CHAPTER 6
MINISTRY OF COMMERCE

India Trade Promotion Organisation

6.1.1    Irregular payment of Rs.3.92 crore to employees

India Trade Promotion Organisation (Company) introduced (September 1996) an incentive scheme for its employees including Board level appointees, which envisaged that the employees would receive an annual payment of 8.33 per cent of their basic pay and dearness allowance, subject to a maximum of Rs.6000 from the financial year 1996-97 onwards. It was observed in Audit that the Government had not approved this incentive scheme so far. Although DPE guidelines stated that no ex gratia /honorarium or reward should be paid by PSEs unless approved by Government in accordance with the prescribed procedure, the Company made irregular payment of Rs.3.92 crore to its employees from 1996-97 to 2001-02 under the above scheme, which resulted in undue benefit to them.

Management stated (June/August 2002) that the payments were made to the employees as interest-free advances every year and were recoverable from them in case the scheme was not approved by the Government of India. They also stated that the Company followed the prescribed procedure of getting the incentive scheme approved by their Board as per DPE guidelines issued in October 1988 and hence approval of Government was not required.

The reply is not tenable as the DPE guidelines issued (March 1996) based on which the incentive scheme was introduced, never authorised a PSE specifically to introduce a new incentive scheme with the approval of the Board. The requiement of the prescribed procedure would imply that approval of the Government was necessary for the introduction of any incentive scheme in the absence of specific direction issued to the contrary. Besides, Ministry of Commerce had already indicated (September 2000) to the Company that further incentives to the employees were not necessary in view of the substantial increase in their pay and allowance structure. The DPE guidelines issued (October 1988) were meant to cover incentive schemes already in operation under the Payment of Bonus Act while the employees of the Company were not covered by the said Act.

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

MMTC Limited

6.2.1    Avoidable loss in soya operations

MMTC Limited (Company), through its branch at Indore (branch) was engaged in the procurement of soya seed (seed), processing and sale of soyabean oil and de-oiled cake (DOC). As per the guidelines prescribed by the Company for soya operations, parity (Parity occurs when the cost price equals the sale price) calculations were required to be done before purchasing seed to arrive at the extent of expected profit/loss per MT. The guidelines also provided that even in the case of negative parity, purchases had to be continued during the soya season, especially during October to December.

A review of the operations of the branch for the oil year (Oil year is from October to September) 1998-99 revealed that the Corporate Office permitted branch to purchase seed from 7 November 1998 onwards. During the oil year 1998-99, the branch procured 38573.605 MT of seed. It was also noticed in Audit that of the above, 24471.756 MT was procured when all the parity calculations showed losses ranging from Rs.435 to Rs.1543 per MT in respect of DOC. The remaining quantity of 14101.849 MT was purchased without making any parity calculations. It was observed that the international prices of DOC gradually declined from US$ 331 (May 1997) to US$ 135 (November 1998). Moreover, there were indications that due to good production of seed in the world, the prices of DOC would be under pressure. Despite this, the branch went ahead with the purchase of seed. The branch produced 30718 MT of DOC and 6891.738 MT of oil from the processing of 38489.149 MT. Of this, the branch sold 28546 MT of DOC and 6859.828 MT of oil during the oil year1998-99 and incurred a loss of Rs.5.28 crore.

Management stated (July 1999) that it had to go in for bulk purchase so that at least the minimum required quantity was converged at the plants to commence the processing. Also, the market conditions were such that there was no parity on each day of floating of rates.

Ministry endorsed (March 2001) the reply given by Management.

The reply of Management/Ministry is not tenable as soya operations are a trading activity and the Company should have ensured commercial viability of the transactions as a whole, if not on a day-to-day basis. The cost of producing DOC and oil amounting to Rs.36.84 crore besides other related cost was more than the sale price of Rs.34.91 crore, indicating that there was no overall parity on the purchase of seed. Further, the guidelines of the Company which allowed the purchasing of seed even without parity, were defective, as they allowed the branch to continue the purchase of seed despite a continuous fall in the international prices of DOC.

