CHAPTER 5
MINISTRY OF COMMERCE

Export Credit Guarantee Corporation of India Limited

Export Credit Guarantee Corporation of India Limited (Company) provides Whole Turnover Packing Credit Guarantee (WTPCG)/Whole Turnover Post Shipment Guarantee (WTPSG) to banks to cover their advances against export bills. Due to specific lapses on the part of the banks in extending credit in line with guidelines of the Company and failure to ensure compliance to procedure formalities resulted in settlement of inadmissible claims amounting to Rs. 2.43 crore as enumerated below:

The Company issued a WTPCG to Oriental Bank of Commerce, New Delhi for a maximum limit of Rs. 30 crore for the year 1992-93. Under this policy, the overseas branch of the Bank at New Delhi sanctioned (27 May 1992) to an exporter a Packing Credit (PC) limit of Rs.3 crore for export of rice/paddy.

Bank released PC advance of Rs. 3 crore between 29 May 1992 to 2 June 1992 against a confirmed export order of 15,000 MT of rice at US $ 255 per MT to be executed by November 1992. Exporter purchased paddy valuing Rs. 4.84 crore from PC advance. However, the export could not be executed as buyer refused to accept the revised minimum export price of US $ 275 per MT fixed by the Government of India. In order to protect the goods from getting damaged, stocks valuing Rs.4.08 crore were shifted to exporters’ processing unit at Samana. The balance stock was sold for Rs.49.67 lakh and credited against the PC advance. Bank, while following up the regularisation of advances with the exporter, formally reported default (November 1992) and filed (February 1993) a claim on the Company for Rs.3.28 crore.

According to clause II (i) of the terms of the WTPCG cover, the Bank was required to exercise reasonable care and prudence until the advances were repaid by the exporter. The stocks meant for export procured with PC advance as per the Bank’s sanction letter were to be comprehensively insured including flood, storm tempest, etc., in the name of the Bank and the exporter. While claim of the Bank was being processed, the entire stocks were lost (July 1993) due to floods. As the stocks were not insured against flood, no recovery could be made from insurers.

Inspite of the specific lapse on the part of the exporter in not obtaining the comprehensive insurance policy (including flood) and also the Bank’s failure to ensure that all the procedural formalities were complied with by the exporter, the claim was approved (March 1997) by the Board of Directors of the Company for Rs.1.88 crore being 75 per cent of the admissible outstanding advances of Rs.2.50 crore.

Payment of claim was not warranted, as the Bank had not acted with reasonable care and prudence in that (i) they did not ensure proper insurance of the stock and (ii) they had also not conducted periodic inspection of the stock as verification was done only upto April 1993.

In response the Management stated (August 2001) that:

1. the stock were insured fully but not against floods as floods were unprecedented and such eventuality had not been foreseen by anybody in several years; and
2. the Company had accepted Bank’s contention that they had good experience with the parent unit of the exporter and that the borrowers were people of good standing.

The Ministry endorsed (October 2001) the views of the Management.

The contention of the Management/Ministry is not tenable, as the floods were not unexpected during the monsoon (July) and the Banks had failed to enforce proper procedures and thus, the resultant loss should have been borne by the Bank.

Thus, the Company lost Rs.1.88 crore on settlement of inadmissible claim overlooking negligence and lack of prudence shown by the Bank.

The Company issued a WTPSG to Allahabad Bank (Bank) for the period from 1 July 1997 to 30 June 1999 for maximum liability of Rs. 10 crore. A Mumbai Branch of the Bank sanctioned post-shipment advance of Rs. 94.61 lakh on 31 December 1997 to M/s. Kothari Global Limited without the Company’s prior approval. It did so by discounting two bills of exchange for export despite the fact that two of the directors of the export company had been placed on SAL on 16 December 1997. The Bank could not recover the advance and claimed it from the Company on 29 April 1999 under WTPSG. The claim was settled in March 2000 at Rs.54.68 lakh.

While settling the claim the Company condoned Bank’s lapse in extending credit without its approval when the exporter’s name had been placed in SAL. Thus, it bore the liability of Rs.54.68 lakh.

In response the Management stated (September 2001):

1. the information regarding ‘Exporter under SAL’ was not available with the particular branch of the Bank due to time taken for the communication;
2. the bills were purchased only to adjust the then outstanding packing credit and no fresh facility was extended; and
3. the Bank was transferring the packing credit advances to the cash credit account for better monitoring and ensuring the end use of funds meant for export.

