A horror story
The 39th annual report of Southern Petrochemical Industries Corporation is a continuation of the horror story of the company that initially reared its ugly head in the late 1990's. Originally set up to make urea from ammonia, to provide a stimulus to agricultural production, it is now badly in need of stimulants to rejuvenate itself. It appears to be nothing but a victim of gross mismanagement. The annual report and the copious notes to the accounts does not quite bring to the fore the gravity of the dilemma that it is now confronted with. Unless the measures initiated by ARCIL (Asset Reconstruction Company of India) are followed to the letter, the company way well be living on borrowed time. Originally promoted by the late M.A Chidambaram, jointly with TIDCO, the investment arm of the Tamil Nadu state government, the company is today chaired by his son A.C. Muthiah.
Corporate India follows the same ethics as that of Indian politics. The centerpiece of which is the total lack of accountability by the promoter management. And with the dice being heavily loaded against them, the lenders, the employees, and other stakeholders can only watch in mute helplessness. The co promoters who till the other day had a combined stake of 37.2% in the voting stock of the company, have engineered a remarkable makeover of their holding. It is wrenching to see that the very management at whose behest the company was forced to perform so many unintended cartwheels, is today in effective control of the company. And the 69 year old Mr. Muthiah has thought nothing wrong of ingratiating himself with a salary package of Rs 5.4 m in a year when the auditor's state that the total liabilities exceed the total assets by a considerable margin. It is a more refined way of saying the company has gone belly up. The auditor's add that the ability of the company to continue as a going concern is dependent on the successful implementation of the rework package approved by ARCIL. The current liabilities at year end exceed the current assets by Rs 2.8 bn, and the accumulated losses are at a very depreciating Rs 11.4 bn. In all probability the actual accumulated losses, even after excluding contested claims, are significantly higher. The total outstanding debt amounts to Rs 21.7 bn.
Some astounding aspects
The most astounding aspect of the tamasha that just unfolded is that with the Muthiah group smelling an opportunity, and acting on it pronto, following the intervention of ARCIL, deemed it fit to increase the family stake in the voting capital during the year (including shares to be converted post facto) to an absolute majority of 52.3% from 30.55%. This is an audacious move. (The various notes to the accounts on this score are difficult to comprehend, in its totality. Is there another issue in the offing to the Chidambaram group?). The combined holding of the promoter groups correspondingly went up to 56.2% (TIDCO's holding slipped to 4.4% from 6.7% in the new equation), following this book entry. One of the measures mooted by ARCIL, to apparently try and turn the clock back, involved the issue of Rs 500 m worth of compulsorily convertible preference shares at an issue price of Rs 18 per share. These convertible shares were subscribed to by the Chidambaram group, who brought in the moolah from a Mauritius based entity. They simultaneously converted some of these preference shares into equity shares, (the balance shares to be converted at a future date) enabling them to raise their stake to an unassailable level. (The monies that they brought in were used to pay off one of its creditors, Indian Oil Corporation). This equity addition is a piece of cake, and appears to have been orchestrated deliberately to aid the dominant co-promoter gain absolute control of the company. This would appear to be a case of criminal injustice, given the humungous issues on hand. In any event, how does an additional investment of Rs 500 m help turn the fortunes of an ailing behemoth? It is like proffering half a spoon of water to a starving soul.
