and preferred to take VRS when threatened with disciplinary action.

Another case cited by Trade Unions was Samir Jena, electrician. He has lost

his mental balance after taking VRS and he is not employed anywhere. Manager

(HR) clarified that Shri Jena was mentally imbalanced and hence it was better that he

took VRS.

Yet another case cited by Trade Unions was that of K C Kar, who was

employed in Personnel & Administration Branch. He was forced to take VRS,

though he had 15 years of service left and he had small children. Manager (HR)

clarified that Shri Kar was a drug addict.

A couple of technicians who were interviewed appeared to be apprehensive of

Management's motives and fact that however well they performed, they may be sent

home on VRS. However, a couple of contract labour did not find much change in

their working conditions after privatization.

399


10. Impact on Employment

The scope for employment in Paradeep, in particular and in Orissa, in general

appears limited. Hence, apprehension of loss of jobs at the factory is something

which cannot be dismissed lightly. Privatization and consequent labour restructuring

has caused a lot of hardship to workers who have not been able to find alternative

employment. This has caused near starvation for some. Trade unions felt that petty

thefts have increased around Paradeep due to unemployment.

In the immediate future, the outlook for employment in the factory is bleak,

since the new management is intent on downsizing surplus labour. It is expected that

additional investment in the future would increase employment opportunities.

11. Impact on Consumers

Since fertilizers prices are controlled by Government of India and there is a

substantial amount of subsidy on them, privatization and labour restructuring has had

no impact on the consumer.

12. Impact on State of Orissa

Orissa state is backward in agricultural operations. Scope for fertilization

consumption is limited. Additional investments have not fructified, which could lead

to additional demands for raw materials and additional employment. Hence, the State

has not benefited from Privatization so far.

13. Conclusions

Disinvestment in Paradeep Phosphates Limited has been a success story in the

following respects:

(a) Financial Performance.

400


Within one year of operation, the company was able to reduce its losses

substantially, without any additional investment. This shows that ownership

did matter in turning around a loss making company.

(b) Workers received the benefit of long outstanding wage rev1s1on and

arrears of salary

(c) Workers, who have not left the company under VRS, have stood to gain

from better working conditions and better pay packets etc.

(d) The Company's performance is production and sale of fertilizer has been

excellent.

(e) Further investment is bound to take place, leading to increased jobs and

regional development.

Disinvestment has also meant that the workers who left on VRS face a bleak

future, since most of them spent their compensation money on gambling and

on social functions. The Company has not made any arrangements for

retraining VRS optees for alternative employment. Since the region is itself

very backward, the prospects of employment in the region is very bleak

indeed, unless Paradeep Phosphates and other firms in the area implement

rural development schemes.

401


CASE STUDY 4

Videsh Sanchar Nigam Limited (VSNL)

1. Privatisation

VSNL, formerly a government-owned company, was privatized and became a

Tata Group company in February 2002. As one of India's earliest private sector

entrants into telecom services, the Tata Group has a substantial national presence in

basic and cellular services and the Internet business. In a highly competitive telecom

environment, the integrated offerings from VSNL and the Tata Group provide them

with a distinct added advantage across the entire telecom value chain, through the

optimum use of infrastructure, investments and expertise. VSNL's services are now

provided under the Tata Indicom name, an umbrella brand for the Group's various

telecom service offerings.

2. Performance

Discussions held with Shri A.K.Gupta, Vice President (Finance), VSNL,

reveal that privatization and demonopolisation has meant severe competition for the

company, entry is now possible at lower costs and there has been a paradigm shift in

Government policy which has made the task of VSNL more difficult.

The Indian telecom market is now highly competitive, with a large number of

service providers of different kinds, including fixed-line, cellular and wireless-in

local-loop (WLL) providers, operating in different combinations of service segments

such as local, ILD and national long distance (NLD) services. In this complex and

rapidly evolving marketplace, regulatory actions have a crucial impact on the

business and viability of all operators.

402


On January, 2004, the Telecom Regulatory Authority of India (TRAI) decided

to introduce the interconnection usage charge (IUC) regime to govern inter-operator

settlements for calls passed between different networks; it implemented the system

from May 1, 2003. The IUC includes the cost of the origination/termination of a call

and an inbuilt access deficit charge (ADC), which makes up for below-cost monthly

rentals and local call charges for fixed telephones. Currently, the IUC for

International Long Distance(ILD) calls is a high (Rs.5.50 to Rs.6.00) per minute

including an ADC ofRs.5.00 per minute. For National Long Distance( NLD) traffic,

the IUC is Rs.0.50 to Rs.2.00 per minute, depending on the call distance.

These high IUCs have inadvertently encouraged grey market ILD services,

especially in the larger cities. Illegal routing operators offer cheaper services since

they do not pay IUCs; various market estimates put the volumes as much as 30%-

50% share of the incoming long distance traffic into India. These illegitimate

operators take away the business of licensed providers and deprive the government of

income since licence fees are revenue based.

The TRAI is currently reviewing the IUC system. VSNL has suggested to the

TRAI that the ADC should be reviewed yearly and eventually phased out.

Meanwhile, if the ADC must be imposed, it should be based on uniform principles for

ILD and NLD calls and should vary depending on the distance the call travels in

India. Thus, the ADC for ILD traffic could be Rs.3 to Rs.6, similar to the current

ADC for NLD traffic. The ADC in cities should be low enough to ensure that illegal

operators have no advantage.

