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Home > Business > Columnists > Paranjoy Guha Thakurta

The strange case of privatising Paradeep Phosphates

January 27, 2003

Imagine the controlling interest in a fertilizer corporation in which public funds in excess of Rs 670 crore (Rs 6.7 billion) have been invested being sold to a private company for barely Rs 15 lakh (Rs 1.5 million)! Sounds improbable? Well, not really.

This is exactly what has happened in the case of Paradeep Phosphates Limited, a former public sector undertaking located in Orissa's port town by the same name.

The sequence of events following the privatisation of this company has placed Union Divestment Minister Arun Shourie in a tight spot.

The ministry of finance, headed by Jaswant Singh, has asked the ministry of divestment -- under Shourie -- to seek fresh approval of the Cabinet Committee on Divestment for this rather unusual transaction.

A new Cabinet note would now have to be placed before the CCD justifying the circumstances under which shares of this former public sector unit were first sold for a sum of Rs 151.70 crore (Rs 1.517 billion) to Zuari Maroc Phosphates Private Limited, after which the company claimed Rs 151.55 crore (Rs 1.5155 billion) back from the government.

Since the difference between the two figures works out to Rs 15 lakh (Rs 1.5 million), it implies that 74 per cent of PPL's shares has been purchased by Zuari Maroc for this ridiculously low amount.

There is another aspect to this rather strange deal.

Shourie had told Parliament in March 2002 that the average net loss incurred by PPL varied between Rs 10 crore (Rs 100 million) and Rs 12 crore (Rs 120 million) every month during fiscal 2001-02.

It now transpires that the actual losses incurred by the company were twice as high.

Before delving into the details of this extraordinary case of privatisation, first a bit of background information about the company in the limelight.

Paradeep Phosphates Ltd has been losing money since its inception and till the end of March 2001, had accumulated losses worth Rs 431.5 crore (Rs 4.315 billion) on its books of account.

Work on constructing the company's plant manufacturing phosphatic fertilizers had begun in 1986 and was completed four years later.

The company's outstanding liabilities at the end of March 2001 stood at Rs 856.34 crore (Rs 8.5634 billion).

This included amounts owed to a Moroccan group called OCP, GCT of Tunisia and the Indian public sector MMTC (formerly Minerals & Metals Trading Corporation).

In addition, PPL owed more than Rs 200 crore (Rs 2 billion) to the government for a loan it had taken.

The company has installed capacity to produce 720,000 tonnes of di-ammonium phosphate a year.

It has a dedicated jetty at Paradeep port to import raw materials such as sulphuric acid, phosphoric acid, ammonia, rock phosphate, sulphur and potash.

PPL ran into trouble recently when the Orissa high court directed the Union government to shut down the company's plant by mid-February 2002 for polluting the environment. This order was thereafter reviewed.

Because of its perennial losses, the government has had to restructure the company's finances no less than three times -- in March 1994, March 2000 and March 2001.

At the end of March 2001, PPL's net worth had shrunk to barely Rs 1.15 crore (Rs 11.5 million).

According to Shourie, as on March 31, 2001, PPL's net fixed assets were worth Rs 303.08 crore (Rs 3.0308 billion) and its capital investment was Rs 670.69 crore (Rs 6.7069 billion), but 'because of heavy losses that were being incurred every month, by March 31, 2002, the net worth of the company would have fallen to around minus Rs 120 crore.'

Though the government had decided in 2001 to privatise PPL by offering 74 per cent of the company's equity shares to a 'strategic partner' in the private sector, it was not until February 2002 that the ministry of divestment invited financial bids on the basis of the company's accounts as on March 31, 2001.

The 'reserve' price of PPL's shares was fixed at Rs 473.82 per scrip, each with a face value of Rs 1,000. For 74 per cent of the company's equity with a face value of Rs 320.10 crore (Rs 3.2010 billion), the total value of the stake worked out to roughly Rs 176 crore (Rs 1.76 billion).

The 'global advisors' to the divestment had recommended the reserve price after giving weightage to two methods of valuation of the company's business.

These two methods were the 'discounted cash flow' method and the 'replacement-based asset value' method.

As Shourie himself stated in his reply to a starred question in the Lok Sabha on March 19, 2002: "This was a deviation from the usual practice of setting the reserve price on the basis of the DCF valuation alone and did not conform to the guidelines of the ministry (of divestment) on the subject."

After taking into account the recommendations of an inter-ministerial group and a core group of secretaries to the government of India, the government decided to accept the bid of Rs 151.70 crore (Rs 1.5170 billion) placed by Zuari Maroc and, to use the minister's words: "This was well above the DCF valuation, but was marginally (emphasis mine) below the reserve price recommended by the advisors."

