CHAPTER 15
MINISTRY OF MINES
National Aluminium Company Limited
15.1.1 Loss due to premature procurement of conveyor belt
Procurement of conveyor belts simply on the recommendation
of the supplier, ignoring good condition of the belts in operation and
limited guaranteed life of the fresh belt, led to an unfruitful expenditure
of Rs.12.76 crore.
National Aluminium Company Limited (Company) installed
(January 1987) cable belt conveyor system to transport bauxite ore from mines to
refinery at Damanjodi. The belts of the conveyor system were supplied by Cable
Belt Limited (CBL), Australia with a guaranteed life of 10.5 years. In terms of
the contract, CBL was to conduct several inspections of the cable belt. In
August 1994, CBL inspected the belts of the conveyor system and recommended
procurement of entire length of belt (30 km) in a phased manner during
1995-2000. It opined that general condition of the belt was fair due to good
maintenance and operating practices but due to aging factor, the belt would need
replacement within next 2-3 years. The Company had a stock of 887 meters of
belts at that time.
The Company procured 9 km of belts from CBL, as a proprietary
item, during the period August 1995 to September 1996 at a cost of Rs.12.76
crore. The Company took the decision of the procurement of fresh belts relying
on the recommendation of CBL, ignoring the good condition of belts in operation
and the limited guaranteed life of the fresh belt.
In their subsequent belt inspection report, CBL suggested
(May 1998) only minor replacement of belts. It was observed that the Company had
utilised only 10 meters for replacement of existing belt since 1993. Therefore,
the Company was left with a stock of 9.877 km of the belt. The belts in stock
were showing signs of deterioration due to corrosion, termites, sunlight
exposure (hardness of exposed belts), blistering etc. Further, the fresh stock
of belt (9 km) had exhausted more than 50 per cent of its guarantee period. The
Company had no plan for bulk replacement of belt except short pieces up to a
maximum of 150 meters which could have been taken care of with the existing
stock of 887 metres prior to import.
The Company had already taken write-off action of the belts
in the books of accounts and till 31 March 2002 belts worth Rs.11.09 crore out
of Rs.12.76 crore had been written off. Thus, it was evident that the
procurement of fresh belts on the recommendation of the supplier was premature
and therefore, was not on sound footing and lacked commercial prudence. With no
immediate plan for bulk replacement of the belts and gradual deterioration in
quality, the Company is facing a potential loss of Rs.12.76 crore.
Ministry stated (July 2000) that keeping in view the critical
role of the conveyor system in the entire production process and the expert
advice of CBL, the top Management took a conscious decision to purchase fresh
belt.
Ministry’s reply is not tenable on the following grounds:
- The Company’s decision to import extra belts was based on
the recommendation of CBL, the manufacturer and the supplier of the belts,
which had a personal stake in recommending large scale purchase of the
belts. The decision was not based on any independent assessment made by the
Company; and
- Taking into consideration the good condition of the belts
in operation, the experience in belt replacement in the past and the limited
guaranteed life of the fresh belts, the Company should have avoided
premature procurement of belts.
Eventually the decision to import extra belts, as brought out
above, proved a flawed decision.
Subsequent to the issue of the audit para, a case was taken
by the Central Bureau of Investigation and an FIR (First
Information Report)
had been filed in the matter (September 2001). The result of investigation is
not available as yet (September 2002).
15.1.2 Loss due to defective contract terms
By allowing two conflicting kind of provisions in a sale
transaction the Company could not recover its dues amounting to Rs.1.44
crore from a party which was later on referred to Bureau of Industrial and
Financial Reconstruciton. In terms of the marketing policy of the Company prevailing
till 30 September, 1998, one of their customers viz Orissa Extrusion Limited (OEL)
was availing 90 days credit facility under stand-by letter of credit (LC)
arrangement. Subject to this credit facility, the Company received (April 1998)
an order from OEL for the supply of 6000 MT of Aluminium metal to be supplied
during 1998-99. As a stand-by arrangement the Company accepted LC which was
subject to the provisions of “Uniform Customs and Practice for Documentary
Credits” (1993 Revision) International Chamber of Commerce (Publication No.
500), (UCP-500). The provisions of UCP-500 inter alia stated that in
cases where credit required presentation of transport documents, bank would not
accept documents presented to them later than 21 days after the date of shipment
unless specified otherwise.
Despite knowing the stipulation of UCP-500, the Company
accepted LC without any mention of specified period of time for presentation of
documents after the date of despatch. Thus, by allowing 90 days credit to OEL on
one hand and accepting LC under UCP-500 without mentioning the specified period
of time on the other hand, the Company allowed two conflicting kind of
provisions which became detrimental to its interest in the following sale
transaction.
Under the arrangement of standby LC valid up to December
1998, the Company despatched (September 1998) 202.018 MT of Aluminium metal
valuing Rs.1.73 crore to OEL. OEL, however, failed to pay the amount within the
allowed credit period. The bank also refused (December 1998) to honour their LC
on the ground that the bill was presented for negotiation after expiry of 21
days of despatch. In the meanwhile, OEL was referred (January 1999) to Bureau of
Industrial and Financial Reconstruction (BIFR) by then, the Company could
recover Rs.33.00 lakh only. The Company initiated arbitration proceedings
against OEL in March 2001. After adjusting interest and bank charges (Rs.5.97
lakh) and discount (Rs.2.48 lakh) an amount of Rs.1.44 crore remained
unrecovered (August 2002) even though the Company won the arbitration award
(November 2001).
Management contended (March 2002) that:
- the said transaction was made against standby arrangement
under the prevailing marketing policy of allowing 90 days’ credit to the
party;
- the bank was all along accepting documents after 21 days
against similar LCs; and
- on experiencing such technical problems, stand-by
arrangement had already been withdrawn from its marketing policy.
Ministry endorsed (June 2002) the views of Management.
The contention of Management/Ministry is not tenable in view
of the fact that:
- the then marketing policy did not envisage that LC would
be opened under UCP-500;
- acceptance of documents by banks after 21 days in certain
cases ignoring the provisions of UCP-500 was a later event which could not
be anticipated initially at the time of entering into this arrangement; and
- the amount remained unrecovered not so much because of
the marketing policy, but because of not mentioning the specified period of
time for presentation of documents to the bank in the LC opened under the
provisions of UCP-500.
In the circumstances detailed above, the Company failed to
recover its dues, which were secured through LC. As OEL has since been referred
to BIFR, the chances of recovery of the dues are remote.
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