Thus, the purchase of seed without working out parity calculations/ignoring negative parity at the time of purchase despite the declining trend in the international market prices of DOC resulted in a loss of Rs.5.28 crore.

6.2.2    Avoidable extra expenditure in the purchase of coal

During the currency of a valid agreement for obtaining supply of coal of superior quality at a lower rate, the Company entered into another agreement with the same supplier for coal supply of lower quality at a higher rate, resulting in an extra expenditure of Rs.2.63 crore.

The Company entered into (15 May 1999) an agreement with Punjab State Electricity Board (PSEB) for supply of 4 to 6 million metric tonnes (MT) of thermal coal of a specified quality within a period of three years. In order to execute this agreement, the Company placed (19 August 1999) an order with M/s. Rich Group International (RGI) for supply of 7,50,000 MT coal during the period from August 1999 to May 2000 at a rate of US$ 31.70 per MT. RGI supplied 2,86,000 MT of coal during the period from September 1999 to April 2000.

Meanwhile, the Company received (April 2000) an order from Gujarat Electricity Board (GEB) for the supply of 1,30,000 MT of coal. Even though RGI was yet to supply the remaining contracted quantity of 4,64,000 MT against the earlier agreement which was sufficient to cater the need of GEB and PSEB, the Company reduced the contracted quantity of 7,50,000 MT to 5,50,000 MT on 9 June 2000 on the plea that PSEB was unable to give bank guarantee for the supplies to be made. It then entered into another agreement on 30 June 2000 with RGI for the supply of 1,30,000 MT coal at the rate of US$ 34.65 per MT for a lower quality for supply to GEB. As a result of this unusual decision, the Company incurred an extra expenditure of US$ 0.58 million (equivalent to Rs.2.63 crore) on 1.35 lakh MT of coal supplied to GEB.

Management stated (June/September 2001) that adequate arrangements for obtaining bank guarantee for supply to be made to the PSEB were not in place, as a result of which the quantity ordered through the previous contract had to be reduced. They further stated that the two agreements entered into with RGI had different specifications of coal and therefore the two agreements were not comparable.

Contention of Management is not tenable in view of the fact that at the time of reduction in quantity of the first agreement, the Company was already in possession of a firm order of supply of 1,30,000 MT of coal from GEB and the specifications requirement of coal under the second agreement meant for GEB was lower than that of PSEB. Thus, entering into a second agreement with the same firm at a higher rate for lower specification when adequate balance quantities were available for meeting the requirement of GEB out of the first contract was wholly injudicious and commercially beyond any intelligent comprehension. This is more so since the Company itself had diverted one consignment of 61715 MT of coal to GEB from the previous contract with higher margin of profit.

Ministry stated (June 2002) that it had no comments to offer, as this was purely a commercial transaction of the Company. The reply is not very encouraging because the way the contract was done for the supply to GEB, needed thorough probe from the vigilance angle by Ministry.

Thus, the fact remains that entering into a second agreement with the RGI at a higher rate for lower quality of coal the Company incurred an extra expenditure of Rs.2.63 crore.

PEC Limited

6.3.1    Irregular payment of ex gratia

The Company made irregular payments of Rs.72.88 lakh as ex gratia to its employees in contravention of the guidelines issued by the Department of Public Enterprises.

The Department of Public Enterprises, issued (October 1993 and January 1997) instructions to public sector enterprises (PSEs) not to pay bonus /ex gratia to their employees who were not entitled for bonus under the provisions of Payment of Bonus Act, 1965 (Act). It also clarified that no payment in the name of ex gratia, honorarium or reward, whatsoever, should be made by the public enterprises under the administrative control of the Central Government to their employees over and above the entitlement under the provisions of the Act or the executive instructions issued by the DPE in respect of ex gratia unless the payment had been authorised under duly approved incentive scheme in accordance with the prescribed procedure.