Whereas the DCF price calculated by the global advisors stood at approximately Rs 83 crore (Rs 830 million), the so-called marginal difference between the reserve price recommended by the advisors and the amount paid by Zuari Maroc worked out to over Rs 24 crore (Rs 240 million)! This is a pretty hefty amount by any standard.

As it happens, this was the first time the government agreed to accept a bid in which the price quoted by the strategic partner was below the reserve price recommended by the global advisor to the divestment.

Besides Zuari Maroc, the other companies that had expressed interest in bidding for the 74 per cent government stake in PPL included Tata Chemicals, Oswal Chemicals & Fertilizers and Rashtriya Chemicals & Fertilizers.

Interestingly, unlike Zuari Maroc, after submitting their 'expressions of interest,' these companies chose not to submit their price bids presumably because their representatives that it would not be an easy task to arrive at a proper value for the shares of the public sector fertilizer company with huge losses on its books of account.

Thus, Zuari Maroc emerged as the sole bidder for the government's 74 per cent stake in the company.

This was hardly the end of the PPL privatisation story.

On the last day of February 2002, the strategic partner signed two agreements with the government of India represented by the ministry of divestment: the shareholders' agreement and the share purchase agreement.

The strategic partner in this case, Zuari Maroc Private Limited, is a 51:49 joint venture between Zuari Industries promoted by the K K Birla group and Maroc Phosphore, a wholly owned subsidiary of Morocco's OCP group.

The joint venture was floated as a 'special purpose vehicle' to bid for PPL.

As already mentioned, Morocco's OCP group was owed a substantial amount by PPL for having supplied it rock phosphate. In US dollar terms, out of the company's total outstandings of nearly $90 million to foreign suppliers, more than $50 million was owed to the OCP group alone.

The Zuari-Chambal group headed by K K Birla already had a close association with OCP. Chambal Fertilizers & Chemicals has 50:50 joint venture with OCP in Morocco called Indo Maroc Phosphate that produces phosphoric acid, a raw material used by PPL.

According to media reports, plans have been drawn up to invest between Rs 50 crore (Rs 500 million) and Rs 100 crore (Rs 1 billion) in PPL to increase its annual DAP manufacturing capacity from 720,000 tonnes to one million tonnes over the next year or so.

The company's daily output of DAP would thus rise from around 2,400 tonnes to roughly 3,000 tonnes.

Additional investments are reportedly required to set right the 'mismatch' in PPL's production capacities.

At present, roughly half the requirement of phosphoric acid of the company's DAP plant is met through internal production while the other half is imported.

In recent times, international prices of phosphoric acid have been volatile and it has been felt that PPL should reduce its dependence on imported phosphoric acid to around one-third its requirement to cut costs and become viable.

Once PPL's manufacturing capacity goes up to one million tonnes per annum, the K K Birla group would become by far the biggest player in the country's DAP market with an annual production capacity of close to two million tonnes -- at present, Zuari Industries has an annual manufacturing capacity of 700,000 tonnes while the capacity of Chambal Fertilisers is 200,000 tonnes per year.

The closest competitor to the Zuari-Chambal group would be Oswal Fertilizers & Chemicals promoted by Abhey Oswal that currently has DAP manufacturing capacity of 170,000 tonnes per annum.

Incidentally, the Oswal plant is also located at Paradeep.

The K K Birla group says it expects the loss-making PPL to turn around in three years. From the fourth year onwards, the company should start earning profits.

The company is likely to lose Rs 120 crore (Rs 1.2 billion) during the current fiscal year ending March 31, 2003.

Shourie often highlights two aspects of the working of PPL to claim how successful the government's privatisation policy has been.

First, there was a clause in the shareholders' agreement signed between the ministry of divestment and Zuari Maroc that no employee of PPL would be retrenched for a one-year period.

Subsequently, a voluntary retirement scheme would be put in place.

Not surprisingly, the unions and associations of employees of PPL had, in July 2001, met the secretary (fertilizers) and the secretary (divestment) urging them not to privatise the company -- the government, of course, did not reconsider its decision.

The shareholders' agreement provided for specific clauses to protect employees' interests.

Thus, Zuari Agro committed in writing that with a month of becoming a strategic partner, it would implement pending wage revisions prospectively and that within three months, it would finalise modalities of payments of arrears to workers.

Zuari Maroc further stated that it 'shall use its best efforts to cause the company to provide adequate job opportunities' to persons belonging to the Scheduled Castes, the Scheduled Tribes as well as other socially disadvantaged and physically handicapped individuals.

The other aspect of PPL's post-privatisation performance highlighted by Shourie relates to the company's financial results.