The reply of the Management is not tenable as:

1. The Company had notified SAL of 16 December 1997 to Bank immediately and hence consequences of the lapse of not circulating the same to its branches in time should have been borne by the Bank itself and the time gap between the date of SAL circular and date of advance was also not so short especially in the context of advance communication facilities available.
2. Utilisation of post shipment advances to liquidate packing credit granted earlier could not be construed as non-extension of fresh facility. The outstanding packing credit relating to February 1997 or earlier against which the amount was adjusted was otherwise payable by the exporter.
3. By transferring the packing credit to the cash credit accounts of the exporter, Bank gave leverage to exporter for utilising the said amount for all purposes with the risk of default remaining with the Company.

Thus, the Company settled an inadmissible claim for Rs.54.68 lakh in spite of serious lapses on the part of the Bank, which did not merit condonation.

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

MMTC Limited

The Board of Directors of MMTC Limited (Company) formed a Committee of Directors (COD) in November 1992 to take investment decision and delegated its power to invest up to Rs.3 crore for setting up of joint ventures. The COD exceeded its powers and approved (22 June 1994) investment of Rs.4.75 crore in Indo-French Biotech Enterprises Limited (IFBEL) who had a project for production and trading in grapes and strawberries. IFBEL suffered heavy losses and the value of MMTC’s investment of Rs.4.75 crore diminished to Re.1 as on 31 March 2001.

An audit analysis of the investment decision revealed the following deficiencies:

1. MMTC relied on the statement of IFBEL without any verification that the latter had entered into collaboration with M/s. Richer S.A. Franch and M/s. IBESEE SRL, Italy for supply of equipment, know-how and for commissioning of plants besides sales whereas association of these collaborators was not backed by any valid legal bindings;
2. While delegating (November 1992) power to COD, the Board of Directors stipulated that Company should participate in any joint venture with private party having sound financial position and past record. In the instant case IFBEL was only incorporated in November 1992 and approval for investment was given in June 1994. The period of less than two years was not adequate for assessing financial strength or the past record of performance before making investment and, hence, prior approval of Board of Directors should have been obtained by COD before according approval for the investment;
3. The Board had also emphasised for exercising adequate control in procurement of plant and machinery to be made by the joint venture. In deviation from the proposal for investment, IFBEL only procured plant and machinery worth Rs.3.47 crore against Rs.14 crore projected. Thus, the Company could exercise little control in this critical area at the time of start up of operations; and
4. The financing pattern of the projects included collection of Rs.8.5 crore from nominees and associates of IFBEL as refundable trade deposit. The fact of collection of Rs.11.93 crore earlier by IFBEL from number of investors from public for a scheme titled ‘Project Grapes Scheme’ and liability of IFBEL to such investors was not highlighted in the investment proposal. On a case filed in Mumbai High Court by the investors, the Chief Justice recorded that MMTC had abetted the whole situation by joining as co-promoter of such companies and action taken by MMTC was not sufficient to render justice to the common investors of IFBEL.

Implementation of the agreement entered into with IFBEL revealed the following deviations which defeated the objective and security of the investment made by the Company:

1. Though total turnover of IFBEL was Rs.44.25 crore and 14.35 crore during 1994-95 and 1995-96 respectively, the material exported through MMTC during these years was Rs.35.91 lakh and Rs.38.41 lakh respectively. In the light of this, the objective of the Company for effecting exports equal to 30 per cent of the turnover of the joint venture remained underachieved;
2. The Company was entitled to recover services charges of 5 per cent of the first 30 per cent of the annual turnover of IFBEL subject to a minimum of Rs.78 lakh. Except payment of Rs.78 lakh for the year 1994-95, subsequent payments could not be realised by the Company. Similarly, an amount of Rs.63.44 lakh towards dividend declared by IFBEL for 1994-95 also remained unrealised;
3. As per the terms of agreement an Executive Committee was required to be constituted with a view of monitoring the working of IFBEL. Two employees of the Company were to remain members of this committee. As per rules of the business of the committee, it was required to meet at least once in six weeks. After meeting for the first time on 27 January 1995, the committee did not meet further. Similarly, though the agreement stipulated nomination of one full time director by the Company on the Board of IFBEL, no director was, however, nominated on full time basis. Thus, objective of monitoring the operations with a view to safeguarding the investment was defeated; and
4. Further, the Company was entitled to depute 40 of its employees to IFBEL, against which not a single employee ever got posted to IFBEL.

