CHAPTER 23
MINISTRY OF STEEL

Kudremukh Iron Ore Company Limited

23.1.1    Imprudent investment in joint venture company

Kudremukh Iron and Steel Company Limited (KISCO) was incorporated (June 1995) as a joint venture company (JVC) with a maximum of 50 per cent equity participation from Kudremukh Iron Ore Company Limited (Company) and two other PSUs, viz., MECON (MECON (I) Limited) and MSTC (Metal Scrap Trade Corporation Limited) to manufacture low sulphur low phosphorous pig iron (LSLP) and ductile iron spun pipes (DISP) at Mangalore. The remaining 50 per cent equity was to be raised by making offers to financial institutions, mutual funds and the public. Presently, KISCO’s subscribed and paid up capital is Rs.2200 i.e. 220 shares of Rs.10 each. The Company holds 102 shares and MECON and MSTC each hold 4 shares. In addition, the Company progressively advanced Rs.49.99 crore towards share application money whereas MECON and MSTC have paid Rs.1.80 crore and Rs.75 lakh respectively. Pending allotment of shares, KISCO continues to be a JVC and its activities remain outside the scope of parliamentary control. The Company holds 46.36 per cent voting power after contributing Rs.50 crore towards equity whereas 11 promoter-employees, who subscribed to KISCO in their individual capacity without Government permission continue to carry 50 per cent voting powers with financial stake of only Rs.1100. Though the Government permitted the Company to maintain an arm’s length relationship with KISCO, it further advanced Rs.235.50 crore progressively as concessional term loans to KISCO to repay the existing loan taken from banks and to finance its capital expenditure and working capital requirement. KISCO repaid only Rs.8 crore as such the outstanding loan amounted to Rs.227.50 crore as of March 2002. The Company did not obtain permission from the Government to advance loans to JVC on the plea that its Board included the representatives from the Administrative Ministry who were apprised of the status of KISCO including financing pattern by the Company. This contention of the Company is not tenable as the consent of the representatives from the Administrative Ministry could not be construed as formal approval by the Administrative Ministry.

The LSLP project was not completed by October 1997 as scheduled and commercial production started only in May 2001. The DISP project, scheduled to be commissioned by April 1998, is yet to be taken up (June 2002) mainly due to non availability of funds. According to the report of M/s. KPMG who carried out a techno-economic viability study, KISCO is likely to generate net profit from the year 2008 if DISP plant is commissioned in the year 2002. This indicates that KISCO would not be in a position to pay either interest on loan or dividend on equity investment made by the Company in near future. The interest not paid by KISCO on the loans advanced by the Company amounted to Rs.24.23 crore up to March 2002.

Ministry stated (May 2002) that:

1. the public issue proposed by KISCO did not materialise due to depressed and sluggish conditions in the primary market resulting in insufficiency of funds leading to delay in implementation of LSLP and DISP projects;
2. the Company had to necessarily agree to the corporate guarantee of the loan to be given by the consortium of banks and undertook to provide additional funds, as otherwise implementation of projects would have come to a standstill after having spent a sizeable amount; and
3. the proposal for merger has been forwarded by the Company to the Government with a view to have benefits in the long run.

Ministry’s reply is not convincing due to the following:

1. the depressed primary market condition for equity issue was present from 1996 onwards. As such, the viability of the joint venture should have been considered in 1996 itself;
2. the Company undertook additional financial commitment to give corporate guarantee for the payment of KISCO’s loan and interest thereon and to bring additional funds to complete the project though it was directed by the Government to maintain an arm’s length relationship with KISCO;
3. the merger of KISCO with the Company will be at huge cost as the Company itself assessed KISCO’s yearly projected losses at Rs.50.14 crore, Rs.60.12 crore, Rs.65.28 crore, Rs.70.43 crore and Rs.75.44 crore during 2000-01 to 2004-05 respectively. Ministry is silent on this aspect; and
4. the Company has further assessed that the current financial position of KISCO is such that it would not be in a position to service its interest liability.

Thus, the Company’s investment in equity of KISCO was imprudent as it holds only 46.36 per cent voting power even after contributing Rs.50 crore towards equity and while eleven promoter-employees hold 50 per cent of voting power after contributing only Rs.1100. Equity shares up to the value of contribution by the Company have not been issued by KISCO apparently to evade legislative oversight. Moreover, contrary to the directions of the Government, it advanced concessional loans to KISCO. This has resulted in loss of interest of Rs.24.23 crore on the loans advanced to KISCO.

MECON (I) Limited

23.2.1    Loss of Rs.1.77 crore due to faulty project management

The Company incurred cost of Rs.9.12 crore on the project as against realisation of Rs.7.35 crore resulting in loss of Rs.1.77 crore on account of wrong estimation.

MECON (I) Limited (Company) received an order in March 1993 from Bokaro Steel Plant (BSL) for the supply of Sulphuric Acid Plant (Plant) at a firm price of Rs.7.35 crore. According to the said order the work was required to be completed within 15 months from the date of issue of the telex work order i.e. by 30 June 1994.

Scrutiny of records of the Company during February to April 2000 revealed that:

1. Though the Company commissioned the project in November 1994, and finally received the final acceptance certificate on 4 January 1996, it continued to incur expenditure on the Plant beyond 1994 without any formal work order from BSL. The Company spent Rs.77 lakh during the post commissioning period i.e. 1995-2000.
2. The Company had incurred total cost of Rs.9.12 crore on the Plant as against realisation of Rs.7.35 crore and thereby suffered a loss of Rs.1.77 crore. The Company had neither requested the Bokaro Steel Plant for annual maintenance contract nor was paid any sum for maintaining the Plant during 1995-2000.
3. Analysis of the reasons of loss to the Company indicated that the Company incurred the actual man-hour cost of Rs.2.45 crore on the project as against the estimated cost of Rs.33 lakh. This was more than seven times of the estimates.
4. Though the Company lodged (April 1995) a claim of Rs.49 lakh towards additional job done in the execution of the aforesaid contract, it could finally realise only Rs.5 lakh from the client.

Management admitted in August 2001 that additional manpower were spent in order to stabilise the operations of the Plant by removing the defects in the post commissioning stage.

The contention of the Company is not tenable as the Company had completed the erection and commissioning of the Plant in November 1994, guarantee tests were completed between 27 December to 29 December 1994 by fulfilling all the guarantee parameters and the Plant started giving production since then. As such the continuation of its services beyond that date without additional charges was not justified. Further its financial position also did not allow it to overlook commercial considerations. Interestingly, the Company had been incurring heavy losses during the period when it was providing the client free of cost maintenance, for which the Company should have entered into an annual maintenance contract with the client and charged them accordingly.

Ministry, while admitting the lapse (March 2002) on the part of Management towards faulty preparation of bids, delay in obtaining Final Acceptance Certificate resulting in extension of services even beyond the performance guarantee test without ascertaining the nature of defects and providing services in guarantee period without ascertaining whether they were liable to render such services under contractual provision had desired the Company to get the management of contract investigated with a view to fix responsibility on the erring officials of the Company.

Thus, the Company suffered a loss of Rs.1.77 crore in execution of Sulphuric Acid Project due to faulty preparation of estimates, lack of proper contractual provisions and absence of proper monitoring mechanism.