403


The TRAI also intends to implement carrier selection in the Indian market,

though this move has been delayed. The carrier access code (CAC) regime was

initially to have been implemented in phases for different segments of the long

distance sector, with the final implementation of carrier pre-selection (CPS) by

December, 2003. However, little progress has been made and it is likely that the

deadline for full implementation will have to be extended beyond December 2003,

because of the inadequate network readiness of Bharat Sanchar Nigam Limited

(BSNL)/Mahanagar Telephone Nigam Limited (MTNL). Carrier selection will give

subscribers the option to either pre-select a long distance carrier for all ILD calls, or

choose a provider for each call by dialing a carrier access code before the call. The

customer will then be free to choose a carrier based on competitiveness and quality,

rather than the choice being made by access operators, as is the case currently.

Due to severe competition the company's profits came down from Rs.l4074

crores to Rs.7800 crores. The earning per share has reduced from 49.38 for the year

ended 31-3-2002 to 27.37 for the year ended 31-3-2003 137

3. Meeting Competition To keep VSNL in the forefront of the Indian telecom sector, the Company's

strategy is three-fold. First, given the pressure on its international voice traffic

business, which VSNL will make its best efforts to protect, VSNL will also

endeavour to enhance its other offerings, increasing value to customers through

improved and new services. For example, VSNL has considerably enhanced its

137.VSNL- Annual Report for 202-03

404


corporate offerings, such as through the launch of its IP-based virtual private network

(IP-VPN) services. VSNL also now uses the important emerging Voice over Internet

Protocol (VoiP) technology to handle some international voice traffic. Second,

VSNL has expanded into related businesses, which will de-risk and mcrease

revenues, leverage VSNL's capabilities and infrastructure and capitalize on telecom

sector liberalizations in India and abroad. Accordingly, VSNL entered the Indian

NLD services and Internet telephony markets during 2002-03, and has established

operations in the emerging telecom markets of Nepal and Sri Lanka. Finally, VSNL

is restructuring its operations for improved efficiency, by cutting costs, optimizing

assets, redesigning core business processes, sharpening its customer focus and

strengthening its marketing.

3.1 International Initiatives

VSNL is now globalizing its operations and capitalizing on the liberalization

of emerging telecom markets.

3.2 United Telecom Ltd.

VSNL, MTNL and Telecommunications Consultants India Ltd. (TCIL), have

set up a joint venture named United Telecom Limited (UTL), along with Nepal

Ventures Private Limited (NVPL). While NVPL holds 20% in the consortium, the

other partners hold 26.66% each. UTL will offer CDMA based basic services in

Nepal and is currently setting up a network for 150,000 subscribers in Nepal's top 10

cities. UTL can also operate NLD and ILD services.

3.3 VSNL Lanka Ltd.

InJun 2003, VSNL Lanka Ltd., a wholly owned subsidiary set up by VSNL in

Sri Lanka, received an External Gateway Operator (EGO) licence, since Sri Lanka

405


Telecom's monopoly has ended. The EGO licence, acquired against a licence fee of

US$60,000, allows VSNL to offer ILD voice and data services. The Sri Lankan

market, estimated at 400 million ILD minutes, offers VSNL a promising opportunity

to increase its presence in the sub-continent.

3.4 VSNL America Inc.

In June 2003, VSNL formed VSNL America Inc., a wholly owned subsidiary

in the U.S., to provide IP-VPN solutions. This venture will allow end-to-end

management of VSNL's Internet bandwidth from India all the way to the U.S.,

providing improved service to its Internet, data and IP-VPN customers. This

company would take over Gemplex's assets and set up other subsidiaries as already

discussed. VSNL also has several joint ventures with domestic and foreign partners.

3.5 Business Restructuring and Internallnitiatives 138

The Company is restructuring its business to maximize competitiveness in the

new market environment. VSNL has created three customer- facing divisions

wholesale, corporate and retail - to better serve its major customer segments.

VSNL's other restructuring initiatives are as follows:

3.6 Sales and Marketing

VSNL has significantly increased it sales and marketing effectiveness by

creating dedicated teams of trained people to proactively address the corporate and

retail markets. VSNL now has a three-tier structure; the Company's sales force

138 Annual Report ofVSNL for 2002-03

406


directly handles large corporate accounts; channel partners service small and medium

enterprises; and retail service channels serve retain customers. The Company is also

part of the Tata Indicom Enterprise Business Unit as discussed earlier, for focused

coverage of large corporate accounts.

3.7 TEEM and Quality Initiatives

During the year, VSNL began to implement the Tata Business Excellence

Model (TBEM), which aims at business excellence driven by the use of quality

improvement tools and processes. TBEM lays down best practices for Tata Group

companies focusing on areas like strategy development and deployment, managing

for innovation, planning and processes, customer service and social responsibility.

Over the next few years, VSNL intends to use TBEM as a framework to match

industry and global best-practice benchmarks in these areas.

3.8 Profit Enhancement and Cost Cutting

In September 2002 VSNL embarked on a major cost reduction exercise. The

exercise is part of a broader profit enhancement programme that aims to increase

efficiency and productivity; cut costs; optimize traffic, equipment and infrastructure;

and improve debt recovery and timely collections. The Company is attacking its cost

base, including legacy costs, through a combination of measures.

