CHAPTER 13
MINISTRY OF HEAVY INDUSTRIES AND PUBLIC ENTERPRISES

Bharat Heavy Electricals Limited

Hyderabad Unit of Bharat Heavy Electricals Limited (Company) floated limited tender enquiries for design and supply of coal handling plants (CHPs). These were required for execution of two orders from Coal India Limited, Calcutta for establishing 2x10MW Fluidised Bed Combustion (FBC) Boiler-based captive thermal power stations at Moonidih and Kathara in Bihar. The supplier, Bulk Systems International Limited (BSIL), Bangalore was selected (July 1989) at a contract price of Rs. 6.53 crore and delivery was scheduled for November 1990.

The supplier went into liquidation before completing supplies of CHPs. The Company, however, ensured the completion of supplies to its customer by dealing directly with BSIL’s sub-vendors. When the thermal power stations at both the sites were synchronised in June 1993/February 1994, the screening facility of CHPs was found to be defective. Although the tender specifications stipulated screening of crushed coal, the CHPs at both the sites failed to give the desired level of coal output due to design deficiency in the screening system.

To overcome the deficiency the Company modified the CHPs and also installed (December 1995/ November 1996) additional screening facilities at both the sites. The TG sets were finally commissioned in March 1996 (Kathara) / March 1997 (Moonidih).

There was, thus a delay of 6 years in installing the CHPs from the date originally envisaged for commissioning. In the process, the Company incurred total additional expenditure amounting to Rs. 4 crore (cost of modification of CHPs plus installation of additional screening facilities).

In response, the Ministry stated (April 2001) that the deficiency in the design of CHP came to light only during the commissioning of the plant. The impact crushers failed due to the presence of a large percentage of shale in the raw coal and that the Company had not foreseen the supply of this type of coal by the customer at the design stage. It also stated that the Company had to absorb the additional cost of Rs.4 crore as modification of coal handling facilities while its price escalation claims to the tune of Rs.10.50 crore though agreed to in October 1994 had not been released so far. Further, although execution of this order culminated in cost overrun, these costs could, however, be absorbed as Hyderabad Unit has been making profit during all the years.

The reply of the Ministry is not tenable as the Company was forced to absorb the additional cost of Rs.4 crore towards modifications in CHPs, as it had selected a contractor without ensuring his technical and financial soundness. This also multiplied the overall delays in execution of the project. Moreover, the fact that Hyderabad Unit had been continuously making profits can not absolve the Company of uneconomical execution of a contract.

Thus, due to the avoidable delays in supplies and in rectification of CHPs, the Company incurred an extra expenditure of Rs.4 crore.

The general terms and conditions followed by M/s. Bharat Heavy Electricals Limited (Company) for sale of equipment provided for 10 per cent payment as advance along with the order, 30 per cent on completion of 50 per cent of the delivery and balance 60 per cent along with price variations and taxes and duties against despatch documents through the bank. In two cases the Company not only deviated from the standard conditions but also failed to enforce the conditions agreed to, resulting in blocking up of funds to the tune of Rs. 5.35 crore and loss of interest of Rs.2.12 crore as discussed below.

The Company received (January 1997) an order from M/s. Jindal Vijayanagar Steel Limited (JVSL) for supply of four numbers of 700 HP diesel electric shunting locomotives at a total price of Rs.5.36 crore excluding taxes and duties. The payment terms accepted by the Company in the order provided for 10 per cent payment as advance, 80 per cent on presentation of invoice after receipt of the locomotives at site and 10 per cent after commissioning.

After despatching two locomotives in March 1997, the Company raised invoices for Rs. 2.67 crore. Despite the fact that payment was not received for the despatches made in March 1997, the Company further despatched remaining two locomotives in March 1998 and raised another invoice for Rs.2.67 crore. Besides, the Company also raised invoices for an amount of Rs.58.85 lakh towards commissioning and service charges during the period February 1998 to September 1998.