23.2.2    Avoidable expenditure of Rs.1.23 crore for preparation of tender documents in anticipation of approval of the client for change in consortium

The Company signed a Memorandum of Understanding (MOU) on 19 March 1999 with Kaiser Engineers (Asia) Pty. Limited, Australia and Stork Engineers and Contractors, Malaysia to form a consortium to submit a response to Petronet LNG Limited (PLL) request for pre-qualification for the engineering, procurement and construction contract for the LNG (Liquified Natural Gas) terminals and marine facilities at Dahej (Gujrat) and Kochi (Kerala)

As per the terms of the MOU, the cost for preparation of tender was to be shared among the consortium members and each party was required to bear all costs that it incurred in performing and completing its obligation under this MOU. There was no provision in the MOU for compensation to be paid by a partner of the MOU in case of premature withdrawal from the consortium.

The consortium after being prequalified by M/s. PLL could not remain intact due to withdrawal of one of the consortium member viz M/s. Stroke Engineers and Contractors, Malaysia.

The Company, however, entered into a fresh MOU with ICF Kaiser to proceed with the bidding and undertake pre-tender design and engineering work at a cost of Australlian $ 0.21 million (Rs.67 lakh approx.), without getting the approval of the PLL for the changed structure of the consortium. This was despite the fact that it knew that bidding documents did not contain any provision for change of consortium. The Company further, incurred in-house expenditure of Rs.56 lakh.

PLL did not agree to the request for change in consortium and as such the Company was not able to bid for the work.

Ministry stated (Jan 2002) that the ICF Kaiser and the Company’s request was not accepted by the client on unreasonable grounds, as they had agreed for major changes (even after issue of tender) for major and more critical items but did not agree for very small and less critical item for which the Company had made repeated requests. In this way Kaiser-MECON consortium was kept out of bidding process by unjust and unfair means.

The reply of Ministry is devoid of any merit, as non-acceptance of request was the prerogative of the client. If the consortium was kept out by unjust and unfair means, it was for them to convince the client of their viewpoint. The fact is that the Company in a rather hasty decision incurred cost in anticipation of the specific approval of the client for change in the consortium and did not bother to seek their approval before beginning the tender papers.

Thus, the Company had to bear the entire expenses of Rs.1.23 crore it had incurred without deriving any benefit.

23.2.3    Forfeiture of earnest money deposit

In response to tender enquiry from Indian Oil Corporation Limited, New Delhi (Client) in April 2000 for construction of roads, drains, boundary walls and building at its Paradip centre, the Company submitted its bid along with bank guarantee of Rs.38 lakh towards earnest money deposit on 19 May 2000. The bids were opened in November 2000. Though the Company was declared as L1, it backed out in December 2000. As a result, the client forfeited the earnest money deposit of Rs.38 lakh.

Scrutiny of records of the Company during January-March 2001 revealed that:

1. The price of Rs.34.45 crore quoted initially was revised by the Company to Rs.32.40 crore in September 2000.
2. Although the initial offer was valid up to 19 September 2000, its validity was extended by the Company unconditionally up to 30 November 2000 and subsequently up to 31 December 2000. The validity of the bank guarantee was also extended up to 30 January 2001.
3. When quotations were opened on 16 November 2000, the Company was adjudged as L1 at Rs.32.40 crore.

The client desired (December 2000) the Company to make a presentation on execution methodology of the project. In the presentation meeting held on 9 December 2000, the Company indicated that the price quoted by them had become unworkable in view of the changed site condition as a result of super cyclone in Orissa and decided to back out from the tender.

As a result the client forfeited the earnest money deposit of Rs.38 lakh.

• Interestingly, Orissa had been hit by the super cyclone in the month of October 1999 whereas the Company prepared and submitted its offer in the month of May 2000. Thus, the excuse given by the Company was baseless, misleading and non-existent.
• It was, thus, obvious that the Company prepared/submitted its offer without making realistic assessment of the post cyclonic conditions of the site. Further, it also lost the last occasion of revising the quoted price by extending its unconditional validity of the offer beyond 19 September 2000. Ascertaining site conditions either by personal visits or otherwise was the normal routine job and it seems that the Company failed to carry it out or carried out inefficiently.
• It is clear, therefore, that serious lapses on the part of the top Management of the Company, resulted in the Company loosing out the contract and also incur a loss of Rs.38 lakh.

Ministry in their reply (December 2001) have accepted the facts and stated that the Company had been advised to be more vigilant in future so that such incident do not occur.

Metal Scrap Trade Corporation Limited

23.3.1    Loss due to failure in providing financial safeguard

Decision of Management to import furnace oil on behalf of a party without adequate financial guarantee against non-performance resulted in a loss of Rs.2.56 crore.

Metal Scrap Trade Corporation Limited (Company) entered (August 1998) into an agreement with M/s. Omega Petro Product Limited (OPPL) for import of furnace oil (FO) and sell the same to the latter against a service charge of 1.5 per cent on cost, insurance and freight (CIF) value of the material. In terms of agreement OPPL had to provide security deposit equal to 15 per cent of CIF cost by demand draft in advance and a cheque covering approximately 90 per cent of the CIF value on receipt of shipment advice from the Company. The Company would import FO and sell it in batches of minimum value of Rs. 25 lakh to OPPL on payment by demand draft/inland sight letter of credit (LC) in favour of the Company. OPPL would have to lift entire cargo within 30 days from the date of bill of lading, failing which the Company would sell it at the risk and cost of OPPL.

The Company imported (October 1998) 8206.20 MT of FO at a landed cost of Rs. 6249.99 PMT (including tank rent, insurance and interest) and kept it under bond in the tankers hired by OPPL. In the meanwhile the prices of FO reduced considerably in the international market and OPPL did not lift the cargo within the stipulated period (i.e. by 31 October 1998). As the prices of FO further fell down (December 1998) in the domestic market, the Company sold (January 1999) the entire cargo @ Rs. 2594.67 PMT on ex-bond basis to a party under a separate agreement entered into (January 1999) with OPPL, according to which OPPL furnished to the Company cheques amounting to Rs. 3.06 crore to cover their risk and cost on account of (i) difference in price, (ii) interest and (iii) voyage loss. All these cheques bounced on their due dates and the Company filed a suit (September 1999) against OPPL under Negotiable Instrument Act, which was subjudice (September 2002). The Company absorbed the loss of Rs.2.56 crore in its accounts for the year 2001-02.

Thus, the injudicious decision of the Company in accepting cheque as financial security of the venture and thereafter again accepting post dated cheques under the second agreement led to non recovery of Rs.2.56 crore (after adjusting security deposit of Rs.39 lakh). This could have been avoided, had adequate safeguard with regard to financial interest of the Company been taken by way of LC or bank guarantee instead of cheques.

Management accepted (June 2002) the loss and stated that it was an isolated case and that the deal had suffered mainly on account of sudden drop in international prices of FO after the material arrived at port and further reduction in prices by domestic oil companies in December 1998.

The reply of Management, so far as the reasons of loss is concerned, is not acceptable due to the fact that:

1. as per agreement with OPPL of August, 1998, the Company was not having any concern for spurt in international/domestic prices of FO. Basically this was due to weak financial security (post dated cheques) which left the door open for OPPL to back out its commitment in the changed market scenario, leaving no other choice with the Company but to sell the material at a lower rate; and
2. the venture ab initio was a loss making and on which an amount of Rs.5.76 crore was to be invested for a month for a meagre amount of Rs.5.43 lakh (1.5 per cent of Rs. 3.62 crore) as service charges when interest alone on this amount works out to Rs.7.44 lakh at cash credit rate of 15.5 per cent.

The matter was referred to Ministry in July 2002, their reply was awaited (September 2002).

National Mineral Development Corporation Limited

23.4.1    Avoidable payment of Rs.1.73 crore towards energy charges due to application of incorrect tariff

The Company incurred an avoidable extra payment of Rs.1.73 crore due to acceptance of incorrect tariff for colony consumption.