The Management stated (July 2001) that five employees were posted to IFBEL during November 1994 but IFBEL refused to accept them for want of space/residential accommodation and inability to meet salary demanded.

The reply is not convincing as infirmities in contract cannot be taken as a plea for non-fulfilment of objectives of enhanced monitoring in implementation of project with a view to safeguard Company’s interest.

Thus, the Company suffered loss of Rs.4.75 crore by making investment in a newly promoted company in violation of prescribed norms and without adequate examination of investment proposal.

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

MMTC Limited (Company) received (February 1998) special import licences (SILs) worth Rs.160.04 crore from the Director General of Foreign Trade (DGFT) against export performance of 1996-97. These SILs were valid till the end of February 1999.

On 4 May 1998, M/s. Coromandel Fertilisers Limited (CFL) offered to purchase SILs worth Rs.23 crore and asked the Company to quote the rate of premium for the same. The premium on SILs at that time raged from 5.15 to 5.50 per cent of the value of SILs. The Company took 11 days in communicating its intention to sell the SILs to CFL by which time the latter had arranged their requirements of SILs from other sources.

Subsequently, the Sale/Purchase Committee of Directors (SPCD) decided on 31 May 1998 to sell SILs to the extent of 40 per cent of the total value immediately and for the remaining 60 per cent, asked the Management to put up viable proposals to it after identifying the products that could be imported and marketed in India by the Company. After a lapse of one month, the Company invited offers for the sale of SILs at a post box address by issuing (6 July 1998) an advertisement in the newspapers.

Despite knowing the volatility in the SIL market where rates of premium change every hour, the Company gave 15 days’ time to the prospective buyers to submit their offers. The Company could receive the offers only on 6 August 1998 when the validity of the offers had expired. On subsequent telephonic discussions with some parties, the Company obtained their offers for SILs at rates of premium ranging from 2.85 to 3.40 per cent.

Even though the Company was aware that (i) the rates of premium now offered were within the rates prevailing in the market and better than the rates at which another public sector undertaking, viz. The State Trading Corporation of India Limited had disposed off their SILs, (ii) further delay in sale of SILs would result in shortening the validity period of the SILs with reduction in the premium receivable on such SILs, it relied upon certain unconfirmed reports in newspapers about the likely addition of new items to the list of items permitted for imports under SILs and decided (20 August 1998) to delay the sale of SILs for one week. In October 1998 again, the Company decided to defer the sale of SILs when the highest rate of premium was 3 per cent.

The Company could utilise SILs worth Rs.4.89 crore. On 11 January 1999, when the remaining validity of SILs was just one and a half month, the Committee of Directors (COD) was informed that the chances of utilisation of the SILs internally were bleak and that the additional items added to the list of imports did not contain any items of mass consumption to boost the demand for SILs from importers. The Company invited (15 January 1999) offers upto 20 January 1999 through an advertisement in newspapers for the sale of SILs worth only Rs.145 crore. The highest offer of premium received by the Company was 1.85 per cent. The highest bidder received (25 January 1999) two conflicting letters from the Company, one accepting the offer and the other asking for extension of the validity period of the offer till 28 January 1999 and also re-invited (27 January 1999) offers from other parties who had quoted in response to the advertisement of 15 January 1999. The highest bidder withdrew its offer on 28 January 1999. Finally, the Company sold the SILs worth Rs.155.15 crore for Rs.157.00 crore (including sales tax of Rs.0.07 crore) with a premium of Rs.1.78 crore at an average rate of 1.15 per cent in the last month of the validity period i.e. February 1999.

Thus, due to delay in taking decision on sale of SILs to CFL and faulty decision to retain the balance 60 per cent of the SILs for internal use without exploring the prospects of their utilisation, the Company deprived itself of higher premium of Rs.3.24 crore than it earned from the sale of SILs at the fag end of the their validity. In case, the Company had acted promptly to accept the offers of August 1998 and January 1999 for the sale of SILs, it could have earned extra premium of Rs.2.57 crore and Rs.1.02 crore respectively.

