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Modi Govt Has Made a Start, But More Loss Making Companies Need to Be Shutdown

Oct 5, 2016

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On September 28, 2016, the union cabinet led by the prime minister Narendra Modi, decided to shutdown Hindustan Cables Ltd (hereinafter referred to as Hindustan Cables). This is one of the best decisions that the Modi government has made in the recent past and I sincerely hope that this trend to shutdown loss-making public sector enterprises continues.

Hindustan Cables has had no production activity since January 2003. Take a look at the following table. The company accumulated losses of Rs 5,847 crore in the decade spanning 2005 and 2015:

Year Losses(in Rs crore)
2014-2015 933
2013-2014 782
2012-2013 885
2011-2012 648
2010-2011 607
2009-2010 506
2008-2009 445
2007-2008 435
2006-2007 311
2005-2006 295
Total 5,847

Source: Public Sector Enterprises Survey

In 2014-2015, the company incurred total losses of Rs 933 crore. It was sixth in the list of the ten largest loss making public sector enterprises in India. In fact, it has constantly been in the list of the ten largest loss-making public sector enterprises since 2005-2006.

Given that it has not produced anything since 2003, the closure has taken way too many years to finally happen. Other than the losses, the company also managed to accumulate a huge amount of debt. As of March 31, 2015, the company had a total debt of Rs 5,963 crore. And not surprisingly, the interest that needs to be paid on this debt was the biggest expense of the company.


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In 2014-2015, the total interest on debt amounted to Rs 747 crore. The company stopped production in 2003. Given this, it was not earning anything from its operations. In this scenario, in order to continue paying the employees on its rolls, it had to borrow money. Employees' remuneration and benefits at Rs 113 crore was the second largest expense of the company.

And how many employees did the company have? As on March 31, 2015, it had 1,533 employees. The number of employees as on March 31, 2013, was 1,832.

This basically means that the government chose to run a loss of Rs 933 crore in 2014-2015, just so that 1,500 people continue to have a government job. By keeping Hindustan Cables and many other such companies alive, the government has gone around wasting the hard earned money of taxpayers over the years.

The good part is that now that it is shutting down, the government will no longer have to bear the losses of the company. The government bears losses of the loss making companies in two forms. One is by putting money into the company every year to keep it going. Or it ultimately has to take on itself the entire debt that the company takes on to keep itself going. And the financial system lends to the company despite it not making any money because it knows ultimately they are lending to the government.

The other good thing that will happen is that the government will end up with a lot of land (on which any public sector enterprise like Hindustan Cable sits). The 2014-2015 annual report of Hindustan Cables points out that the company got land free of cost from state government of West Bengal as well as erstwhile Andhra Pradesh. This land should be returned to the states and can become a part of the land bank that states can use to attract industries.

This is very important given that the land acquisition policy in the country remains a mess. Hence, land from public sector enterprises which are shut down can be an important source of land in the short to the medium term, for a programme like Make in India to take off.

Further, it is important that the government continues with this and shuts down more loss making public sector enterprises in the time to come, especially those companies which haven't been producing anything for a while.

Take the case of Hindustan Photo Films Manufacturing Company Ltd. Between 2004-2005 and 2014-2015, the company had accumulated losses of Rs 12,432 crore.

In 2014-2015, the company incurred total losses of Rs 2,164 crore. It was fourth in the list of the ten largest loss making public sector enterprises. In fact, it has constantly been the list of the ten largest loss-making public sector enterprises since 2004-2005.

Year Losses (in Rs crore)
2014-2015 2,164
2013-2014 1,820
2012-2013 1,561
2011-2012 1,352
2010-2011 1,157
2009-2010 1,003
2008-2009 876
2007-2008 789
2006-2007 653
2005-2006 561
2004-2005 496
Total 12,432

Source: Public Sector Enterprises Survey

The funny thing is that the company was referred to the Board for Industrial and Financial Reconstruction (BIFR) under the terms of the provisions of Sick Industrial Companies (Special provisions) Act, 1985, in October 1995.

Interestingly, the BIFR had confirmed its opinion for winding up the Company in an order in January 2003. This company has continued to exist and accumulate losses as well as debt. The total debt of the company as on March 31, 2013, had stood at Rs 7,692 crore. This debt had been taken on in order to ensure that the company continues to operate despite making losses.