National Mineral Development Corporation Limited (Company), at its Donimalai Iron Ore Project has been drawing power for consumption in the mine, plant and colony through 11 KV line of Karnataka Electricity Board (KEB). The schedule of tariffs of the KEB for energy charges were being revised from time to time as per the Karnataka Electicity (Supply) Act, 1948/Reforms Act, 1999.

The power consumption of the project was billed separately for industry and colony under HT-2(a) and LT-2(b) tariffs respectively till July 1992. As the revised tariffs effective from August 1992, did not prescribe separate tariff for the colony, the Company paid for the colony consumption also at the industrial tariff rate. In July 1997, the KEB, however, introduced a new tariff (HT-7) for residential apartments and colonies availing power supply independently or by tapping the main HT supply of the Industry which was cheaper than that applicable for industrial consumption. KEB was billing continuously the colony consumption at tariff applicable for industrial consumption even after the introduction of new tariff in July 1997 and the amounts were paid as per bills raised in such a manner till May 2001. The Company only in November 2000 (i.e after a lapse of nearly three and half years) approached the KEB requesting for the application of residential tariff for the colony for which the latter had taken no corrective action (December 2001).

Thus, due to acceptance of incorrect energy tariff, the Company incurred an extra expenditure of Rs.1.73 crore on power consumption for the period from July 1997 to May 2001.

Ministry in its reply (May 2002) confirmed the fact that the Company had failed to take corrective action in the matter and had made payments from July 1997 to 15 May 2001 at higher rates amounting to Rs.1.73 crore.

Thus absence of timely action to get the tariff applied, had resulted in an avoidable extra payment of Rs.1.73 crore.

23.4.2    Avoidable expenditure of Rs.85.43 lakh due to detention of vessel beyond lay time

The Company entered (June 2000) into a contract with M/s. Great Harvest Limited, Hong Kong (Buyer) for export of 3 lakh Wet Metric Tonnes (WMT) each of Iron Ore Lump and High Grade Fines and 7 lakh WMT of Fines. The deliveries of the 13 lakh WMT with plus/minus 10 per cent at buyer’s option, was to be exported between 1 April 2000 and 31 March 2001. The terms of the contract provided that:

• the Company would load ore at his expense and risk on board vessels allocated by Buyer at Mormugoa or Chennai Port;
• the Buyer would advise the Company about vessels’s allocation at least 14 days prior to the expected date of vessel’s arrival at the loading port;
• the lay time i.e. permissible time for loading would commence 12 running hours after vessel tenders notice of readiness and would be counted based on the loading rate specified with reference to the carrying capacity of the vessel; and
• the Company would incur demurrage to be paid if the vessel was detained beyond the permissible lay time.

Accordingly, the Buyer intimated the Company on 13 December 2000 allocation of the vessel, MV Bunga Saga Enam for shipment. Based on the confirmation given by the Company on the same date, the vessel reported at Mormugoa Port on 28 December 2000 and tendered its notice of readiness. However, the vessel was berthed only on 21 January 2001 after it being detained for 24 days from 28 December 2000 to 21 January 2001 due to non-availability of ore at the port. The vessel, after loading (63046 WMT), finally sailed from Mormugoa Port on 22 January 2001. Thus, the vessel was detained for 22.67 days beyond the permissible lay time of 1.64 days (63046 WMT/38500 WMT prescribed to be loaded in a day) and the Company paid Rs.85.32 lakh towards demurrage for detaining the vessel beyond the lay time allowed and Rs.0.11 lakh towards bank charges in terms of the contract.

Management/Ministry attributed (April/September 2002) (a) absence of an exclusive plot at the Goa Port, prevented it from converging cargo in advance; and (b) limitations imposed by the quota system introduced by Railways as the cause for delaying the berthing of the vessel which in turn had resulted in demurrage. The Company loaded the cargo to Sanvordem from where it transported the ore to the port on a barge. As the Railways did not allot required number of rakes for loading to Sanvordem, the Company had to load the cargo to Tanaighat, which entailed road transport from Tanaighat to Sanvordem. This also contributed to the delay.

The contention of Management/Ministry is, however, not tenable due to the following:

1. The Company was already allotted a port plot for convergence of cargo and had a stock of 3000 MT on the date when it confirmed the vessel nomination. This is corroborated from letter (18 January 2001) addressed by Traffic Manager of the Goa Port in which the Company was requested to plan arrival of future vessels in such a way that sufficient cargo is collected in advance on the plot allotted to the Company.
2. In their letter dated 10 November 2000, the Railways had confirmed that it had decided to continue the present system of allotment of rakes in accordance with ship arrival. There might have been problems to the Railways in allotment of rakes, but it is incorrect to say that the Railways had followed any quota system, which was responsible for the delay. It is pertinent to point out that in the meeting held on 11 September 2000, the Railways had advised all exporters to plan loading and shipment in a precise manner to meet loading target as well as avoid demurrages. It was the poor planning that necessitated detention of the vessel beyond the lay time rather than the regulation of rakes allotment by Railways.

Basically, therefore, it was the failure on the part of Management in effective coordination and proper follow up with Railways that resulted in detention of the ship beyond the permissible lay time, and consequently an avoidable expenditure of Rs.85.43 lakh.

Rashtriya Ispat Nigam Limited

23.5.1    Loss of revenue of Rs.9.17 crore due to unwarranted restriction of production in the Blast Furnaces

Rashtriya Ispat Nigam limited (Company) has two Blast Furnaces for producing hot metal. It has three Coke Oven Batteries for producing metallurgical coke, which is required for the production of hot metal. Under normal circumstances, the entire requirement of metallurgical coke for the two Blast Furnaces can be met out of the production from the three Batteries.

The operations of the Furnaces were restricted between June 1998 and March 1999 due to operational, mechanical and electrical problems etc., and due to non-availability of metallurgical coke as well. The total hours of production lost in the two Blast Furnaces due to non-availability of metallurgical coke was 1853 hours during the above period. However, as per the reports of the Production Planning and Monitoring Department of the Company, metallurgical coke ranging from 15852 MT to 32710 MT was in stock during the period. Even after considering the shortage of 7820 MT found in physical verification during 1998-99, stock ranging from 8032 MT to 24890 MT should have been always available with Company during the above period. Thus, restriction of operation of Blast Furnaces on the ground of non-availability of metallurgical coke was unnecessary and unjustified. As a result, there was a loss of production of 46063 MT of hot metal during the period. Consequently, the Company lost revenue of Rs.9.17 crore, which would have gone towards contribution to fixed cost.

Management, while confirming that the operation of the Blast Furnaces was restricted by 1853 hours between June 1998 and March 1999, stated (June 2002) that the production of hot metal was brought down consciously in order to take care of depleting Blast Furnace coke stock vis-a-vis its availability and also to bring down the stock of pig iron and steel materials which were mounting up and the prices of pig iron in the international market were not remunerative. It was further stated that in March 1999 the stock of coke came down to zero level on some days and the stock pointed out by Audit was book stock and not physical stock of metallurgical coke and the stock at the end of March 1999 was only 2419 MT.

Management’s reply is an afterthought since the reasons on record clearly confirm that during the period between June 1998 and March 1999, the operation of the Blast Furnaces was restricted by 1853 hours for want of metallurgical coke only but not for any other reason such as the one now stated by Management. Further, the stocks pointed out by Audit are the actual stocks after considering the shortages noticed during the physical verification. In fact, the physically verified stock of metallurgical coke as at the end of March 1999 was 14,289 MT and not 2,419 MT as contended by Management. It was clearly the lack of co-ordination and communication between the Departments that resulted in restriction in production in Blast Furnaces by 1853 hours on the ground of non-availability of coke despite its availability.