The Management, while accepting (January 2001) the delay in communicating acceptance of the proposal to CFL, stated that due to frequent reports in the media and developments in the office of DGFT about permission of new items for imports under SILs, the sale of SILs was postponed.

The reply of the Management is not acceptable as they relied more on unconfirmed media reports and ignored (i) the volatility of the market of SILs and (ii) very limited prospectus of utilisation of the 60 per cent of the SILs internally. Lack of prompt action and effort on the part of the Management for accepting the better offers at opportune time led to distress sale of the SILs at the fag end of their validity, which fetched nominal premium.

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

As per corporate credit policy of MMTC Limited (Company), secured credit could be offered at the prevailing interest rates with the approval of the competent authority. Security can be in the form of a letter of credit or a bank guarantee (BG) or banker’s certified cheques. As per the credit policy, the competent authority for the secured credit sales is the Board of Directors. Besides this, in the course of commercial transactions with their clients, the Company was required to have the BG verified from the issuing bank before accepting the same. The Company favoured two private parties by not following the laid down procedure and sustained a heavy loss of Rs.2.97 crore in the two cases enumerated below:

Based on the proposal of M/s. Electra India Limited, Meerut (M/s. Electra, Meerut) the Company agreed (November 1994) to extend 90 days’ credit to M/s. Electra, Meerut against post-dated cheques duly endorsed by a nationalised/acceptable bank confirming the payment on due date along with applicable interest. During November 1995 to January 1996, the Company supplied copper worth Rs. 2.39 crore to M/s. Electra, Meerut on 90 days’ credit by accepting post-dated cheques.

The Company did not present the cheques to its bank on the due dates and allowed M/s. Electra, Meerut to take the cheques back on the plea of replacing the same by demand drafts. Subsequently, instead of demand drafts, M/s. Electra, Meerut submitted (October 1996) post-dated cheques during October 1996 to December 1996 for Rs.2.42 crore.

Despite the fact that Chairman cum Managing Director of the Company had imposed ban in August 1992 on the acceptance of post-dated cheques as a means of payment and acceptance of such cheques amounted to extending of unsecured credit to M/s. Electra, Meerut in terms of the Company’s credit policy, the requisite approval of the Board of Directors for extending the unsecured credit was not obtained. The Management could not detect the irregularity in time in the absence of any monitoring system for watching the movement of post-dated cheques/demand drafts for timely realisation of payment.

These post-dated cheques were dishonoured (October 1996 to January 1997) by the bank when presented for payment. On pursuance for payment, M/s. Electra, Meerut informed (January 1998) the Company that all of its assets were mortgaged and it had no money to pay the dues. Though the cheques were dishonoured between October 1996 and January 1997, the Company filed a case in the court of law only in April 1998 for recovery of a claim of Rs.3.55 crore (Principal: Rs. 2.39 crore plus Interest: Rs.21 crore upto April less recovery: Rs.4.45 lakh (October/November 1997)) which was pending adjudication (August 2000).

The case was investigated by the Central Bureau of Investigation (CBI), which established (October 1998) criminal conspiracy of an official of the Company with M/s. Electra, Meerut and sought permission from the Company to prosecute the delinquent official. By that time the official was already under suspension since October 1996 in a similar case. Even after granting (January 1999) the permission to the CBI for prosecution, the Company reinstated (August 2000) the official without taking any punitive action against him. The Company had held no departmental enquiry in this case till October 2000. However, the CBI had filed a charge sheet in the court against the said official. In the meantime, the Company could realise Rs.4.5 lakh from M/s. Electra, Meerut and declared the balance dues of Rs.2.47 crore (including interest: Rs.8000) as doubtful of recovery in the accounts for 1998-99.

Thus, acceptance of post-dated cheques, instead of bank drafts, in exchange for confirmed cheques and extending unsecured credit without the approval of the Board of Directors resulted in avoidable loss of Rs.2.47 crore.

The Management admitted (February 2000) the Audit observations but did not give any reasons for the omissions and commissions committed by the Company.