A major focus area is saving bandwidth charges -which contribute a sizeable

share of VSNL's operating expenses- by maximizing bandwidth capacity utilization

through re-grooming cables, surrendering excess bandwidth and identifying lower-

cost suppliers. VSNL has also instituted a new revenue assurance function to

minimize revenue leakages, in line with industry best practices. Various assets,

notably earth station equipment, are also being redeployed for maximum utilization.

407


3.9 Customer Service

Customer service is a key focus for VSNL. Over the past year, the Company

has put in place a customer service organization with dedicated call centres and back

office infrastructure to support both corporate and retail customers. Apart from

setting up helpdesks at all its branches, in March 2003 VSNL set up a round-the-

clock call centre for the western region, catering to six cities. The Company is

currently setting up call centres for the other three regions of the country. VSNL has

also developed a Customer relationship management system to improve service levels

and has installed backend customer service support teams and processes.

3.10 Infrastructure and Information Technology

Over the years, VSNL has invested in a combination of satellite bandwidth,

submarine cables and microwave systems, which provide seamless, high-quality

connectivity and a strong platform for continued leadership in the field of

international voice and data communications and value added services. VSNL spent

Rs.3.95 billion in 2002-03 on infrastructure including cables, NLD switches, its

optical fibre link and a data centre at Vashi.

The Company is upgrading its information technology (IT) systems with an

emphasis on billing systems and integrated network management systems. During

2002-03, VSNL upgraded business critical applications like wholesale and retail

billing and the billing mediation system to the latest versions with new features, while

other like ILD billing were also upgraded and migrated to state-of-the-art servers.

The Company implemented wholesale (inter-carrier) billing for NLD and improved

service availability and security by relocating all critical IT infrastructure to its data

centre at Vashi. VSNL also began to consolidate its existing dialup Internet billing

408


systems into a single, centralized system, with a similar exercise for internet

messaging systems.

4. Human Resources

Discussion held with Shri RadhaKrishnan Nair, Head (Human Resources),

revealed that VSNL privatization proceeded smoothly since in the run up to

privatization. Regular meetings were held with employees at all regional centres. The

first VRS which was undertaken in 2001 off-loaded 87 people. On March, 31, 2003,

VSNL employed 2,752 people against 2,880 on March 31, 2002. Of these 1,081

(1, 126 last year) were executives and 1,671 (1,754 last year) were non-executives.

The Company had 381 women employees (131 executives and 250 non-executives)

on March 31, 2003 against 400 (134 executives and 266 non-executives) on March

31, 2002.

During the year, the Company stepped up communications with employees

and training activities. A series of programmes called 'Integration Confluence' were

held, involving over 1,000 VSNL employees. Senior executives shared business

information with employees through videoconferences and several town-hall

meetings were held. The Company conducted specialized sales training and

managerial and leadership programmes. About 1,000 executives were trained on a

newly designed performance management system.

VSNL announced a Voluntary Retirement Scheme (VRS) on May 9, 2003.

The scheme was opened on May 15,2003 for employees who were 40 years of age or

about with 10 years of service. Approximately 1,675 employees were eligible, of

which around 1,100 were non-executives. The scheme closed on July 14, 2003 and a

total of 953 employees opted to retire voluntarily, including 246 executives (23% of

409


the executive workforce) and 706 non-executives ( 44% of the non-executive

workforce). VSNL's workforce has consequently fallen to 1,775 employees.

4.1 Salient Features ofVSNL Voluntary Retirement Scheme, 2003

4.1.1 Eligibility:

The Scheme was open for all employees who had attained 40 years of age and had

completed 10 years service in VSNL, on the date of application. Employees were required to

have minimum 3 months service left on the date of application.

4.1.2 Payments

4.1.3 Retirement benefits- Accumulation under Provident Fund, Gratuity were

payable.

4.1.4 Retirement Gifts- As per the length of the service it was given.

4.1.5 Early Bird- Employees applying for the retirement within first 15 days were

entitled for One-month salary (Basic+DA) as early bird.Dislocation allowance -

Expenses for setting at the hometown, any where in India.

4.1.6 Ex gratia Benefit- Employees had the option to opt for any one of the

exgratia benefit under the scheme-

Option 1 -They were entitled for 60 days salary (last drawn Basic+ DA) for

every year of service rendered in VSNL or 100% of future salary, whichever

is less. They were also entitled for Medical Benefit (both Domiciliary and

Hospitalization) as per VSNL Retired Employees Medical Benefit Scheme

Option II: Employees based on their grade and age, were entitled for a

lumpsum payment towards the retirement compensation. At the non

executives level, the payment varied from Rs.3.85 lacs to maximum Rs.11.55

lacs. The maximum payout was at the age of 53 years. At executive level

the payment varied from Rs.9.3lacs to Rs.l6lacs.

410

4.2


4.1.7 Span ofwindow- The scheme was kept open for a period two months from

15th May to 14th July 2003.

4.1.8 The financial implication - Out of approx. 1700 eligible employees, 953

employees (244 executives & 709 non-executive) opted to retire under the scheme.

The total outflow towards VRS compensation was approximately Rs.95 Crores.

Training

Though no formal programme of retraining for

reemployment/entrepreneurship was undertaken by VSNL, financial institutions

including LIC were called upon to counsel VRS optees. There is no data of the extent

of re-employment VRS optees, but it is learnt that out of 200 executives who had

taken VRS, only 5 or 6 have found jobs so far.