Restricting the production in the Blast Furnaces resulted in loss of production of hot metal with consequential loss of revenue amounting to Rs.9.17 crore.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

23.5.2    Excess consumption deposit with APSEB- additional interest burden of Rs.3.93 crore

As per clause 28.2.1(a) of the terms and conditions of APSEB (Andhra Pradesh State Electricity Board), the Company was required to maintain a consumption deposit equivalent to three months average demand and energy charges with the Board. If the actual average consumption was more or less demand for shortfall or refund of excess would be made as per amended clause 28.2.2 (vi) of the terms and conditions of the power supply. The Company maintained a deposit of Rs.12.15 crore (yielding an interest of 3 per cent per annum) with APSEB between December 1987 and December 1993 towards consumption deposit. This remained deposited as against the minimum required deposit ranging from Rs.5.89 crore to Rs.9.99 crore during the period from 1995-96 to 2001-2002 due to reduced power consumption.

As the Company was operating on cash credit, borrowing funds at rates varying from 14.75 per cent to 20.75 per cent per annum, it could have avoided the payment of interest amounting to Rs.3.93 crore during the seven year period from 1995-96 up to the end of March, 2002 on cash/credit borrowed funds had the excess consumption deposit which yielded very low interest been got refunded.

Management stated (March2000) that the Company had been pursuing with APSEB for refund of total consumption deposit on the grounds that the Company had been a net exporter of power to APSEB under a separate agreement dated 24 March 1997. Ministry added (June 2002) that APTRANSCO (Transmission Corporation of Andhra Pradesh Limited) could have refunded the amount they deemed fit instead of total refund.

The reply of Management/Ministry is not tenable. The Company should have taken up the issue of refund of the total deposit separately. The Company should have concentrated first on getting the excess consumption deposit refunded because there were no doubts about the Company’s claim and it could have saved itself significant amounts in interest on cash credit. The Company should have sought refund of the excess deposit, at least when its repeated efforts to get refund of the total deposit failed.

Thus, by not pursuing the refund of excess consumption demand under amended clause 28.2.2 (vi) of terms and conditions of power supply, the Company incurred an additional amount of Rs.3.93 crore on the cash credit/borrowings, which was completely avoidable.

23.5.3    Loss of revenue of Rs.3.07 crore due to irregular award of contract for export of pig iron

By waiving red clause and EMD, the Company improperly awarded a contract to a foreign firm which did not fulfil its commitment and as such suffered a loss of Rs.3.07 crore.

The Company invited (December1999) limited tenders for booking orders for 50,000 tonne MT of pig iron to be exported during the last quarter (January-March) of 1999-2000. The floor level price (FLP) fixed by the Company was US$ 120 per MT. In response, fifteen parties submitted their bids by the prescribed time and date. Another bid, that of M/s. Glencore International AG,Baar/Switzerland was received on 22 December 1999 at 1550 hours (as against 1530 hours) through e-mail without the earnest money deposit (EMD). Of all the bids, the bid of M/s. Glencore International AG, which made an offer of price of US$130.15 per MT, was the highest though it was not valid as per the tender condition. The second highest bid was that of M/s Priya Holdings at US$ 126.25 per ton. The Company, however, considered the bid of M/s. Glencore International AG, by waiving the requirement of EMD.

The payment terms specified in the tender document envisaged payment through letter of credit (LC) in the format of seller with the red clause. The red clause entitles the seller to negotiate the LC opened by the buyer and realise 100 per cent of the value of the materials ready for shipment in the event the buyer fails to nominate a suitable vessel within 15 days from the date of service of seller’s “Notice of Readiness”. Based on a request from the buyer, the Company without recording any other reason waived the red clause and also waived the applicability of security deposit at its own. Accordingly an agreement was entered into (31 December 1999) between the Company and M/s. Glencore International AG for 50,000 MT at US$ 130.15 per MT to be lifted in two lots in January and February 2000,with a special condition that LC shall be opened strictly conforming to the format enclosed in the terms and conditions baring red clause.

The buyer opened a letter of credit on 6 January 2000 for US$ 6.51 million (Rs.28.28 crore) without red clause, which the Company accepted. The buyer did not lift the material on the grounds of declining price levels in international market. Despite the failure on the part of the buyer, the Company could not invoke the LC as it had already waived the red clause in the LC. The Company finally cancelled (February 2000) the agreement and called for (March 2000) fresh bids. The material was finally sold (April to June 2000) to M/s. Cargill at a price of US$ 112.10 per MT, which was far below the originally contemplated floor level price of US$ 120 per MT of December 1999.

Thus, due to invalid award of contract and also due to extension of an undue advantage to the buyer M/s. Glencore International AG, by waiving security deposit and the red clause, the Company lost Rs.3.07 crore being the differential price between M/s. Priya Holdings and M/s. Cargill (US$ 126.25 minus US$ 112.10 per MT) on the 50,000 MT of pig iron exported. Even compared to the floor level price of US$ 120 per MT, the loss sustained was Rs.1.72 crore.

Management stated (June 2001) that the bid of M/s. Glencore International AG, was technically acceptable as non-payment of EMD along with bid was not a fatal condition as per the tender conditions. As the EMD amount alone was to be forfeited in case the successful bidder failed to accept the confirmation as per the bid, the EMD amount alone should be treated as the amount at risk. The decision of the Company to waive EMD in case of M/s. Glencore International AG was taken in view of the fact that it had been lifting substantial quantities of the pig iron till that time and fulfilling all contractual obligations fully in line with the policy of the Company.

Management’s contention is not acceptable. As per clause 3.6 and 3.10 (vii) of the export marketing procedure order dated 1 May 1998, EMD or red clause should not have been waived. In exceptional cases, waiver may be considered accordingly on reasons in writing with the approval of Director (Commercial). His action for waiver of red clause without recording any reason and also waiver of EMD at its own was not a prudent decision.

Thus, the action of the Company in waiving of the security deposit and red clause placed it in a highly disadvantageous position while door had been left open for the buyer to walk out of the contract if it did not suit him. In the process, the Company suffered a loss of Rs.3.07 crore.

The matter was referred to Ministry in June 2002; their reply was awaited (September 2002).

23.5.4    Avoidable expenditure of Rs.2.89 crore on unnecessary shifting of stockyard at Delhi

For handling of iron and steel products at Delhi, the Company appointed (May 1990) M/s. RKKR Enterprises as consignment agent till December 1995. In the meantime the Board of Directors approved (July 1995) a policy decision to develop Company’s own stockyards at various places including one at Delhi. However, the efforts of the Company to acquire a site at Delhi for this purpose were not fruitful. Further, before expiry of the agreement the consignment agent while expressing (November 1995) their unwillingness, offered to lease out his stockyard at Badarpur in Delhi for a period of 2 years and also to continue as consignment agent till alternative arrangements were made by the Company. However, the Company took on lease the stockyard for one year i.e., up to December 1996 and appointed him as handling contractor till March 1996. From April 1996, the Company appointed another handling contractor (M/s. VTC Limited) for a period of three years. Simultaneously, the Company approached (April 1996) M/s. Hindustan Steelworks Construction Corporation Limited (HSCL) who offered to lease out a stockyard at Tikrikalan in Delhi, which was to be developed. After an assurance by HSCL that it would develop the stockyard in due course, the Company accepted (August 1996) the offer and entered into an agreement for payment of lease rent at Rs.4.95 lakh per month for a period of 3 years effective from January 1997, with an option to terminate the lease agreement at any time by giving three months notice without assigning any reason and without payment of compensation.