Despite these instructions, PEC Limited (Company) paid Rs.72.88 lakh as ex gratia during the period from 1994-95 to 1999-2000 to its employees who were not entitled to bonus under the provisions of the Act. It was noticed that during the year 2000-2001, the Company had engaged the National Productivity Council to frame a Productivity Linked Reward Scheme for its employees. Similar comment was made in para 5.11 of the Report of the Comptroller and Auditor General of India-Union Government (Commercial) No.3 of 1995 and the Company had obtained ex-post facto approval of the Government for the payments made up to the years 1993-94.

Thus, the payment of ex gratia to the employees who were not eligible for bonus was irregular and inconsistent with the guidelines issued by DPE and was against the provisions of the Act.

Management stated (March and May 2001) that the payment of ex gratia was made after the approval of the Board of Directors and was on the lines of the one made by The State Trading Corporation of India Limited (STC) as a commitment of parity of scales and service conditions had been given to the employees at the time of separation of the cadre of the Company from that of STC. They also stated that they had taken up the matter with the Government for their approval. Ministry endorsed (August 2001) the reply of Management.

The reply is not tenable as the payment of ex gratia was in violation of DPE guidelines and the provisions of the Bonus Act.

The State Trading Corporation of India Limited

6.4.1    Irregular payment of ex gratia

The State Trading Corporation of India Limited made payment of Rs.5.49 crore as ex gratia to its employees in gross violation of the Payment of Bonus Act and instructions of the Government of India.

The payment of bonus or ex gratia is regulated by the Payment of Bonus Act, 1965 (Act). As per the Act, a salary limit for the purpose of drawing of bonus has been prescribed. Employees of the public sector drawing salary above this limit are not entitled to draw either bonus or ex gratia, unless the amount is authorised by the Government under a duly approved incentive scheme, framed in accordance with prescribed procedure.

It was observed that The State Trading Corporation of India Limited (STC) was paying bonus to its employees as per the provisions of the Act. In addition to bonus, STC was also paying ex gratia to its employees who were not covered by the Act by virtue of their drawing salary beyond the limits stipulated in the Act. It was also noticed that STC had not formulated any incentive scheme as per the instructions issued by DPE. STC had paid Rs.5.49 crore during the period from 1992-93 to 1999-2000 as ex gratia to its employees. A similar lapse had been pointed out in para 4.6 of the Report of the Comptroller and Auditor General of India-Union Government (Commercial) No.3 of 1994 and STC had obtained ex-post facto approval of the Government for the payment made up to 1991-92. When Ministry sought (May 2000) explanation for the basis of payment, STC intimated (June 2000) that though Government had not approved the original Productivity Linked Reward Scheme, its staff was being paid ex gratia in lieu of bonus to maintain a cordial industrial relationship. They further informed (June 2000) that a suitable incentive scheme was being framed in this regard.

Thus, the payment of ex gratia to the employees who were not eligible for bonus was irregular and inconsistent with the guidelines issued by DPE and was also against the provisions of the Act.

Management replied (June 2001) that the Act neither allowed nor forbade payment of bonus or ex gratia to the employees drawing a monthly salary of more than the prescribed limit. They further replied that though the approval of the Government had not been obtained, the Government was in the knowledge of the payment of ex gratia by STC as the Board of the Company consisted of officials from the Government of India. They further replied that the Productivity Linked Incentive Scheme had been sent to the Government for their approval.

The reply of Management is not tenable as sub-section 13 of Section 2, read with the preamble of the Act, clearly prohibits the payment of bonus or ex gratia to the employees drawing monthly salary of more than the prescribed limit. Further, presence of officials from Ministry in the Board of STC could not be construed as de-facto approval of the Government for payment of ex gratia by STC in violation of the provisions of the Act.