As per the terms of the order, JVSL was required to make payment in March 1997 and March 1998. However, JVSL paid an amount of Rs.5.31 crore in instalments from May 1998 to March 2001, with a balance of Rs.61.99 lakh still outstanding (March 2001).

This resulted in blocking of the Company's funds for more than four years along with consequential loss of interest of Rs. 1.27 crore, besides undue financial benefit to the party.

Case (B)

The Company accepted (September 1998) a letter of Award (LOA) from M/s. Neelachal Ispat Nigam Limited (NINL) for supply and commissioning of four Diesel Electric Locomotives at a price of Rs. 5.90 crore inclusive of taxes and duties.

Though the Company despatched all the locomotives in March 2000 and raised invoices amounting to Rs. 4.73 crore, the party failed to make the payments in accordance with the terms of the order. Despite being reminded by the Company, the party was yet to release the amount (August 2001). Further, an amount of Rs. 73.50 lakh was yet to be billed due to non-receipt of preliminary acceptance certificate from the party. (August 2001).

This resulted in blocking of the Company's funds to the extent of Rs. 5.47 crore and consequential loss of interest of Rs. 84.83 lakh.

The Management stated (September 2001) that the deviation from the general terms of sales of equipment was necessitated by purely commercial considerations and changes in the payment terms were agreed upon so as not to lose the order.

The reply is not tenable, as the Company should have safeguarded its financial interests while accepting the deviation in the standard terms of payment. Also, the Company could not enforce the payment terms of the order due to accepting to send despatch documents directly to the party instead of routing through bank. This was not a prudent financial decision, which amounted to extending undue benefit to the customers while resulting in loss of interest amounting to Rs. 2.12 crore to the Company. Further, an amount of Rs.5.35 crore was yet to be realised as of August 2001.

The matters were referred to the Ministry in June/July 2001; their replies were awaited (October 2001).

Bharat Heavy Electricals Limited (Company) received a supply order from Northern Coalfields Limited (NCL) in November 1991 for supply of nine Float Motors (motors) at a total cost of Rs. 1.91 crore. As per the supply order, delivery of motors was to commence within 11 months and completed within 16 months from the date of receipt of the order, subject to the condition that eight motors out of the total nine were to be supplied only after getting clearance from NCL regarding satisfactory performance of similar motors supplied earlier by the Company. In fact, the Company had supplied similar motors for replacing the imported ones during the period from February 1992 to September 1993.

Despite the above terms and conditions, the Company manufactured and supplied all the nine motors during the period July 1992 to July 1994 without taking clearance regarding satisfactory performance of earlier motors.

After releasing a sum of Rs. 59.79 lakh (upto April 1994), NCL withheld the balance payment of Rs. 1.52 crore including escalation of Rs. 21 lakh, pending clearance of satisfactory performance of the earlier motors. NCL stated that as the earlier motors supplied by the Company had failed frequently, the balance payment would be released only after satisfactory performance of all the motors.

The Company, however, could not enforce the release of balance payment, as it did not seek the clearance from NCL either before commencing the process of manufacturing or before starting the delivery of motors. Moreover, the supply order did not contain any time limit within which NCL was required to give the requisite clearance.

The Management stated (July 2000) that release of 25 per cent of the payment due implied clearance of despatch of the motors. Further, non-release of the balance amount was due to the inability of NCL to put motors on trial and not due to non-adherence to the terms of the supply order.

The reply of the Management is not tenable because the Company would have avoided the blocking of its funds, had it adhered to the terms of the supply order by obtaining the requisite clearance especially in view of the special nature of the motors. Further, 25 per cent of the payment was released by NCL only on ad hoc basis, with a clear indication that the balance payment would be released only after satisfactory performance of the motors.

Thus, the Company’s failure in not obtaining the requisite clearance before commencing the manufacturing resulted in blocking of funds to an extent of Rs. 1.52 crore for more than six years with consequential loss of interest amounting to Rs. 1.50 crore.

The matter was referred to Ministry in April 2001; their reply was awaited (October 2001).