The change of stockyard (January 1997) from Badarpur to Tikrikalan, necessitated the change of Railway Siding from Tuglakabad to Bahadurgarh, wherein the trucks union levied a fee of Rs.100 per MT. Consequently, the handling contractor (M/s. VTC limited) had demanded an increased rate of Rs.140 per MT as against existing rate of Rs.36 per MT. The Company without seeking any alternative accepted the rate of Rs.140 per MT from January 1997 and continued the contract till 29 June 2000 and thereby incurred an avoidable extra expenditure of Rs.2.89 crore. It was only after a lapse of three and half years, the Company after working out relative economics, reverted to the consignment agency system and appointed M/s. VTC Limited as consignment agent from 30 June 2000. Under the new consignment contract, the truck union fee was avoided and the contractor shifted the Railway Siding to Badli.

Management Stated (October 2001) that Nangoli siding was considered for its operation, while Bahadurgarh siding was considered as the alternative, but it could not imagine that the Railways would close Nangoli siding for iron and steel consignments and truck union would exit at Bahardurgarh siding and thus, the Company was forced to operate from Bahadurgarh Railway Siding involving additional expenses towards truck union fee.

Management reply is not tenable as:

1. the Company should have been aware of the Railway’s decision of October 1996 regarding closure of Nangloi Siding and in fact Management was well aware of the issue as the same was deliberated in its proposals of January 1997;
2. it should have been ascertained the costs involved in the use of Bahadurpur Siding before entering into lease agreement with HSCL effective from January 1997 and had this been done, it would have avoided the extra expenditure; and
3. the Company continued the lease contract for three and half years (January 1997 to June 2000) though it had a option to terminate the contract without any payment of compensation and thereby incurred an avoidable extra expenditure of Rs.2.89 crore.

The matter was referred to Ministry in December 2001; their reply was awaited (September 2002).

23.5.5    Loss of Rs.64.24 lakh due to failure in obtaining bank guarantee and extension of unauthorised credit sales

The Company sold steel products to M/s. Enfield Industries Limited (M/s. Enfield), Calcutta from November 1995 through its Branch Sales Office, Calcutta. M/s. Enfield had obtained (November 1995) provisional certificate for tax-free purchases from the West Bengal Commercial Tax Authorities. Based on this certificate and also the declaration given by M/s. Enfield, the Company did not levy sales tax on the sales made to M/s. Enfield. The tax authorities, however, instructed (February 1996) the Company not to sell any material to M/s. Enfield without charging the applicable sales tax as the legality/validity of the said provisional certificate was challenged by the Department. This was contested by M/s. Enfield in the West Bengal Taxation Tribunal. Notwithstanding the doubts raised about M/s. Enfield’s eligibility for tax exemption, the Company failed to collect the sales tax on the sales made to M/s. Enfield. It started collecting security deposit equivalent to the applicable sales tax on the sales value only from 25 June 1996. When the Company requested M/s. Enfield to provide security towards sales tax for the sales made prior to 25 June 1996, they agreed (August 1996) to provide a Bank Guarantee towards sales tax for the entire sales, provided the Company would refund the security deposit collected so far, on this account. The Company, however, did not agree to this proposal but continued sales up to October 1996 to M/s. Enfield by collecting the security deposit equivalent to the sales tax amount. In the process, the Company collected Rs.47.53 lakh only as security deposit towards sales tax as against the sales tax of Rs.1.14 crore on the sales made to M/s. Enfield during February 1996 to October 1996.

Further, the Company extended (September 1996) unsecured credit sales of Rs.50 lakh against a post dated cheque issued by M/s. Enfield without obtaining the written approval of the competent authority. M/s. Enfield lifted materials worth Rs.49.93 lakh during September 1996 against a post dated cheque of Rs.50 lakh which, on presentation was dishonoured (October 1996). The ex post facto approval of the competent authority for the above irregular credit sales was obtained only in November 1996 i.e., after dishonour of the cheque. The Company, however, took a year to file (October 1997) a criminal suit against the party for realisation of its dues. The suit was yet to be decreed (September 2002).

The Taxation Tribunal gave its final verdict (October 1996), inter alia, cancelling the provisional certificate issued to M/s. Enfield and directing the Company to pay the sales tax amounting to Rs.1.14 crore for the sales made to M/s. Enfield during February to October 1996. Accordingly, the Company paid (November 1996 to August 1997) sales tax of Rs.1.14 crore and adjusted the security deposit of Rs.47.53 lakh collected and other credits of Rs.38.02 lakh payable to M/s. Enfield towards discounts, rebates etc. This apart, the Company received during 1999-2000 a further sum of Rs.14.18 lakh towards refund of sales tax leaving the balance of Rs.14.31 lakh to be borne by the Company in addition to the non-recovery of Rs.49.93 lakh due to dishonour of cheque. However, a civil suit was filed in June 1997 against M/s. Enfield for the recovery of original amount (Rs.78.42 lakh) and a provision for doubtful debts for the said amount was also made in the accounts for 1998-99. The civil suit is yet to be decreed (September 2002).

Ministry, while confirming the lapses on the part of Management in allowing credit against a post dated cheque stated (August 2002) that extending the unsecured credit without proper assessment of risk and benefits to a party with which the Company had a dispute regarding sales tax payments was not prudent and the matter had been referred to the Chief Vigilance Officer of the Company to probe and fix responsibility.

Thus, failure of the Company to obtain either a bank guarantee or security deposit covering the sales tax liability for the period from February 1996 to 24 June 1996 coupled with extension of credit sales without proper authority resulted in a loss of Rs.64.24 lakh

Steel Authority of India Limited

23.6.1    Avoidable expenditure of Rs.27.68 crore due to delay in finalisation of agreement for import of coal

Coal accounts for the major cost of raw materials of Steel Authority of India Limited (SAIL). SAIL laid down (January 1999) a policy for import of coking coal which, inter alia, provides that price fixation under long-term agreement (LTA) for purchase of hard coking coal be finalised after discussion with the long-term suppliers by an Empowered Joint Committee (EJC) comprising SAIL Directors, RINL Directors and from Ministry of Steel (MOS). However, prices so negotiated/settled are not to exceed the benchmark Japanese Steel Mills (JSM) prices.

Scrutiny of records of the Compnay during 2000-01 revealed that:

Prices per MT finalised for supply of hard coking coal by different suppliers for the year 1999-2000 were US$ 36.98 with BHP (BHP Coal Pty. Limited), US$ 36.45 with Shell (SHELL Coal Pty. Limited) and US$ 36.95 with MIM (Mount Isa Mines Limited) etc. with buyer’s option (excepting with MIM).

SAIL exercised (March 2000) minus buyer’s option i.e. importing minimum quantity of coal as per LTA for 1999-2000 on the assumption that they would get a better price over the price of 1999-2000 during 2000-2001 as JSM had settled lower prices around that time for the supplies to be made in 2000-01.

However, only one supplier viz. MIM agreed (May 2000) to supply 1.87 million MTof coal during 2000-01 at a price of US$ 36.30 per MT, which was lower by US$ 0.65 per MT as compared to the price for 1999-2000.

Two other suppliers finally agreed to supply coal under long-term contract for the year 2000-2001 at the following rates and quantity in August 2000 by BHP and in September 2000 by Shell.