Ministry endorsed (October 2001) the reply of Management and agreed with the contention of Audit that the presence of officials from Ministry in the Board of STC could not be considered as de-facto approval for payment of ex gratia to its employees.

6.4.2    Unjustified expenditure in the construction of a warehouse at Kakinada Port

Board of Directors of STC approved (March 1997) construction of a warehouse measuring 9622 square metres with an open stockyard on a piece of land taken from Kakinada Port Authorities, at a total cost of Rs.4.89 crore. It assumed that commodities like sugar, rice and oil extracts to the tune of 7 lakh MT per annum with a dwell time of 30 days for each cargo would be routed through Kakinada Port by STC in the fourth year of the operation of the warehouse.

Export of commodities through Kakinada Port had been falling from 1997-98 itself. In the year 1998-99, STC did not handle any export of wheat or rice through Kakinada Port and also decided (August 1998) to stop its oil extraction business, which was to account for 20 per cent of the total cargo emanating from the port. Despite these trends, the STC Management did not inform the Board about the unviability of running the warehouse and went ahead with the construction of the warehouse, which was completed in April 2000 at a cost of Rs.5.11 crore. However, STC did not handle any commodity to utilise its warehouse. In the light of the reduced business potential emanating from Kakinada Port, STC also closed its Kakinada office with effect from July 2001. The warehouse was unable to cover its operating cost from the date of its construction on 26 April 2000 to March 2002, as STC had earned rent of only Rs.6.46 lakh against the lease rent of Rs.8.42 lakh already paid to the port authorities during this period. Consequently, STC incurred an infructuous expenditure of Rs.5.11 crore.

Management stated (April 2001/June 2002) that since it was already in possession of the plot it had to go ahead with the construction of the warehouse as surrender of the plot midway would have resulted not only in financial loss but would also have created an adverse image of STC. They also stated that the declining trend in the export of commodities at Kakinada Port was on account of a number of complex factors and in agricultural goods there was no set trend over medium/long-term periods.

Ministry, while endorsing the reply of Management, stated (July 2002) that since the transaction under scrutiny related to business/commercial activities of the Company, it was not in a position to offer any comment.

Contention of Management/Ministry is not tenable as they should have suspended work to restrict further losses with due regard to the financial prudence. It completely overlooked the downward trend of exports during the same period and also failed to apprise the Board of this development, which had a bearing on the viability of the investment.

Thus, the fact remains that STC incurred an infructuous expenditure of Rs.5.11 crore on construction of an unviable warehouse.

6.4.3    Loss of investment due to improper appraisal

With a view to have a committed supply for exports and a long-term relationship with the entrepreneurs, STC entered (September 1995) into agreements with M/s. Bluegold Maritech (International) Limited (BMIL) and M/s. Richfield Aquatech Limited (RAL) for aquaculture projects, for farming and export of Tiger Shrimps, with equity participation to the tune of Rs.1.60 crore (10.6 per cent) and Rs.55 lakh (13 per cent) respectively. As per the terms of the agreement, STC could disinvest the shareholdings to the promoters in September 2000 after a lock in period of 5 years from the date of entering into the agreement under a buy back scheme.

Scrutiny by Audit revealed that STC knew (April 1995) that (i) aquaculture projects were prone to the vagaries of nature and the industry had faced a severe setback in 1994, (ii) banks had disassociated themselves from extending loan facilities for aquaculture projects due to the high risk involved in the same and (iii) the projects did not have a firm market tie up and could face competition from existing firms in the business. Besides this, STC availed of (May 1995) the services of CRISIL for an independent appraisal of the aquaculture projects prior to making investments in them. CRISIL, in their report, had stated that the experience of large corporate houses in the aquaculture industry had not been encouraging in the past. They further informed that various risks like low margin, extensive control by outside agencies and unplanned investments were associated in this line of business and had concluded that the overall operational risk involved in the project was high and the returns would be average.