4.3 Job Search Assistance

Management had forwarded names of VRS · optees to vanous insurance

companies who were desirous of retraining them. From information available that

appears quite a few of them have selected by private insurance companies. However,

there is no systematic counseling or retraining for life after VRS. The competitive

environment in VRS function is likely to create less and less employment

opportunities that diversification may partly off-set the numbers who have to take

VRS . Discipline has definitely improved in the company - this has been accepted

both by the management and the labour unions.

4.4 Employees' Grievances

Discussions were also held with Employees' Federation. They were critical of

the privatization process which did not take into consideration employees protection

beyond a period of 2 years. The wage agreement which was signed in 1997 expires

in 2007. The retention period during which the privatized company could not

411


retrench any employee to be comes to an end in February 2004. Labour is

apprehensive that VSNL would be drastically reducing numbers through 'forced

VRS'. Many services such as maintenance were being franchised out on contract

basis. Hence, employees were feeling scared that there days were numbered in the

company. Government did not call for any negotiations with the union before

privatization. Chairman Telecom Commission agreed to meet employees unions on

their initiative. Secretary Disinvestment also attended this meeting. However, all the

assurances were held out by the Government were not fulfilled.

Government initially considering a 3 years retention period but actually

agreed for one year and Tata' s agreed for one year more. Employees share have not

been given to the desired extent. Employees were apprehensive that when. the

remaining 26 per cent of the shares are off-loaded there will be no body to protect

their interest. Employees' Federation felt that workers are being coerced into taking

VRS.

5. Conclusions

From the above analysis, we can reach the following conclusions:-

!. VSNL was privatized when it was going to become a competitive industry.

Hence, the company had to face a number of problems of adjusting to

competition.

2. VSNL had extensive discussions with employees in the run up to privatization

and also subsequently when VRS was being launched.

3. VSNL, therefore, tried to prepare its employees for privatization and

competition.

412


4. Though Competition and VRS has resulted in many workers having to opt for

VRS, those remaining are receiving higher pay packets and better working

conditions.

5. VSNL privatization is an example of how the rules of the game should not be

changed after government sells its equity. In this case, the rules of competition

appear to have been against the incumbent VSNL.

6. Government appears to have done well in privatizing this entity before

competition was introduced; hence cutting its losses.

7. Greater investment by the purchaser would be required to enable VSNL to

diversify into other areas, where competition would not be so fierce.

413


CASE STUDY 5

Indian PetroChemicals Limited

1. Introduction

Indian Petrochemicals Corporation Limited (IPCL) is the pioneering

petrochemical company in India. Established in 1969, IPCL today is one of the top

ranking petrochemical companies of the world. Its business comprises of polymers,

synthetic fibres, fibre intermediate, surfactants, industrial chemicals, catalysts,

absorbents. Backed by strong R&D and product Application Centres, the company is

continuously upgrading its processes and products. The company owns and operates

three petrochemicals complexes, a naphtha based complex at Vadodara, a gas based

complex at Nagothane and a new gas based petrochemical and chlor-alkali complex

at Dahej in Gujarat. The company also owns a catalyst manufacturing unit at Thane.

2. Resources

IPCL's authorized capital as on 31st March, 2001 stood at Rs.500 crore. The

total resources of the undertaking as on 31st March, 2001 stood as under:-

Source of fund Amount (Rs. in Crore)

Share Capital 249 (Includes Government of India share ofRsl48.8 crores) Reserves and Surplus (Net of Misc. Expenditure) 2946 NetWorth 3195 Loan fund Secured loan Unsecured Loan

Total Resources

414

994 3282 4276 7471


3. Business Analysis

3.1 Main Products IPCL is predominantly a polymer company. It also produces fibre and fibre

intermediaries and industrial chemicals. IPCL's main products are as under:

IPCL' d t s mam pro uc s Polymers Fibre and Fibre Chemicals

intermediaries Low Density Polyethlene Acrylic Fiber (AF), Linear Alkyl Benzene (LDPE) (LAB). Linear Low Density Paraxylene (PX), Polyethylene (LLDPE) High Density DiMethyl Orthoxylene Polyethylene (HDPE) Poly Vinyl Chloride Terepathalate (DMT), (PVC) Polypropylene (PP) Ethylene Oxide (EO), Poly Butadiene Rubber Mono-Ethylene Glycol -(PBR) (MEG)

. . Source: D1smvestment CommisSion, Report No. VIII, March 1998 .

3.2 Existing facilities and projects.

The following Table gives the details of the installed capacities for various products,plant-wise :

Table No.6.8 Existing plants- Installed Capacity

Plant Baroda (in MT) Nagothane (In Gandhar (In MT) MT)

Orthoxylene 45400 DMT 30000 Ehtylene 130000 400000 300000 Benzene 32600 Butadiene 36000 . LDPE 80000 LLDPE/HDPE 220000 160000 pp 105000 60000 PPCP* 25000 PBR 50000 EG/EO 8600/10000 50000/5000 1 00000/1 0000 ACN** 30000 AF 12000 DSAF*** 12000

415


ACR/\ 10000 PVC 55000 150000 PR# 5000 LAB 43500 8 Wire & Cable 12500 Butene 15000 Caustic Soda 133000

.. Source : Mm1stry of chemicals and Petro-chemicals, Performance Budget 2002-2003 Note: * Polypropylene Co-Polymer** Acrylonitrile***Dry Spun Acrylic Fibre AAcrylates #Petroleum Resin.