Scrutiny of records further revealed that:

Although in the beginning of 2000, there was downward movement in the price and JSM settled price was lower by US$ 2.15 (5.1 per cent) per MT compared to last year, SAIL erred in not starting price negotiation immediately in January/February 2000 and instead waited till April 2000 for commencing the negotiations. The decision to exercise minus option was taken in March 2000.

Precious time lost in taking the decision had a major impact as the prices started rising up. As a result, the prices settled with BHP and Shell (now Anglo) for delivery during July 2000 to June 2001 were US$ 38.50 and US$ 37.81 per tonne respectively i.e. higher by US$ 1.52 and US$ 1.36 per MT compared to previous year prices.

Essentially therefore, SAIL lost out because it could not start negotiating price settlement immediately after JSM price fixation. This delay was all the more deplorable because the very purpose of setting up a high level committee was to get over the usual delays that plague such purchases. Even if the committee had settled the price at the previous year’s rate, there would have been a saving of Rs.27.68 crore. It is pertinent to mention that the price obtained in the spot market in February 2000 was US$ 34.25 per MT. However, SAIL, due to delay in taking up issue of price negotiation, lost the benefits of lower prices.

Management stated (May 2001) that once JSM settlements were known in January 2000, SAIL requested Ministry of Steel for nomination of their representatives. The nomination was received from MOS on 10 April 2000 only and the first round of negotiations was started on 10 April 2000. Clearly Management reply indicated that the fault lay at Ministry’s delayed decision.

The matter was referred to Ministry in April 2002; their reply was awaited (September 2002).

23.6.2    Procurement of soft coking coal

In pursuance of the SAIL Board’s decision of May 2000, the Empowered Joint Committee (EJC), consisting of Joint Secretaries from Ministry of Steel (MOS) and Directors from SAIL and RINL (Rashtriya Ispat Nigam Limited) decided (June 2000) for import of 0.8 to 1million MT of soft coking coal, out of a total requirement of 1.2 to 1.5 million MT during 2000-01, under long-term agreement (LTA) and the rest from spot tender and started discussion with Oceanic Coal Australia Limited (OCAL) and Fording Coal of Canada from whom SAIL had been procuring soft coking coal.

Delay by Management and Ministry in taking a decision regarding relaxation in specifications caused a loss of Rs.12.18 crore as detailed below:

On 2 August 2000, OCAL submitted their offer for supply of 2 lakh MT of soft coking coal to SAIL with a further quantity of 1.65 lakh MT on mutual consent at a price of US$ 33.40 FOB (Free on Board) per MT, which was reduced to US$ 32.30 FOB per MT during negotiation. The quantity was to be delivered to SAIL between October 2000 and September 2001.

On 16 August 2000, OCAL sought slight/marginal relaxation in the coal specifications i.e. load port tolerances of 34 plus/minus 1 per cent on volatile matter and 0.90 per cent plus/minus 0.05 per cent on MMR (Mean maximum reflectance of virtue) as against SAIL specifications of 34 per cent and 0.90 per cent respectively. SAIL, however, did not agree to the changes and asked the supplier to enter into agreement for supply of soft coking coal with the original specifications. OCAL, however, refused to enter into agreement unless technical specifications were relaxed.

Meanwhile against the spot tenders floated by the SAIL for supply of 5 lakh MT of soft coking coal in August 2000, none of the firms offered/quoted to supply the soft coking coal.

Since the price negotiated with the party was quite attractive, Director (Commercial) RINL, member of the EJC, suggested (October 2000) resolving the issue of relaxation in coal specifications as sought by OCAL. However, the meeting was not convened because MOS felt that there was no need for such meeting and matter of procurement of soft coking coal from OCAL was closed in November 2000.

Hence the entire requirement of imported coal for the period September 2000-August 2001 was met from the costlier hard coking coal.

Subsequently, a SAIL delegation comprising Directors of SAIL and Joint Secretary, MOS in their next visit to Australia between 3 and 10 May 2001 held discussions with OCAL for procurement of same variety of "Teralba Premium" soft coking coal for the period 2001-02 and obtained offers from them.

OCAL offered their quotations for supply of soft coking coal at US$ 40.50 FOB per MT with relaxed tolerances in volatile matter (VM) and MMR by plus 1 per cent and plus 0.05 per cent respectively as sought by them earlier in August 2000. But this time their relaxed tolerances in VM and MMR were agreed to and Committee of SAIL Directors on EJC and nominee of MOS negotiated price with the party.

It was finally decided (29 August 2001) to purchase a quantity of 4.50 lakh MT fixed plus 1.50 lakh MT of soft coking coal from OCAL at a price of US$ 39.25 FOB per MT with relaxed specifications in volatile matter (35 per cent maximum) and in MMR (0.85 per cent minimum). Accordingly, a LTA was entered into between SAIL and OCAL on 4 September 2001.

In this connection, the following observations are made:

Since no coal could be contracted against the three spot tenders issued by SAIL for soft coking coal in August/October 2000, the best option left for SAIL was to finalise the contract with OCAL. This was particularly so because coking coal prices had started firming up.

Further, when the MOS did not feel the necessity of resolving the issue, SAIL did not try to pursuade or reason out with the MOS regarding advantages of acceptance of the request of OCAL. Thus, the opportunity of availing the benefits of lower price was missed due to MOS’ insistence on not holding the meeting and SAIL's in-action and failure to put forward its views effectively to Ministry.

In view of soft coking coal being cheaper than the hard coking coal, its consumption in the coal blend was a necessity to effect reduction in the cost of consumption of coal. However, non-procurement of soft coking from OCAL for the year 2000-01, the Company had to depend on the costlier hard coking coal. Non-consideration of the lower offer of OCAL of August 2000 and procurement of coal at higher rate as per agreement of September 2001 has resulted in loss of Rs.12.18 crore in import of soft coking coal.

Management, while accepting the fact of non-receipt of offers against spot tenders, stated (May 2002) that since the party insisted on relaxation of technical specifications, it was not possible to conclude an agreement. On the suggestion of Director (Commercial), RINL, they further stated that it was decided that the EJC might internally review the situation and take a view so that the same could be implemented. Accordingly, SAIL approached the MOS for holding a meeting of the EJC on the subject, which was, however, not agreed to.

Ministry generally endorsed (September 2002) the reply of Management.

Although there is some merit in the decision not to relax specifications made earlier, the delay in taking the decision even after being aware of hardening of coal prices and non-receipt of offer against repeated spot tenders went against commercial principles. It was necessary for SAIL to have the contract concluded with OCAL keeping commercial consideration in view by analysing their offer for the relaxed specifications, which were in any case agreed to by SAIL subsequently.

Thus, not holding the meeting of the EJC for review of the situation and failure of SAIL to convince the MOS deprived it a benefit of Rs.12.18 crore.

23.6.3    Blockade of Rs.7.39 crore on installation of Coal Tar Partially Distilled boiler

To meet the increased requirement of steam after modernisation of Durgapur Steel Plant (DSP), SAIL approved (April 1995) a scheme for installation of a Coal Tar Partially Distilled (CTPD) boiler having steam generating capacity of 80 tonne per hour at DSP at an estimated cost of Rs.11.10 crore.

The job was awarded to L1 bidder i.e. Ignifluid Boilers India Limited (subsequently re-named IBIL Tech. Limited) on turnkey basis on 1 September 1995 at a total price of Rs. 12.65 crore with a completion period of 13 months i.e. September 1996. The contractor could start the work from July 1996 only due to delay in handing over the site by Management.