A review of the working of the joint venture companies revealed that both of them suffered since inception due to (i) non creation of facilities envisaged on account of promoters’ inability to tie up the balance sources of funds which were necessary for the completion of the project, (ii) adverse climatic conditions and (iii) shortage of working capital. With the rudimentary infrastructure created by the two joint ventures, production commenced and in 1996-97, BMIL offered its products valuing Rs.67.80 lakh (20 per cent of the total production) and RAL offered products valuing Rs.38.52 lakh (21.58 per cent of the total production) for sale by STC. STC earned a profit of only Rs.2.47 lakh in the export of the above quantities. No further quantities were offered to STC thereafter by either of the joint venture companies.

Considering the poor performance of the joint venture companies, STC, as per the terms of agreement, demanded (January 2001) redemption of its shareholdings. However, while RAL requested (July 2001) STC for extension of the lock in period of equity shares by another 5 years on the plea of adverse financial position, there was no response from BMIL. There being remote chances of recovery of the amount invested, particularly in the light of the fact that STC had no tangible security in hand, it was forced to provide (October 2001) for the entire bad debt of Rs.2.15 crore in its accounts.

Management stated (April 2002) that the equity participation was a conscious decision with due approval of the Administrative Ministry. They further stated that the joint venture companies did not come up as scheduled because of paucity of funds, repeated cyclones, untimely rains or lack of rains and spread of virus. They admitted that chances of recovery appeared bleak at this stage.

The reply is not tenable as the approval by the Administrative Ministry did not absolve STC from its primary responsibility of proper appraisal of projects to ensure safeguarding of its investments. The reasons adduced for non-performance of the joint venture companies viz. paucity of funds, shortfall/excessive rain and virus problems had been forecast by the expert agency. Besides, CRISIL had also apprised STC of the fact that large Corporates had not found this line of business profitable on account of inherent risks involved.

Ministry, while endorsing the reply of Management, stated (July 2002) that since the transaction related to business/commercial activities of the Company, it was not in a position to offer comments.

Thus, due to improper appraisal and ignoring the advice of an expert agency, STC jeopardised its entire investment of Rs.2.15 crore in the two aquaculture projects.

6.4.4    Excess payment in the implementation of voluntary retirement scheme

STC introduced (February 2001) a voluntary retirement scheme (VRS) to reduce surplus manpower. The scheme was in operation from 1 to 15 February 2001 and 313 employees were relieved (26 February 2001) under the same.

In accordance with this scheme based on Department of Public Enterprises (DPE) guidelines (May 2000), employees were to be paid ex gratia equivalent to two months’ emoluments for every completed year of service or part thereof or the monthly emoluments multiplied by the balance months of service left before the normal date of retirement, whichever was less. But contrary to the guidelines, STC reckoned 26 days as one month instead of 30 days and extended the period beyond 2 months for every completed year of service or the number of months service left whichever was less for computation of ex gratia. Consequently, STC made an excess payment of Rs.1.17 crore to 258 employees who had taken voluntary retirement in February 2001.

Management stated (July 2002) that it was their intention to calculate ex gratia considering 30 days as one month but to maintain parity with its sister organisation i.e. MMTC Limited, STC also calculated ex gratia by adopting 26 days as a month. They also stated that the matter had been referred (February 2001) to DPE and Ministry but no response was received.

The contention of Management is not tenable, as following of an irregular practice adopted by its sister organisation, departing from its earlier practice, which was also contrary to the existing instruction of DPE was inappropriate, particularly when the practice was not in the financial interest of STC. Further, since STC had itself referred the matter to Ministry it should not have made actual payment before receipt of the clarification from the DPE/Ministry.

Thus, adoption of 26 days as one month instead of 30 days for computation of ex gratia for implementation of VRS resulted in an excess payment of Rs.1.17 crore.

