The Hindu : Poor choice of location led to sugar unit's closure

Online edition of India's National Newspaper
Sunday, Nov 16, 2003

Southern States

Southern States - Karnataka-Bangalore

Poor choice of location led to sugar unit's closure

By S.K. Ramoo

BANGALORE NOV. 15. Gangavathi Sugars Ltd. (GSL), which has been closed down, was established at Manali in Koppal district on an investment of Rs. 7.89 crore. It was a poor choice of location as the region lacks sufficient sugarcane for supply to a sugar factory.

The management is not in a position to revive the factory. The Government, which made several attempts to bail it out, has also failed in its endeavour. However, it is under pressure to revive the factory.

The choice of Manali for establishing the factory was a poor business decision, and it was based on political and other extraneous considerations. From inception, GSL faced insurmountable problems and experienced paralysing disabilities mainly because of lack of adequate supply of cane. The factory became a sick unit within two years of commencement of commercial operations. Although the annual crushing capacity of GSL was 2.5 lakh tonnes, only 30,000 tonnes of sugarcane a year per annum was available in the jurisdiction of the factory. The gap between the demand and availability of cane should have served as a deterrent to the establishment of the factory. A heavy price was paid for the unwise and impractical decision of the promoters. The management suffered heavy losses and the workers were put to hardship. Banks and other financial institutions, which had extended loans, are not in a position to recover money.

Although GSL was established in 1972, it commenced operations only in 1976. It abruptly suspended operations for three crushing seasons from 1984 to 1987, mainly on account of closure of the Tungabhadra left bank canal, which was its only source of water. It accumulated losses and was unable to raise internal resources for repayment of loans.

The Government could have opted for the liquidation of GSL at the initial stage instead of permitting the uncertainty to prolong. It came forward to stand financial guarantee when banks and other financial institutions served a recall notice on the management demanding repayment of loans. In 1988, GSL was declared a sick unit and referred to the Board for Industrial and Financial Reconstruction (BIFR) for its rehabilitation. The BIFR recommended liquidation following a detailed study.

The management and the Government preferred an appeal before the Appellate Authority for Industrial Finance and Reconstruction (AAIFR) and obtained a stay order against the verdict of the BIFR. The AAIFR directed the management to deposit Rs. 2 crore with the IDBI, and this as done with the Government's assistance.

Since the parties involved could not arrive at a consensus on the rehabilitation package, it was decided to privatise the factory. But only three parties responded to the bidding, including a firm from Andhra Pradesh, which offered to buy the factory for Rs. 28 crore. However, the firm backed out even before a meeting of creditors and shareholders was convened. It is said that this was because of a delay on the part of the management and the Government in completing formalities.

The Government thought that an encumbrance-free company might attract bids for privatisation. Therefore, to render GSL attractive to potential buyers, it provided Rs. 1 crore interest-free loan and allowed the management to utilise the amount for crushing operations. But, as expected, the factory could not crush an adequate quantity of sugarcane. The poor level of capacity utilisation pushed the factory to the brink. Owing to paucity of funds, it could not undertake crushing operations in 2002-2003. Non-availability of water in the T.B. Reservoir made matters worse.

By then, the factory had sustained a loss of Rs. 46.35 crore. The total loan amount, both secured and unsecured, was Rs. 59.80 crore. The factory had also not cleared dues of Rs. 97.35 lakh to farmers for cane procurement during the 2001-2002 season. It had unsold sugar stock worth Rs 6.50 crore, and its dues were more than its fixed assets, which was valued at Rs. 18 crore.

It was estimated that Rs. 30 crore was required for one-time settlement of dues to financial institutions.

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