The progress of work was not satisfactory since beginning and the contractor suspended all activities in July 1998 due to financial problems. As the contractor failed to resume the work despite repeated reminders, risk purchase-cum-contract termination notices were issued in July 1999 and January 2000. The contract was finally terminated on 17 February 2000. An amount of Rs. 8.79 crore was released to the party. Management, however, could encash bank guarantee of Rs.1.40 crore available against the contract. No order could be placed to complete the balance job as no party was ready to do this job. Management made a provision for loss against CTPD boiler.

The requirement of steam is at present being met through the existing power plant and there is no proposal to complete the CTPD boiler to increase production of steam. Thus, the justification for sanction of the CTPD boiler in April 1995 was not realistic or need-based. It resulted in blocking a sum of Rs.7.39 crore in an incomplete CTPD boiler which is lying idle.

Ministry stated (October 2001) that order was issued to IBIL Tech. Limited who was one of the reputed parties. Further, for completing the balance work issue regarding use of alternative fuel combination of BF(Blast furnace) gas, CO (Coke oven) gas and furnace oil was under examination.

The reply of Ministry is not tenable as the party left the job mid-way without completing the construction of CTPD boiler. Further, the issue of examination of alternative fuel combination also could not succeed.

Thus, the expenditure of Rs.7.39 crore on the project had been rendered infructuous with no possibility of a solution in the near future.

23.6.4    Undue favour to a private party

SAIL’s failure to comply with the laid down credit policy led to blocking of Rs.1.76 crore for over 7 years and unrealised interest of Rs.2 crore as of March 2002 from a private party.

SAIL introduced a marketing tool in June 1994 under which regular customers could be provided unsecured credit (beyond bank guarantee limit) only as an exception and subject to overall credit period not exceeding 90 days. The above facility required the prior approval of the Chief Executive personally, after examination of the party’s creditworthiness.

M/s. Gangadharam Appliances Limited, (GAL) Chennai, a customers of Salem Steel Plant (SSP) executed (September 1994) a bank guarantee of Rs.1 crore to cover the value of goods sold on credit. SSP, however, allowed unsecured credit to GAL in excess of bank guarantee limit as a matter of course. It was seen that outstanding invoice value of goods was Rs. 6.94 crore as on March 1995, against which prior approval of the Chief Executive existed for sales made to the extent of Rs.4 crore only. The release of goods without prior approval flouted clearly laid down corporate policy and was indicative of undue favour to GAL. As of March 2002, arrears of invoice dues aged more than 7 years stood at Rs.1.76 crore and interest on above accumulated to Rs.2 crore.

Ministry sought (August 2002) to justify SSP’s action referring to: (a) the market conditions prevailing at that time; and (b) the need to improve sale of goods by SSP. Further, Ministry maintained that there was no undue favour on the plea that the customer was doing business and was paying old dues in instalments.

Ministry’s reply above was silent as to why SSP officials refrained from seeking prior approval of the competent authority notwithstanding adverse market conditions prevailing then. Also, the arrangement for recovering old invoice dues from GAL by way of monthly instalments (2000/2001) by relaxing the credit policy was not successful. GAL stopped honouring its commitment (November 2001) and the outstanding principal stood at Rs.1.76 crore (August 2002). Further, considering the bank rate, the interest chargeable to the customer worked out to Rs.1.73 crore as of March 2001 according to SSP’s own projections. Notwithstanding the fact that in 2001-02 there was further addition of interest of Rs. 26.40 lakh (15 per cent cash credit rate on Rs.1.76 crore). Ministry was apparently satisfied with the above state of affairs by informing (August 2002) the Audit that Rs.9 lakh was received in 2002-03 which was adjusted against interest payable by GAL.

Thus, the corporate policy that inter alia stipulated regular monitoring for timely recovery of unsecured credit dues was not enforced in this case. Obviously, SSP’s failure to comply with clearly laid down policy caused non-realisation of Rs.3.76 crore including interest of Rs.2 crore from GAL.

23.6.5    Unsecured credit to private firm amounting to Rs.1.99 crore

M/s. Ahura Welding Electrodes Manufacturers Limited was one of the key customers (Party) of the Branch Sales Office, Coimbatore and was lifting about 250-300 MT of electrode quality wire rods per month. SAIL granted secured credit of Rs.50 lakh and unsecured credit of Rs.1.50 crore (October 1999) inspite of the fact that the party was making losses from 1997-98 onwards and the mismatch in supplies and payments started widening from June 1998 as the party repeatedly defaulted in making payment of the bills. The outstanding as on 31 March 2001 stood at a significant principal amount of Rs.1.37 crore (excluding interest). Against this, Central Marketing Office (CMO), SAIL was holding bank guarantee of only Rs.50 lakh, which was encashed on 7 June 2001. Inspite of this, total amount recoverable from the party stood at Rs.1.99 crore (principal of Rs.85.73 lakh and accrued Interest of Rs.1.13 crore). Since no further payment could be received from the party, SAIL decided to initiate winding up proceedings against party to recover its dues.

In this connection, the following observations are made:

M/s. Ahura Welding Electrodes Manufacturers Limited started making losses from 1997-98 onwards and the accumulated loss as on 31 March 1999 stood at Rs.1.11 crore. Inspite of the above, the Branch initiated a proposal on 18 July 1999 to increase the unsecured credit limit of the party from Rs.1.20 crore to Rs.1.50 crore for the year 1999-2000.

Although the credit rating cell of SAIL did not recommend any unsecured credit to the party in view of their losses during 1997-98 and 1998-99, the competent authority sanctioned unsecured credit of Rs. 20 lakh on 21 July 1999.

The Branch again sent a proposal on 28 July 1999 for enhancement of credit limit from Rs.20 lakh to Rs.1.50 crore as there was overdue outstanding of more than Rs.1 crore from the party. The proposal was approved by the competent authority on 5 October 1999 with the condition “subject to clearance of overdue outstanding and to bring down the credit limit to Rs.1 crore by 31 December 1999 and to Rs.50 lakh by 31 March 2000.

However, this condition was not met as the party continued lifting the materials, availing of the credit facility without paying the dues till December 1999.

The instructions of the competent authority to bring down the credit limit were not followed. On the contrary, the Branch allowed the party to lift the material even beyond the credit limit sanctioned. Resultantly, the overdue outstanding (principal amount excluding interest) remained high throughout, i.e., Rs.2.48 crore as on 31 December 1999 and Rs.2.46 crore as on 31 March 2000.

In case of the customer’s business is wound up SAIL’s position would be that of an unsecured creditor. As such, chances of realisation of any amount through winding up proceedings were remote and uncertain, as accepted by Management itself.

Management stated (June 2002) that the decision for granting unsecured credit was taken in view of the party's loyalty and long association with SAIL, high net sales realisation, strong brand image of finished product etc. Further, the eventuality of non-payment of dues in case of extension of unsecured credit was difficult to be envisaged and hence, the failure should be construed as business risk and not imprudent decision. However, they admitted that the branch had exceeded the credit limit, since monitoring system was not adequate.

Management's contention of the business risk is not tenable since such a decision was ab initio not a prudent one in view of growing financial ill-health of the party. In the event it is surprising that the competent authority ignored the advice of the credit rating cell of SAIL not to give loan to the party. Granting them a steep increase in the credit limit was, therefore, totally unjustified. The facts and circumstances therefore point out clearly that the decision to grant credit and subsequently enhance it substantially was an act of grave financial imprudence.

In sum, therefore, risk perception was so obvious in this case that grant of repeated extensions of unsecured credit to a defaulting party ‘as a special case’ on the plea of retaining a so-called ‘large’ and ‘reputed’ party, who had been reporting financial ill-health for a period of time, was injudicious and against business prudence.