Having incurred a loss of more than Rs 200 crore (Rs 2 billion) during 2001-02, the new managers of the company have reportedly been able to bring down losses to an average of between Rs 3 crore (Rs 30 million) and Rs 4 crore (Rs 40 million) a month.

Thus, the current financial year with a loss of between Rs 36 crore (Rs 360 million) and Rs 48 crore (Rs 480 million).

But this is only one aspect of the full story.

The shareholders' agreement signed between Zuari Maroc and the government's ministry of divestment had a critical clause on 'post-closure adjustment' and this is where the trouble started.

At the time the government accepted Zuari Maroc's bid, PPL's losses were estimated at between Rs 10 crore (Rs 100 million) and Rs 12 crore (Rs 120 million) per month during the financial year 2001-02.

The valuation of the company's shares was based on the financial position of the company as on March 31, 2001.

The actual losses, however, turned out to be twice as high.

In the eleven-month period between April 1, 2001 and February 28, 2002, PPL's losses turned out to be in excess of Rs 218 crore (Rs 2.18 billion).

As per the terms of reference of the shareholders' agreement, the government and Zuari Maroc jointly appointed the firm of auditors, PricewaterhouseCoopers to compute the company's net assets on the closing date.

It was specified that net assets would mean assets reflected on the last balance sheet that constitute that aggregate (current and non-current) assets of the company minus current and non-current liabilities.

It was further stated that if the value of the company's net assets on March 31, 2001 was greater than the value of net assets on the closing date, the government shall pay the strategic partner (Zuari Maroc) an amount equal to the difference between the two values of net assets multiplied by 0.74 (since 74 per cent of the company's shares were sold).

The auditors, PricewaterhouseCoopers, computed the value of PPL's net assets on February 28, 2002, at minus Rs 205 crore (Rs 2.05 billion) against a figure of Rs 1.15 crore (Rs 115 million) reflect in the company's balance sheet as on March 31, 2001.

On the basis of this computation, Zuari Maroc sent in a claim of Rs 151.55 crore (Rs 1.5155 billion) to the government representing 74 per cent of the difference between PPL's net assets value on March 31, 2001 and the value on February 28, 2002.

A charitable explanation is that the ministry of divestment headed by Shourie realised belatedly -- despite the due diligence exercise conducted -- that a PSU like PPL whose shares were not listed on stock exchanges could grossly understate its losses by clever accounting manipulation.

A less complimentary explanation would be that the entire valuation exercise was conducted in a shoddy manner.

Whatever be the truth, the fact is the Zuari Maroc's claim was first sent to the ministry of fertilizers and chemicals from where the relevant file moved to the ministry of divestment and then to the department of expenditure in the ministry of finance.

Besides Zuari Maroc's claim of Rs 151.55 crore (Rs 1.5155 billion), the issue of repayment of the loan worth more than Rs 200 crore taken by PPL from the government would have to be sorted out before the finance ministry could prepare a cheque in favour of Zuari Maroc.

Two of Shourie's colleagues, Finance Minister Jaswant Singh and Fertilizers Minister Sukhdev Singh Dhindsa were briefed about the circumstances leading to Zuari Maroc's claim for compensation.

None of them, it is learnt, was particularly overjoyed at hearing about what had taken place.

In August 2002, fertilizers secretary Nripendra Mishra wrote to divestment secretary Pradip Baijal pointing out that the post-closure agreement clause in the shareholders' agreement has been specifically inserted at the insistence of the ministry of divestment.

The next month, Baijal replied to Mishra saying PPL could not have been privatised without the post-closure agreement clause.

A section of the bureaucracy in the ministry of finance pointed out that this clause was working against the government's interests not only in the case of PPL but also in the instances of divestment of shares of other privatised former PSUs such as Modern Foods, Bharat Aluminium, Hindustan Teleprinters and particular hotels that were owned by India Tourism Development Corporation.

In December, the finance ministry asked the divestment ministry to prepare a fresh note for the Cabinet Committee on Divestment.

"It is advised that since there has been a material change in the terms on which the divestment of the GoI (government of India) stake in PPL was approved by (the) CCD, fresh CCD approval should be obtained," a finance ministry official noted.

It remains to be seen how Shourie and his ministry will now justify the sale of 74 per cent of PPL's shares -- with a face value of more than Rs 320 crore (Rs 3.2 billion) and a deflated 'reserve' price of Rs 176 crore (Rs 1.76 billion) to Zuari Maroc for a piffling amount of Rs 15 lakh.

And, for the record, Rs 15 lakh is 4,466 times lower than the Rs 670 crore (Rs 6.7 billion) worth of capital investment made by the taxpayers of India in Paradeep Phosphates.

We are yet to hear the last of this strange story of privatisation.

Paranjoy Guha Thakurta

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