According to the Ministry of Chemicals, Government of India performance

budget 2002-03, the following are the achievements of the various plants ofiPCL :-

3.3 Performance of Baroda Complex

Baroda Complex performed exceptionally well during the fiscal year of 2000-

01, chalking up a production of 3.96 lakh metric tones (MOU products). The overall

capacity utilizationof the Complex including the recently commissioned

Polypropylene Rubber plants was around 99 per cent. The PP, PBR, LAB, AF plants

of the Complex recorded the highest ever production exceeding targets. During the

fiscal year 2001-02 the production of the major products was 3. 80 lakh metric tones

of MOU products at 100% capacity utilization, while the production of major

products for 2002-03 was estimated to be 3.81 lakh metric tones.

3.4 Performance of Nagothane Complex

The Nagathane Complex is contemporary in technology, economics of scales

and quality of product. In 2000-01, the complex recorded a production of 4.45 lakh

metric tones of major saleable products at 104% capacity. The Gas Cracker plant

produced over 3.8 lakh metric tones of ethylene.

416


The production of the major products of the complex for the year 2001-02 is

estimated to be 4.32 lakh metric tones at 101% capacity utilization and the production

for 2002-03 fir the estimated to be 4.35 lakh metric tones.

3.5 Performance ofGandhar Complex

IPCL's third gas-based petrochemicals complex has been set up at Dahej near

Bharuch. This Complex has substantially strengthened IPCL's base in petrochemicals

in India.

The Complex produced 4.98 lakh metric tones at a capacity utilization of 92%

in the year 2000-01. the production of the major saleable products of the complex for

the year 2001-02 and 2002-03 is estimated at 5.30 lakh metric tones and 5.3 5 lakh

metric tones.

3.6 PRODUCTION Table No.6.9

Product-wise/ Plant-wise from 2000-01 to 2002-03

(In metric Tonnes) z 2000-01 2001-02 2002-03 Reason

8 for >-l > en " ~ >-l > en > en

" "' = varianc el " £:.§ '0 "' el " 2:;.§ a. £:~ 0 2 "' or 2 ...., OQ gr 9. OQ g· ~. " ~· ~. e w.r.t. " 5' ~ E. " - ~ E. .., ..... CD .;:;· .,. "' "' ~~ -<'o.. ~~ ~~ targets' '0 s ~ g "' - " 00-01 0 '

p.. qg_

Baroda

LOPE 80000 80000 84125 105 80000 78000 78000 98 80000 100 PPCP 25000 26000 32282 129 25000 32000 32000 128 28000 112 PP 75000 75000 86125 115 75000 81835 81835 109 80000 107 PVC 55000 55000 50843 92 55000 52000 52000 95 55000 100 Over-

PBR 20000 20000 20235 101 20000 20000 20000 100 20000 100 all

PBRII 30000 25000 20825 69 30000 25000 25000 83 25000 83 Vari-

AF 12000 12000 12807 107 12000 12000 12000 100 12000 100 ance

DSAF 12000 11000 8412 70 12000 695 695 6 10000 83 Posit-

MEG 8600 8600 7977 93 8600 8600 8600 100 7800 91 ive

LAB 43500 47000 53426 123 43500 52000 52000 120 46000 106 EO 10000 10000 9029 90 10000 9000 9000 90 9000 90 ACR 10000 9000 9672 97 10000 9000 9000 90 9000 90 Total 381100 378600 395758 104 381100 380130 380130 100% 381800 100%

417


z 2000-01 2001-02 2002-03 Reason

8 " - Target Actual en () - Target Actual en :> en s for "' "' ., "' Cll '0 "' E:-d '0 V> =::~ "' :!.§ vam.

0 "' or ., or c . ...., () - §.D. () - ~· ~. " ~· ~. w.r.t. ::=.: 'j""" -· ~ -o· '1j ' Cll ~q -<':a. ~~

., ~q targets' j)) '<a.

" ;:!. a. 00-01

Nago-thane LOPE 80000 86000 99844 125 80000 90000 90000 113 90000 113 Over-pp 60000 67000 68737 115 60000 67000 67000 112 70000 117 all

LLDIHD 220000 220000 219228 100 220000 220000 220000 100 220000 100 Vari-

W&C 12500 12500 3520 28 0 0 0 0 0 0 ance

EO 5000 4500 4513 90 5000 5000 5000 100 5000 100 Posit-

MEG 50000 44000 49310 98 50000 50000 50000 100 50000 100 ive

Total 427500 434000 444852 104 427500 432000 432000 101 435000 102 Gandha Adve-r rse PVC 150000 160000 155850 104 150000 160000 107 160000 107 Vari-HOPE 160000 140000 99249 62 160000 140000 88 145000 91 ance

MEG 100000 90000 99256 99 100000 100000 100 100000 100 due to

Caustic 133000 125000 143204 108 133000 130000 98 130000 98 raw mate-rial const-raint

Total 543000 515000 497559 92 543000 530000 530000 98 535000 99 Source: Performance Budget 2002-03, Mm1stry of Chem1cals and Petrochemicals.