The matter was referred to Ministry in June 2002; their reply was awaited (September 2002).

23.6.6    Avoidable expenditure of Rs.1.70 crore due to poor cash management

Railways levy surcharge at the rate of 10 per cent on freight for booking iron and steel materials and 15 per cent on coal under “freight to pay” system i.e. when freight is paid at destination. In other cases no surcharge is payable since payment of freights are made at the time of booking of materials.

In order to avoid payment of surcharge on freight to railways, Durgapur Steel Plant (DSP) of SAIL entered into an agreement with the Railways in February 1998 to facilitate payment of railway dues through Credit Note-cum-Cheque (CNCC) system under Security Bond. As per agreement, CNCC drawn on State Bank of India/any other scheduled banks in Calcutta would be acceptable by Railways at Durgapur Steel Exchange Yard (DSEY) in lieu of cash payment of freight at the time of booking of materials.

DSP issued 20 cheques amounting to Rs.10.92 crore during 1999-2000, which were dishonoured by the drawee bank on the ground of exceeding drawing limits. Consequently, DSP had to pay Rs.1.10 crore towards surcharge on freight.

Similarly Bhilai Steel Plant (BSP) also delayed one day in making payment of Rs.4.84 crore for which Railway levied surcharge amounting to Rs.59.55 lakh.

Ministry in their reply (August 2001) accepted the fact that DSP had to incur freight charges as applicable on “freight-to-pay” basis since CNCC could not be cleared by the SBI. However, it was stated that the benefit of surcharge could not be availed due to constraint on availability of funds on account of sluggish market conditions, high capital related charges of modernisation and also due to loan repayment obligations. Despatches on “freight to pay” basis may be viewed as a source of working capital finance. In respect of BSP, Ministry stated (August 2002) that cheque was delivered on the last day in order to save interest. It was further added that the levy of surcharge was not a tenable claim from the Railways and SAIL would file a case in Railway Claim Tribunal, Kolkata against the action of Railway.

Ministry’s reply is not acceptable, since the fact of sluggish market condition as well as constraint on availability of funds was well known to Management at the time of issue of CNCC. The intention of issuance of CNCC was to make payment and to get the benefit of “freight to pay” system which could not be achieved due to improper cash management. Further payment to the extent of 10-15 per cent for few days could not be termed as a source of working capital.

Thus, due to poor cash management, SAIL had incurred an avoidable loss of Rs.1.70 crore.

23.6.7    Infructuous expenditure on power plant

Sanction of a project without ensuring availability of critical input resulted in stoppage of project work and infructuous expenditure of Rs.89.21 lakh.

The Board of Directors (Board) of SAIL sanctioned (May 1997) a 7.5 MW blast furnace (BF) Gas-based Captive Power Project for Visvesvaraya Iron and Steel Plant (Plant), Bhadravati at an estimated cost of Rs.21.69 crore with a completion schedule of 24 months i.e. by May 1999. The main fuel for Plant was surplus gas of 32500 NM3/hr of blast furnace which was being flared. The project proposal stated that the said surplus gas (Gas) was available with production of hot metal to the tune of 21,000 MT per month and the total Gas generation of 66,000 NM3/hr.

However, the Plant had reduced the level of production in BF due to poor market off-take from October 1996 itself. Consequently the BF Gas generation was practically half from October 1996. Inspite of the above having been discussed in the Board meetings of the Plant held in December 1997, March 1998, May 1998 and in September 1998, purchase orders for main equipment for the project were placed (August 1998) on two private parties. SAIL released (September/October 1998) advance payment and material to suppliers amounting to Rs.1.50 crore against bank guarantee of Rs.1.47 crore. Thereafter, the Plant decided (February 1999) to stop the project work for the reason that adequate Gas was not available for running the proposed Power Project. By then the project schedule was almost over and the project activity did not progress further (September 2002). Bank guarantee of Rs.61 lakh furnished by one of the parties was encashed by the Plant and the other bank guarantee was extended from time to time at the request of the Plant up to December 2002.

Despite holding a bank guarantee, dues from the other party were considered as doubtful of recovery and provided for in the books of accounts (March 2002) since the prospects of recovery were bleak. According to the party (June 2002) continuance of the guarantee for over 4 years was an infructuous exercise in view of their counter-claim for Rs.5.90 crore against goods produced but when delivery had not been accepted by the Plant. In this connection, Management stated (June 2002) that the Plant would discuss with the parties foreclosure of contract and come to a final settlement before which it would not be possible to indicate a specific figure with regard to financial loss. The issue remained unresolved till date (September 2002).

Ministry while confirming the facts and figures stated (September 2002) that the BF was being operated with only one blower, below its rated capacity due to sluggish market conditions and that two blower operation would not be possible in the near future. Further, it stated that to operate the BF at its rated capacity, greater proportion of quality iron ore purchase was required and that coke requirement would be about 15,500 MT per month, which could not be assured at present in view of financial constraints.

It was observed that the fundamental constraint of non-availability of Gas for the proposed project existed even prior to May 1997. However, the Company did not bring this material fact to the notice of its Board in the meeting held on 28 May 1997. This led to wrong decision to set up the Power Plant.

Thus, the Company’s decision to set up the Power Plant despite having knowledge of non-availability of critical input resulted in a poor investment decision and an infructuous expenditure of Rs.89.21 lakh apart from liabilities relating to closure of contracts.

23.6.8    Loss due to non-adherence to credit policy

Unsecured credit given to a financially unsound party resulted in loss of Rs.82.93 lakh.

The Salem Steel Plant (SSP) of SAIL sold (1996-1998) Hot Rolled Stainless Steel Sheets/Coils to M/s. Nagarjuna Steel Limited (customer) on unsecured credit basis with 30 days interest-free period. However, during the above period, the customer was not prompt in settling the dues within the interest-free credit period even on a single occasion right from the beginning. Instead of withdrawing the credit facility, SSP on its part allowed the customer to settle the invoice dues after delays ranging from 56 days to 636 days beyond due date in respect of 212 consignments without charging interest due for the period beyond 30 days. Obviously, SSP was not keen in enforcing the credit terms stipulated in the supply order.

Although, such unsecured credit facility was permissible only in the case of customers who had not defaulted in making past payments, SSP sanctioned (December 1997) further credit facility (unsecured and interest-free) to the same customer and even enhanced credit limit up to Rs.1 crore, more so, when there was already overdue amount of Rs.8.80 lakh (December 1997). Notwithstanding the fact that (a) the customer by then had become financially unsound and (b) it had not adhered to credit terms in the past, SSP still relied upon post-dated cheques given by the costomer and despatched goods worth Rs.54.31 lakh on credit on 29 and 30 January 1998. Thereafter the customer stopped lifting goods from SSP. Since payment was not forthcoming for over 3 years, SSP made provision (March 2001) for the dues treating it as bad and doubtful debts in the books of accounts.

After protracted correspondence, which lasted 4 years, SSP collected only Rs.6 lakh (March 2002 to July 2002). During the above period, the interest on overdue sums blocked up with the customer worked out to Rs.34.62 lakh on the basis of interest on cash credit charged by the SSP’s Bank.

Ministry confirmed the facts and figures and stated (September 2002) that there was a need to re-look at the policy of SAIL governing extension of unsecured credit to customers in order to prevent recurrence of such cases in future and added that SAIL was being requested to take necessary steps in this direction.

Thus, action of SSP in extending unsecured credit to a financially unsound customer was not in conformity with the corporate policy, which restricted such facility only to customers with established creditworthiness. This resulted in loss of Rs.82.93 lakh.