Engineering cockide moves
Engineered simultaneously, were some seemingly cockide moves by ARCIL and some of the lead players, ostensibly to put the company back on its rails. Ten lender banks were asked to convert debt of Rs 600 m at Rs 20 per share (on a face value of Rs 10). Of this Rs 300 m was converted into shares at Rs 18 per share, and the equity holding of the banks in the company now accounts for a miniscule 2.2%. The purpose of the issue was to reduce debt. If that was indeed the stated intention, then it was a very comic attempt at reducing debt. The lenders also wrote off cumulative interest dues of Rs 1.7 bn, and the company wrote off the diminution in the value of investments, in its group companies, to the tune of Rs 3.1 bn. Then there are a string of other entries, in respect of provisions made on the asset side. Provisions against trade debtor dues, provisions against loans to subsidiaries, and, provisions on advances made to others, cumulatively adding up to Rs 699 m against Rs 691 in the preceding year. Notice the similarity in the quantum of provisioning made for the two years. It appears to have been carefully thought out. These book entries notwithstanding, the outstanding claims on the company are frightening in its complexity. The notes on contingent liabilities and related notes to the accounts, run into some five whole pages of small print, and contain both 'desi' and 'videsi' claims against the company! Sample some of the additional fare. Under the Employee State Insurance Act, there are disputed claims on the company to the tune of Rs 1.1 bn (for the period 1977 to 2003) pending in the Madras High Court. The number of legal shenanigans that is bedeviling the company in the various courts of law is a barometer of the depth of the troubles on hand. These wounds appear to be largely of its own making.
No working capital finance
The crux of the matter however, is that the company was experiencing difficulty in getting its mothballed ammonia and urea plant back on stream. The bulk of its productive assets lie embedded in this portfolio. To bring these two players back to life, the company requires working capital credit. Some of the banks which had previously advanced working capital to SPIC have proffered claims before the debt recovery tribunal, and consequently, opening of letters of credit by banks were affected. As a matter of fact, such is the quagmire that the lead lending bank, Indian Bank, has even frozen the fertilizer subsidy receipts of Rs 1.9 bn, routed through it, but payable to the company! However, the company states that following the intervention of ARCIL, production is expected to commence in September 2010.
Spreading itself thin
The bigger issue is that the company has spread itself thin, very thin. It has branched out into operations which do not even vaguely complement its primary operations, and this requires the development of new skills. Pharmaceuticals, tissue culture, and electrical contracting jobs are its other divisional revenue earners. In FY10 the pharma division and the tissue culture division added to the chaos by ringing in losses. The contracting division, by god's grace, reported a positive bottom-line. This is a part of the bigger story. It has set up string of subsidiaries and associates. At year end it had 8 subsidiaries, probably 1 step down subsidiary, 4 associates, and 3 joint ventures. Of the subsidiaries, one has been liquidated, one is under liquidation (SPIC Petrochemicals, in which it has a combined equity cum debt stake of Rs 5.6 bn-but fully provided for). Its two fertilizer units based out of 'foreign' (SPIC Fertilizers, Mauritius, and its wholly owned subsidiary SPIC Fertilizers, Dubai) are totally at sea. The accounts of these two companies could not be prepared, as the Dubai authorities have seized certain assets of these companies! How much more wonky can you get. That leaves 4 subsidiaries. Of this lot, Indo Jordan Chemicals, in which it holds 52% equity and is headquartered in Jordan, was a losing proposition. Fortunately SPIC exited this venture in April 2010 by selling its holding to its partner. Orchid Microsystems a 100% subsidiary is non entity. SPEL Semiconductor in which it has a 56% stake is on solid ground, though the company had made a provision of Rs 521 m in the preceding year, in the value of its investment in this subsidiary. The last in the list SPEL America is another non entity.
Its other three big investments are in Tuticorin Alkali Chemicals, Tamilnadu Petroproducts, and Manali Petrochemical. Tuticorin Alkali Chemicals, which makes soda ash, is like the parent on the vagrant list, with the parent having written off Rs 150 m in equity and debt, while the latter two are surviving on their own. The present book value of its investments is Rs 2.4 bn, after providing for a total diminution in the value of its investments to the extent of Rs 8.4 bn.
Another interesting note
One of the more interesting notes to the accounts relates to its interse dealings with group company, MCC Finance (The acronym MCC stands for Mercantile Credit Corporation). SPIC had advanced Rs 209 m to the latter for the purchase of immovable properties of the latter. But the deal is now stuck, as the provisional liquidator of MCC Finance has filed a petition before the Company Court in Chennai that the sale agreements entered into between the two parties be declared null and void. Matters are about as low as it can get.
Disclosure: Please note that I am not a shareholder of this company
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.