4. Capital Structure

Prior to January 1992, the entire share capital ofiPCL was held by

Government. The capital structure of the company underwent change in the past five

years as under:

Table 6.10

Disinvestment and IPO details Period Disinvestment I IPO Gol Holding January, 1992 Disinvestment of 20% 80% November, 1992 Initial Public Offering 74.86% July, 1994 Conversion of Rights PCDs 64.12%

(not subscribed by Goi) December, 1994 Issue of GDRs 59.96% FY97 Issue of Convertible Bonds 51.2%

Source: Disinvestment Commission Report VII, March 1998.

The equity share capital of IPCL in March 1998 was Rs.249 crores and the

shares ofiPCL were listed in all major stock exchange. The shareholding pattern in

March 1998 was as under:

418


Table 6.11

Sh h ld' P tt are o mg a ern Name of the share holder o;o

holding Government of India 59.96 Fis I Corporate bodies 21.43 GDR holders ( Custodian- Citibank) 7.12 Employees 0.50 Gandhar Villages 0.07 Others including Resident individuals 10.92 Total 100.00 ..

Source: D1smvestment Comm1ss1on Report VII, March 1998.


The company was referred to the Disinvestment Commission by the

Government in 1977. The Disinvestment Commission, recommended 139 that

Government, while retaining 26% equity, should sell 25% to a strategic buyer with

transfer of management control on the basis of global competitive bids. The

Commission emphasized that care should be taken to ensure that the strategic sale

does not lead to market dominance by any single player. However, Government of

India permitted M/s Reliance Petrochemicals, who was a monopoly player in the

market, to bid during the strategic sale.

6. Privatization

In June, 2002, Reliance Petroinvestments Limited (RPIL), a member of the Reliance

group, entered into a Shareholders' Agreement with the Government of India (GOI)

and acquired from GOI a part of its shareholding in IPCL, constituting 6.5 crore

139. Disinvestment Commission Report No.VII, March 1998, pages 37-46.

419


shares, representing 26% of the total voting capital of IPCL, at a price of Rs 231 per

share by payment in cash. Pursuant to the acquisition of the above shares by RPIL,

the GOI's shareholding in IPCL stood reduced to 8.43 crore equity shares,

representing 33.95% ofiPCL's total voting capital.

Upon substantial acquisition of shares and change in control/management of

IPCL, and in accordance with Regulations 10 and 12 of the Securities and Exchange

Board of India (Substantial Acquisition of Shares and Takeover) Regulation, 1997

and subsequent amendments thereof, RPIL made an open offer to the shareholders of

IPCL and acquired 4. 96 crore shares, representing 20% of the total voting capital, at a

price of Rs.231 per share. RPIL thereby increased its equity stake in the Company to

46%.

7. Post Disinvestment Performance

The benefits of change in management control are visible from Company's

performance in the very first year after the acquisition.

• During the year under review, IPCL's three manufacturing sites, namely,

Vadodara Complex, Gandhar Complex and Nagothane Complex have

recorded 14%, 29% and 9% increase in production respectively over the

previous year, resulting in overall production growth of 18%.

• IPCL's Gross Turnover (Turnover and Inter Divisional Transfers) for the year

ended March 31, 2003 increased to Rs.9,921 crore (US$ 2,089 million),

against Rs.8,524 crore for the previous year.

• Domestic sales accounted for 95% of Gross Turnover.

420


• Exports for the year were Rs.424 crore (US$ 89 million) as against Rs.184

crore for the previous year, an increase of 130%.

• IPCL' s operating profit, before other income, increased to Rs.1 ,03 8 crore

(US$ 219 million) during the year, compared to Rs. 7 42 crore during the

prev10us year.

• IPCL's operating margin for the year improved to 10.5% against 8.7% for the

previous year, as a result of:

(a) Higher volumes

(b) Higher product selling prices and

(c) Continued focus on cost, productivity and efficiency.

8. Business Review

The Annual Report for 2003-04 ofiPCL gives the following prospects product-wise:

8.1 Polymers (PE, PVC, PP and PER)

Overall consumption of polymers decreased 5% during the year compared to

growth of 19% during the last year. All the polymer products registered negative

growth in consumption - PE growth was negative 2%, PVC growth was negative 8%

while PP growth was negative 6%. PE production increased 8% and capacity

utilization was 1 00%. PP production registered a growth of 6% and capacity

utilization was over 124%. PVC capacity utilization was over 109%. For the first

time, PBR production has exceeded the plant capacity following increased

availability of C4 supplies. Upswing in prices of Butadiene and PBR in the

international markets and natural rubber in the domestic market, coupled with a

recovery in the domestic automobile sector resulted in higher sales during the year.

421


(Production m KT)

2002-03 2001-02

Polymers 1018 961

The Company developed and introduced new polymer grades resulting in

increased market acceptance. New grades introduced in the market this year and their

end-use application is given below.

Polymer LLDPE pp

PVC

Grade LL20FW010 AM1250N AM1080N AE1250N 57GER068

Sector Film Moulding Moulding Extrusion Calendering

Besides, higher quality standards were also achieved in several other grades in

line with customer requirements. Packaging of LLD/HD was changed to raffia bags

resulting in cost savings and reduction of wastage.

8.2 Cracker Products

IPCL operates one Naphtha based Cracker at its complex at Vadodara and two

gas based Crackers one each at Dahej - Gujarat and Nagothane - Maharashtra.

During the year, Cracker products registered a growth of 19% in production.