Bharat Heavy Electricals Limited (Company) received (September 1997) a letter of intent (LOI) from Maharashtra State Electricity Board (MSEB) for erection, testing and commissioning of 2 Nos. steam generator (boiler) and steam turbine generator along with auxiliaries at Khaperkheda Thermal Power Station (two units of 210 MW each) of MSEB. The units were to be commissioned within 33 months and 39 months respectively from the date of LOI.

For sub-contracting the execution of the above work, the Company initiated the process on 18 February 1998 and decided on 8 June 1998 to invite limited tenders from five selected parties against the normal procedure of open tendering for such high value contracts. In the process, the Company took about 9 months from the date of LOI in deciding the procedure for selection of the sub-contractor.

Limited tender enquiries were issued to the five parties in July 1998 and the price bids were opened in August 1998. While M/s. UB Engineering Limited (UBE) was the first lowest at Rs. 17.40 crore for two units, M/s. Larsen and Toubro Limited (L&T) stood at the second position at Rs. 17.91 crore. For one unit, they quoted rates of Rs. 9.56 crore and Rs. 9.46 crore respectively. Thus a discount of Rs.1.72 crore and Rs.1.01 crore respectively was available if the Company awarded the work relating to both the units to a single contractor. However, instead of taking advantage of discount and awarding the work to the lowest tenderer, the tender committee proposed to award work relating to a unit each to UBE and L&T.

After negotiations, the Company awarded the works to UBE in September 1998 and L&T in December 1998 at the negotiated price of Rs. 9.27 crore each (i.e. at a total cost of Rs. 18.54 crore for two units) thereby incurring an avoidable expenditure of Rs. 1.14 crore over and above the lowest bid price of Rs.17.40 crore.

The Management stated (July 2000) that the order was divided with a view to complete the works within the stringent time schedule and to ward off any labour problem. The contention of the Management is not tenable as UBE had quoted for both the works and therefore, ready to complete the work of both the units within the stipulated time. As regards apprehension of labour problems, the problem was universal and could happen with any contractor. Besides, the purpose of splitting the order was defeated as the work awarded to UBE could be completed in January 2001 against the schedule of July 2000 and the other work awarded to L&T was yet to be completed (May 2001), against the schedule of October 2000.

Thus injudicious splitting of order resulted in avoidable extra expenditure of Rs. 1.14 crore.

The matter was referred to the Ministry in January 2001; their reply was awaited (October 2001).

Industrial Valve Plant, Goindwal of Bharat Heavy Electricals Limited (Company) had generally been procuring conventional valve casting as a prime raw material for production of industrial valve on single tender basis from M/s. Upper India Special Casting Limited, Ludhiana (UISCL) since 1995-96.

In July 1997 the Company issued advertisement in newspapers for enlistment of suppliers of various items including valve casting. Though one party was meeting the requirement, the Company continued to place orders on UISCL on single tender basis during the period from 1997-98 to 1999-2000 at the rate of Rs. 49.25 per kg, Rs. 52.50 per kg and Rs. 50.50 per kg respectively.

In March 2000 when the Company invited quotations for supply of valve castings from five parties, it was able to get the competitive rate of Rs. 39.90 per kg. Accordingly, the supply orders were placed on M/s. Rattan Engineering Corporation Private Limited, Bhiwadi (RECPL), M/s. Saurabh Metals Private Limited and M/s. Mittal Udyog (MU) at the rate of Rs.39.90 per kg for the year 2000-2001. In fact, out of these three suppliers, the Company knew RECPL and MU earlier.

Thus, due to not exploring and developing alternative sources, the Company could not avail the benefit of competitive rates prior to March 2000. Even by taking the indicative rate of Rs.39.90 per kg, the Company could have saved at least Rs.78.35 lakh on the procurement of casting during the years 1998-99 and 1999-2000 as given below:

The Management stated (March 2001) that they explored the possibilities of identifying and developing potential vendors in the northern India since 1991. As a result of such efforts, M/s. Rine Engineering Private Limited (REPL), MU and UISCL were identified as potential suppliers. However, REPL was not considered due to lack of competence and quality and the product of MU was not IBR (Indian Boiler Regulations) approved at that time.