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

6.4.5    Avoidable loss in the export of coffee to USA

Coffee America (USA) Corporation in March 2000 placed two orders on STC for supply of 7500 bags of 60 kilograms each of Indian Arabica Cherry clean bulk coffee beans. The coffee was to be shipped in April 2000 (4500 bags) and May 2000 (3000 bags). The contract named M/s. STC NY(New York) through STC Bangalore as seller. M/s. Kaycee Coffee and Spices Exports Private Limited, who was to supply the item, was named as the “Shipper”.

The shipper M/s. Kaycee did not despatch the consignments by the dates specified in the contract. During April and May 2000, STC NY cautioned STC Bangalore that buyer was concerned at the delay in shipments and also asked Bangalore office to initiate quality inspection to safeguard STC’s interest. STC Bangalore replied that the inspection charges would amount to Rs.12,000 per shipment and could not be borne either by the shipper or by STC. In mid-May, NY office informed STC Bangalore that the buyer was unhappy at the delay in fulfillment of the contract and that the buyer had revealed that M/s. Kaycee’s reputation was not very good.

M/s. Kaycee shipped 10 containers (containing 300 bags each) in April/beginning of May 2000 and 5 containers each on 31 May, 8 June and 10 June 2000. On receipt of these last 15 containers in New York in July and August 2000, the buyer found that the quality of shipment was poor and did not meet the requirements of the contract. The buyer reported that the samples from the containers revealed the contents to be sweepings, robusta and other defective beans. Even as per the quality evaluation report of Coffee Board (India), the samples were not identical to the control sample and contained a mix of Robusta cherry bulk as against Indian Arabica cherry bulk beans ordered by the foreign buyer.

M/s. Kaycee meanwhile managed to persuade STC Bangalore to intercede on their behalf to get payment released soon after the shipment left the Indian shores. On STC’s advice, the buyer released a payment of US$ 0.263 million before receiving the shipment. However, on receipt of sub-standard material in the shipment, the buyer filed a total claim of US$ 0.412 million for arbitration against STC NY and STC Bangalore.

Since STC was identified in the contract as the seller, the liability for not complying with the contract provisions rested with STC as per legal opinion obtained by the STC NY. Hence, after intense negotiations, the STC settled the issue out of court by making a payment of US$ 0.265 million (Rs.1.24 crore) in full and final settlement of the arbitration proceedings initiated by the buyer.

As the Associate could offer no practical solution, STC filed a criminal complaint (August 2000) with the Police against the Associate for committing fraud by supplying highly substandard material and for cheating both the Company and the foreign buyer. The Company also filed a civil suit against the associate on 30 January 2001 in the Court of Civil Judge, Bangalore claiming Rs.1.26 crore.

Thus STC suffered a loss of Rs.1.21 crore (After adjustment of Rs. 6.25 lakh realised on disposal of rejected coffee and legal expenses of Rs. 3.54 lakh) on account of indifference and negligence, which wiped out the profits earned by it in this business in all its branches over the last 7 years. Moreover, the case also damaged the export market of coffee on account of dubious commercial practices.

Management of STC stated (September 2001) that (i) there was no advance intimation from the shipper to the Company to draw samples (ii) the associate was put on notice and advised to take care of the balance coffee to be shipped by them as soon as quality deficiency was noticed and (iii) the loss was recoverable from the shipper. Ministry endorsed (October 2001) the reply of Management.

The Contention of the STC Management has no defence at all as it was incumbent on the part of the STC as a seller to ensure the quality of coffee for which the pre-shipment tests would have cost only a meagre sum of Rs.12,000 per shipment. In light of the fact that the reputation of the Associate was suspect and the information about pre-shipment was not given regularly, the decision of Management not to conduct pre-shipment inspection on the grounds stated looks flimsy. Further, as the Company has made provision towards the loss in the accounts for 2001-02, it is evident that there is no chance of realisation of the amount.