Cracker Products 2002-03

1122

(Production m KT)

2001-02 943

Production of Ethylene and Propylene was captively consumed to the extent

of 99%, captive consumption of Benzene was 53% while Butadiene was entirely used

for captive consumption.

422


8.3 Chemicals (Caustic Soda, LAB, EO and ACR)

EO registered a production growth of 43% due to increased availability from

Gandhar. Acrylates registered a production growth of 10%. Conscious attempts were

made to reduce costs and achieve operational efficiencies in most of the Chemical

plants. Products like CBFS and Mixed Oil were consumed in-house replacing costly

fuel.

Chemicals 2002-03

223

8.4 Fibre and Fibre Intermediates (MEG, AF, CAN)

(Production m KT)

2001-02 214

MEG registered a production growth of 8%. Acrylic Fibre production was enhanced

after reviving production of Dry Spun Acrylic Fibre Plant. Acrylic Fibre production

registered a growth of 66% over last year. The year 2002-03 saw a significant jump in

DEG production as a result of the strategy to convert PEG into DEG and maximize

value.

Fibre and Fibre Intermediates

9. Liquidity

2002-03 243

(Production m KT)

2001-02 208

IPCL shares are actively traded on the Indian Stock Exchanges. The highest

trading activity is witnessed on the National Stock Exchange and The Stock

Exchange, Mumbai. Relevant data for the average daily turnover for the financial

year 2002-03 is given below:

423


Table 6.12

Average Daily Turnover ofiPCL shares for 2002-03.

No. of Shares (in lakhs) Value (Rs. In crore) Value (in million US$) Source: IPCL- Information collected personally

BSE

6.68 7.10 1.49

NSE

11.58 12.53 2.64

Total

18.26 19.63 4.13

IPCL's employee strength as on 31st March, 2003 was 13,308 with an average

age of 43 years as compared to the strength of 13,840 employees as on 31st March,

2002. No. of employees with professional qualifications were as follows:

Table 6.13

No. of employees with Professional qualifications

Qualification Ph.D. Engineers MBAs CA/ICW A/CS/IAAS/MFMISAS/LLB

Source: Annual Report 2002-03

10. Welfare and Community Development

No. of employees 59

1,382 162

58

Discussions with IPCL Officials revealed that the following initiatives have

been taken by the company after privatization:

(a) The Company's social welfare and community development initiatives focus

on the key areas of education, health care and the overall development of the

communities in which the Company operates. These initiatives are undertaken

directly by the Company and also through legally constituted trusts and welfare

bodies.

(b) Maintaining the tradition of being a good corporate neighbour, the Company

provided uniforms to the school children belonging to SC/ST communities of

424


surrounding villages. Scholarships amounting to Rs.5000 per annum per student have

also been awarded to 29 SC/ST students for pursuing BE/MBA courses in Gujarat

State.

(c) The Community welfare cell, jointly with the District sports coaching center,

organized a District sports meet wherein 1500 boys and girls participated. Training

camps for unemployed youth were organized in the surrounding villages of Vadodara

Complex, with the help of the Rural Technology Institute of Gujarat.

(d) Wheel chairs and a few sports equipment were provided to Shram Mandir

Trust, Sindhrot, a charitable institute providing help to persons afflicted with leprosy.

Necessary assistance was provided to Reliance Rural Development Trust for

identifying villages, and agreements have been obtained from about 30 surrounding

villages of Vadodara complex for construction of Anganwadi, Panchayat house,

roads, community hall and water tank sump.

(e) At Nagothane Complex, drinking water supply was provided to Kuhire,

Bense, Zotirpada, V elshet and Kadsure villages. Internal road repairing was

undertaken at some villages. Computers were provided for the Urdu school at

Nagothane.

(f) At Gandhar Complex, 549 cattle were vaccinated in the cattle vaccination

camp for villagers, 25 women were given sewing training. Educational tools,

materials and playing equipment were distributed in primary schools of nearby

villages. Repairing of classrooms and facilities for drinking water was provided for

school children. Notebooks were provided to economically backward students. A

Mobile van was provided for primary health facilities. Besides, activities like tree

425


plantation, medical awareness, cultural programmes and vanous camps were

organized in surrounding villages.

11. Employee Issues

Discussions with the Shri M.L.Singhal, Vice-President (HR) revealed that the

Management of IPCL utilized the long period of 3 years between the time when

intensions to disinvest were made known and by the time disinvestment actually took

place to talk to the workers unions and workers about the necessity of disinvestment.

It could therefore, be said that there were consultations with trade unions about the

forthcoming disinvestment. Management has agreed to retain employees on same

terms and conditions for a period of one year from the date of disinvestment.

However so far, a total of 1365 personnel (891 in supervisory cadre and 744 in non

supervisory cadre which included office staff and teachers) had taken VRS so far.

Though formally no counseling on VRS was undertaken by the company, it

nevertheless arranged for institutions like LIC to counsel workers on utilization of

VRS compensation. No data is available on the extent of re-employment of VRS

optees but it is learnt that many of them had invested their money very wisely and

taken up small business etc.