The reply is not tenable as REPL had supplied the valve castings during 1995-96 and 1996-97 and could have been developed as potential supplier and MU had got IBR* approval in August 1997 from the Central Boiler Board. Further, the order for the year 2000-01 was placed on RECPL with whom the Company had been in touch since 1991.

Thus, the Company was purchasing valve castings on a single tender basis since 1995-96 and during the period 1998-99 and 1999-2000 alone, incurred an avoidable extra expenditure of Rs.78.35 lakh. The Company could avail the benefit of competitive rates since March 2000, when they invited quotations for procurement of valve castings.

The matter was referred to the Ministry in December 2000; their reply was awaited (October 2001).

The Company received (January 1996) an order from M/s. Rohini Strips Limited (RSL) New Delhi (a private party) for supply of 3 Nos. 500/730 KW DC motors for their Gwalior Project at a total price of Rs.35.50 lakh (excise duty and other taxes extra) with contractual delivery of July/August 1996. As per terms of payment 25 per cent advance was to be released against purchase order and balance 75 per cent payment alongwith duties and taxes against proforma invoice before despatch of equipment.

The Company received Rs.13.00 lakh in April 1996 as advance but despatched the motors in March 1997 and May 1997 without obtaining the 75 per cent of balance payment (Rs.32.72 lakh) including excise duty and Central Sales Tax in contravention of the terms of the purchase order. The balance payment had not been received so far (May 2001).

The Ministry while accepting (May 2001) the facts stated that the motors were despatched violating the terms of the purchase order and there was no approval in the file for the despatch. The Ministry further stated that the case was being investigated by CBI and legal action had also been initiated against the customer in the court.

Thus, the Company suffered a loss of Rs.50.87 lakh (Rs.32.72 lakh plus interest of Rs.18.15 lakh) due to despatch of motors without receipt of the balance payment in accordance with terms and conditions of purchase order.

Heavy Engineering Corporation Limited

HEC decided to manufacture 4 Computerised Numerical Control (CNC) special purpose lathes at an estimated cost of Rs.5.70 crore in July 1997. The aim was to overcome the low technological capabilities of existing medium-capacity lathes in the production shops of Heavy Machine Building Plant (HMBP). The new lathes were supposed to replace 12 conventional lathes from the production shops, provide additional time of 21872 hours and generate increased out turn of Rs.6 crore per year. The scheme projected a pay back period of 5 years and internal rate of return (IRR) of 40 per cent.

Scrutiny of the records of the Company during 1999-2000 revealed that:

1. 3 CNC lathes were manufactured at a cost of Rs.3.36 crore during 1997-98, but remained to be commissioned until 2000-2001. The proposal to manufacture the CNC lathes was not based on the actual numbers of orders in hand;
2. The first CNC lathe was installed in HMBP in August 2001 and was still under trial run. The second and third lathes had been modified into general-purpose lathes. Of these, one was in the process of erection and commissioning. None of the lathes had been utilised till date (September 2001); and
3. The capital fund of Rs.3.36 crore spent in manufacturing of these three CNC lathes by 1997-98 remained blocked for the last three years. This resulted in consequential interest burden of Rs.1.41 crore.

The Ministry stated (September 2001) that there was no facility available for profile-turning, coning and thread-cutting in any of the existing machines which required high accuracy and surface finish. HMBP did not possess any CNC lathe and the existing conventional lathes had lost their accuracy and rigidity due to their continuous use for more than three decades. The requirement of specific purpose CNC lathes had been projected based on the market demand of plant and equipment from steel, mining and other core sector industries. It added that the accuracy and surface finish required in certain special equipment could not be achieved with existing conventional lathes and could only be achieved by the use of CNC lathes where accuracy in microns (10/6 meter) could be achieved. The Ministry admitted that the orders as anticipated could not be procured.