As in case of Hindustan Cables, the total production of the company had more or less collapsed: During 2012-2013(the latest annual report that I could find) the total production of the company stood at Rs 3.6 crore. The sales had stood at Rs 3.7 crore. Now, imagine who in their right minds would run a company with sales of under Rs 4 crore, which ends up with losses of more than Rs 1,500 crore, during the course of the year.

The most obvious explanation could have been that these losses helped people continue to have jobs. So how many employees does Hindustan Photo Films employ? As of March 31, 2013, it employed 687 individuals. This had fallen to 348 by March 31, 2015.

What does this mean? The government chose to run a loss of greater than Rs 2,164 crore in order to keep 348 people employed. Of course, all the money being spent is not going towards employee salaries. The biggest expense of such companies is paying the interest on the debt that they have accumulated over the years. In order to pay this interest, they need to take on more debt. A perfect Ponzi scheme, if ever there was one.

When companies borrow to survive their structure becomes akin to that of a Ponzi scheme. They survive by borrowing and then using that money to pay off the interest on outstanding debt as well as debt that needs to be repaid. In case of government companies this can go on endlessly given that the lending is ultimately backed by the government.

To conclude, it's about time that along with Hindustan Cables, the government shut down Hindustan Photo Films and many other such Ponzi schemes that it has been running for a while.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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6 Responses to "Modi Govt Has Made a Start, But More Loss Making Companies Need to Be Shutdown"

amol

Oct 10, 2016

Totally agree with the view of Shri.George T.

Like 

George T

Oct 6, 2016

All this loss making public sector units should be shut down .Most of the units are kept alive for helping the poor employees.These employs should be absorbed to other public sector undertakings through transfer and postings. Now a days government is infusing fresh capital to banks to recap banks.My suggestion is these capital has to be infused through these loss making shutting down units.In one shot banks get the required capital through the closure of bank loans.Their capital base is protected.And loan account is wound up.Also banks capial base is not increased.So existing shareholders interest are protected .

Like (1)

S Ramakrishnan

Oct 6, 2016

On the one hand govt. is allowing such obvious burden on the exchequer to continue and on the other hounding out entrepreneurs like Vijay Mallya who was ready to cough up 50% immediately.And horror of horrors in BOTH the cases it has failed miserably.Such things would not have happened if the reformist of 1994 or later would have put a strong and viable humane LABOUR LAWS in position instead of one dimensional concentration of the then Forex position.

Like (1)

STALIN PALANISAMY

Oct 5, 2016

Dear Mr.Vivek Kaul-ji,
who is responsible for the PSU became sick.what is the role of CMD,DIRECTORS,SECRETARY,JOINT SECRETARY,ADDITIONAL SECRETARY,UNDER SECRETARIES,What these peoples doing,and the Govd paid for this peoples lakh and lakh rupees as salary for what,this is also TAX PAYERS MONEY.
Why punish the innocent employees.
Vivek ji,
you know the HINDUSTAN PHOTO FILMS Employees salary? still date 5TH OCTOBER 2016.we are getting 1987 pay scale which is the only one Indian PSU.
WE ARE THE SLAVES OF INDIAN PSU.
The DEPARTMENT OF HEAVY INDUSTRY AND THE INDIAN GOVT DENIED THE WAGE REVISION FOR Hindustan photo films IN 1992,1997 2007 AND NOW 2012.
WE STRUGGLED FOR REVIVAL FOR MORE THAN 25 YEARS WITHOUT WAGE REVISION.WE LOSE EVERYTHING FOR REVIVAL ,BUT WE FAILED,
If you have influence with OUR PM-JI,pl inform,
FIX the RESPONSIBILITY find the culprits punish them, then only we save the PSU and assets, otherwise This HIGHLY TALENTED irresponsible bureaucrats will LOOT all the PSU with the help of politicians.

Like (1)

Niranjan Parikh

Oct 5, 2016

Entire interest cost cannot be saved by closure.By closing govt can save on recurring wages and cumulative interest on borrowings required for wages year after year.If there are no saleable assets lenders need to be paid by govt.

Like (1)

Rajeev Nayan Ghuwalewala

Oct 5, 2016

Taxes, levies and fee is extorted by hook or crook from entrepreneurs and drained out by government in this manner. Rs 12432 crores is a huge amount paid for no work at all. Entrepreneur work day and night, take risks and stress caused by numerous statutory bodies besides impact of market conditions. It's a straight forward case of misappropriation of Tax payer's money. Modi Government's decision of Shutting down these white elephants however is commendable.All loss making PSUs should be shut down and assets disposed off at the earliest.

Like (1)
  
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