Discussions with the trade unions reveal that they were unhappy with the

Government for not giving them a chance to bid for 26 per cent stake when they had

offered a much higher price than the ultimate purchaser, M/s Reliance Industries

Limited. They were also critical of the fact that Government had gone ahead to

disinvest its stake to Reliance Industries Limited despite the Disinvestment

Commissions recommendations that the selection of the strategic partner should be

done in such a manner so that it does not result in a monopoly. According to them,

426


the valuation of the enterprises was improper. However, there is sense of insecurity

among the employees and Government has not played any positive role in looking

after their interests. Many of the erstwhile workers, whose services had been

regularized, had been terminated due to absenteeism without giving them an

opportunity to better themselves. This has created conditions of penury among such

terminated employees. There is no fresh investment by RIL though investment plans

had been prepared earlier by the IPCL Management and could not carried out due to

disinvestment.

12. Conclusions

The privatization of IPCL epitomizes the gains and perils of disinvesting an

industry to the major player in the country. It is well known that the purchaser is the

only major producer of polymers, chemicals etc. since the Haldia Project will take

some more time to compete with it. Those in favour of disinvesting in favour of the

disinvestment to the purchaser have gone on record saying that monopoly should be

viewed in a global context and not in the country's context alone. In any case, these

products are on Open General Licence (OGL). The only rebuttal one can offer to this

specious argument is that with the monopoly status that this disinvestment ensures,

the company is able to fix prices arbitrarily, though on par with international prices.

True, in theory, any user can opt to import these products from abroad, but the factors

such as time and expense on freight make it easier for the user to buy from the local

producer. May be this alone explains the doubling of profit in a single year in IPCL;

or may be this factor along with excellence of production technologies and

supervision etc. made it possible.

427


Employees have gained as a result of privatization, in better pay packets etc.

Those who took VRS have, by and large, found alternative employment. The

consumer may be paying more, but he may the only loser in this deal.

6.13 Conclusion on Labour Restructuring

1. There are adequate safeguards in the Industrial Disputes Act to ensure that

labour interests are taken care of. The Government of India has ensured that there is

no labour restructuring prior to privatization through specific clauses in the

shareholders' agreements guaranteeing continuity of employment, on terms and

conditions not inimical to those employed under Government ownership, for a period

of one year. With this provision, Government has tried to fulfill its commitment to

safeguarding workers' interests and, at the same time, transferred the headache of

labour restructuring to the strategic purchaser. Labour Unions, who were initially

opposed to privatization, later relented and acquisized ostensibly because of

Government's move to safeguarding employment. But if Trade Unions expected

continued protection from Government, they were in for disappointment, since

Government refused to interfere in the working of the privatized enterprises

immediately after privatization, managements of privatized enterprises brought in

VRS and downsized number of workers though this scheme. In some companies,

such as in MFIL, higher compensation than allowed under Government ownership

was paid to the workers, obviously to persuade them to accept VRS. In others,

workers were paid compensation at Government rates. The enthusiasm for VRS

among workers was surprising, but this could probably be explained by

apprehensions of tough existence under new privatized managements. Many who

428


opted VRS complained that they were 'persuaded' by managements with threats of

transfer to far off places or redeployment in different jobs.

2. Workers or their Unions were not involved in pre-privatization preparation;

neither were they consulted by PSE managements. In VSNL and IPCL, however,

workers and their unions were taken into confidence on the move towards

privatization and efforts were made to remove their apprehensions. In IPCL, one of

workers' unions complained that their offer to match the highest bid in sale was not

accepted by the Government. It is, of course, doubtful whether the Union would have

found the funds to purchase the equity being sold.

3. Workers who were retained have gained substantially through increase in

salaries and allowances. Working conditions have improved for most of them in the

case studies that were taken up. In Paradeep Phosphates, workers were asked to meet

higher standards of performance to earn incentives. Almost all the workers, who

were interviewed in the privatized enterprises taken up for case studies, felt

apprehensive of loss of jobs under privatized management.

4. One of the reasons for this apprehension could be that they saw the sad fate

of those who opted for VRS. Workers who left under VRS were not given any

training in entrepreneurship or retraining for alternative jobs. Neither was any

counseling provided to them on how to use the compensation money. Although no

hard data is available to substantiate, many of the workers lost their money in

fraudulent schemes or spent their money on celebrations such as marriages etc. and

were reduced to penury. For example, workers who opted for VRS, in Paradeep

Phosphates were very poorly off, due to lack of opportunities in Paradeep, which is a

429


very backward town. In IPCL, however, some workers started stock broking

businesses and were reasonable well-off.

5. No counseling or retraining is provided by private managements since it is

not incumbent on them to do so. Possibly, there is a case for Government to include a

clause in the shareholders' agreement making it incumbent on privatized enterprise

management to provide counseling and training to VRS optees within a year of their

having taken the VRS option.

6. It is saddening to note that trade unions are not concerned about the welfare of

VRS optees, ostensibly because they are no longer members of the union.

7. Consumers benefited from better access to products, even though quality of the

products/service did not show any change. Since the products sold by the enterprises

were either regulated by the Government or were dependent on competitive markets,

no firm conclusion could be drawn on the effect of prices on consumers. Peripheral

development appears to have benefited because these privatized units have increased

production and workers have received increased salaries. In BALCO, for example,

the entire town's economy depended on the factory functioning. This, in turn,

indirectly affected the lives of hundreds of people.

8. Thus, it could be concluded that labour restructuring methods in India ha been

successful in the sense that privatized enterprises have been able to downsize labour

without much of a problem. The downside to this assertion is the lack of adequate

social safety net for workers who opt for VRS.

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