The contention of the Ministry is not acceptable in view of the following:

1. The utilisation of existing facilities in 1996-97 was only 43.26 per cent to the total available hours, which gradually declined to 33.66 per cent in 2000-2001;
2. Even upto July 2001, the Company had received orders only for four numbers of 5 cubic meter shovels from Coal India Limited, which were being executed with the existing conventional lathes; and
3. The projected payback period of 5 years and IRR of 40 per cent was incorrect. Further, the so-called market demand was not adequately tapped by effective marketing. As such, the stated objective of replacing conventional lathes by the CNC lathes remained defeated.

Thus, the expenditure of Rs.3.36 crore spent by the Company on manufacture of 3 CNC lathes had become infructuous besides increase in interest burden to the extent of Rs.47 lakh per annum.

HEC was declared sick and referred to the Board of Industrial and Financial Reconstruction (BIFR) in February 1992. BIFR sanctioned (August 1996) a rehabilitation scheme for the Company and the same approved by the Government of India in February 1997. This scheme provided the Company, inter alia, financial relief in the form of equity, interest free non-plan loans, deferment of sales tax dues, working capital facility at concessional rates.

Audit of Company’s records revealed that it had paid excise duty in advance to the extent of Rs.13.46 crore, detailed as under:

(Rs. in crore)

In these cases, (a) the goods worth Rs. 13.79 crore remained to be despatched upto March 2000, although excise duty had been paid in advance in 1998 and 1999; and (b) the goods had been despatched only after a delay ranging from 1 to 12 months. The Company, had, however, treated the goods as sold on the date on which excise duty was paid.

This treatment of sales was commented upon on the accounts of the Company for the year 1999-2000. Following this, the Company terminated its policy of including such sales in their accounts of 2000-2001. Further, Central Excise Rules require that excise duty is payable at the time of removal of goods from the Company premises.

Thus, by making unnecessary payment of excise duty in advance, that too at the time when it was in a severe financial crunch, the Company lost interest thereon to the extent of Rs. 92.19 lakh. Aside of this loss, the Company appeared to have deliberately inflated sales during the aforesaid period and was also against the Company’s Accounting Policies which provides that ‘sales are recorded when significant risks and rewards of ownership are transferred to the customers’.

The Management accepted (June 2001) the facts of the case and admitted the deficiency in the prevailing system. It further stated that the practice, however, had been discontinued since April 2000 and excise duty was being paid only on items which were despatched by 31 March of the financial year.

The matter was referred to the Ministry in April 2001; their reply was awaited (October 2001).

HMT (International) Limited

With a view to increase the export turnover and better profitability, HMT (International) Limited (Company) entered into four agreements with three suppliers as per details given below.

The Company accepted undated cheques and equity shares as collateral securities for Rs.2.18 crore advanced to the three suppliers. The Company did not lay down any policy for extending such export credits.

The shipping documents tendered by NWL were found to be defective and hence the overseas purchasers rejected the goods. NWL subsequently sold partial quantity to other purchaser and the residual quantity was lying at Dubai Port (June 2001). Hence the Company could realise Rs.53.15 lakh from the NWL against an advance of Rs.80 lakh. NCP and KEL did not meet the export obligation and hence the Company insisted November 1998 and April 1999 respectively upon the repayment of the amounts advanced. However, the Company could realise from NCP Rs.3 lakh against an amount of Rs.38.40 lakh advanced. The Company could recover nothing from KEL to whom Rs.1 crore was advanced. The cheques offered as collateral security by the suppliers were dishonoured on presentation. The Company, thereafter, filed criminal cases against the three suppliers which were pending in the Court (June 2001).

The Management stated (March 2001) that policy of obtaining securities for advance and its recovery required to be viewed in the context of the type of agreements entered into with the suppliers in respect of execution of export orders for a specific product. The reply is not tenable as the securities obtained by the Company proved to be insufficient to protect its interest.

Failure to obtain securities encashable on demand like bank guarantees particularly in the field of export of commodities resulted in blocking of funds amounting to Rs.1.62 crore, entailing loss of interest amounting to Rs.56.30 lakh as of March 2001.

The matter was referred to the Ministry in April 2001, their reply was awaited (October 2001).