Adventures in Banking - Milking the Regulations

B was a joint venture undertaking between a State Government and a large and respected industrial group. It had been set up to produce Caustic Soda for captive consumption of a group company. The technology involved is not complex. Common Salt (NaCl) is dissolved in water and electricity is passed through this solution which results in production of Caustic Soda (NaOH) and Chlorine. The main raw material, in terms of cost, is electricity. Some of such plants are set up for production of Caustic Soda with Chlorine being considered a by-product while others are set up for the production of Chlorine with Caustic Soda being considered a by-product. Naturally, financial viability is substantially enhanced if there are nearby customers for both Caustic Soda and Chlorine, since transportation of both the products is difficult and expensive.

B had made substantial losses and were approved a revival-cum-restructuring package, which envisaged all possible kinds of reliefs and concessions, not just from the financial institutions (deferral in repayment of principal, waiver and reduction in interest rates etc.), but also State Government (deferral of Sales Tax) and Electricity Board (concessionary power rates) etc. There was minimal sacrifice by the promoters. After all it was a matter of industrial development and generation of gainful employment for the country.

Visits to the company’s plant however did not remotely suggest that the company was sick. Sick companies have a typical odour.

All was well till implementation of the relief package came up. To effectuate which a joint plant inspection by the bank and financial institution-cum Operating Agency (OA) was arranged. This is where things started to unravel. The OA team consisted of a very young and smart CA and a much older Manager.  They started asking some seemingly innocuous questions and then we realized that suddenly there was a chill in the atmosphere. Anyway, the inspection was completed and we returned to our respective offices. Incidentally, reaching the plant involved an overnight train journey from Patna. The OA team would have come from Bombay to Patna and then by overnight train to the plant. 

The fireworks started at the next hearing at the rehabilitation team, where status of implementation of the package was to be reviewed. The Operating Agency in its report submitted detailed particulars which showed that the “sickness” was essentially due to under-invoicing sales to its group company, who were the sole buyer. Consequently all the approved reliefs and concessions were withdrawn.

This was a major shock to the group’s top management and I understand heads of the many of company’s managers rolled for not being able to handle a bunch of bankers.

Soon after, since I had completed more than two years in this particular assignment, I was given a fresh assignment and got transferred. Much later, I came to know that on an appeal by the company, a similar rehabilitation package was approved and implemented!

Credit Lesson 104: Handling government regulations for the benefit of the borrowing entity is something of an art which many of our business groups have perfected, and getting classified as "sick" is the ultimate perfection of that art. It starts from producing attractive project reports, getting financial and regulatory approvals, syphoning out the borrowed funds, declaring the project sick and getting all kinds of reliefs and concessions from the government and lending banks.

They cannot really be blamed. We have built up a lending eco-system where it would be irrational not to game the system. 

The situation is well summed up in the preamble of the Omkar Goswami Report (Report of The Committee on Industrial Sickness and Corporate Restructuring – July 1993) that, “There are sick companies, sick banks, ailing financial institutions, and unpaid workers. But there are hardly any sick promoters”.