On 12 March 1996, the Company issued 17.38 MT of copper rods valuing Rs.30.99 lakh to M/s. Electra India Limited, Jaipur (M/s. Electra, Jaipur) on 60 days’ credit upon acceptance of two post-dated cheques of Rs.16 lakh each dated 9 May 1996 and a BG for Rs. 34 lakh valid upto 6 June 1996. The Manager (Accounts) of the Company, however, reported the BG to be in order without verifying it from the issuing bank. Again on 12 April 1996, the Company issued 17.31 MT of copper rods valuing Rs. 30.22 lakh to the same party on credit against two post-dated cheques of Rs. 16 lakh each dated 11 June 1996 and another BG dated 10 April 1996 for Rs. 34 lakh with validity upto 10 August 1996 as security. No verification was done for this BG also.

The first set of post-dated cheques with due date of 9 May 1996 was dishonoured by the bank on presentation. Thereafter, M/s. Electra, Jaipur submitted (10 May 1996) another cheque for Rs.31.05 lakh with due date of 13 May 1996, in place of the dishonoured cheque, which was also dishonoured (15 May 1996) by the bank on presentation.

The Company could realise (31 May 1996) Rs. 11 lakh against the first sale. The Company did not present the second set of post-dated cheques on the request of the party. The Company tried to realise its dues by invoking the BGs through State Bank of India. But, the BGs were found to be fake. Though, the Management had prescribed procedure for verification of BG, detailed instructions containing prescribed checks to be exercised by officials independent of the dealing officials were not stipulated. When this fact regarding fake BG was brought to the notice of M/s. Electra, Jaipur, they submitted on 2 August 1996, 5 cheques of Rs. 11 lakh each (dated 10 August 1996) and requested the Company on 9 August 1996 not to present the cheques upto the end of August 1996. The Company accommodated the request despite knowing that the dues against the party had become unsecured and extension of credit facility in such a situation required approval of the Board of Directors. M/s. Electra, Jaipur again requested (31 August 1996) the Company to present the cheques only in October 1996 as the value of the cheques included interest on dues upto 7 October 1996. The Company again acceded to the request. These cheques too were finally dishonoured by the bank when presented (9 October 1996) for encashment.

The Company initiated (November 1996) legal action against the party, which was still pending (May 2000). In the meantime, the Company also suspended (October 1996 and December 1996) two of its employees for the irregularities committed in this case. Subsequently, CBI also registered (September 1996) a case in this regard. The CBI forwarded its report to the Company in October 1997. Even after granting (December 1997) permission to the CBI for prosecution of the two employees, they were re-instated by the Company in August 2000. The prosecution proceedings of CBI were pending (August 2001).

After adjusting a credit balance of Rs.6000, the Company declared the dues of Rs.50.15 lakh against M/s. Electra, Jaipur as doubtful of recovery while finalising its accounts for the year 1998-99. Thus, non-verification of the BG before acceptance and favours extended to the party by not presenting the cheques for encashment on due dates resulted in a loss of Rs. 50.15 lakh.

The Management accepted (February 2000) the facts.

The Ministry while forwarding the reply of the Management in both the cases stated (June 2001) that they had no role in the day-to-day business of the Company and that they had no further comments to offer beyond what had been stated by the Company.

The Board of Directors of MMTC Limited (Company) approved (April 1991) a proposal for construction of an office building estimated to cost Rs.4.78 crore on a piece of commercial land acquired (January 1986) on lease in Bandra Kurla Complex (BKC) in Mumbai from the Mumbai Metropolitan Regional Development Authority (MMRDA). The estimates were revised (August 1993) to Rs.13.31 crore, with a proposal for construction of a ground floor plus eight floors. It was also decided that the construction of the building should continue in anticipation of approval from the Government. The Ministry of Commerce approved (December 1998) this revised proposal of the Company, after the actual completion of the construction of the building in October 1998 at a cost of Rs.8.96 crore.

Out of the 9 floors available, only four floors were required for use by the Company. Advertisements were floated during February and April 1999 offering vacant space for setting up departmental stores/duty free shops/business centres in four floors. Two parties viz. M/s. Great Eastern Shipping Corporation Limited (GESCO) and M/s. Satguru Group of Companies (SGC) were short-listed for consultation and an agreement for 15 years was entered into (October 1999) with M/s. Satguru Infocorp Services Private Limited (SISPL), a newly formed entity floated by SGC for setting up a business centre in four floors. The Company was entitled to receive Rs.1 crore plus 5 per cent of the turnover of the business centre per annum or 17.5 per cent of the turnover whichever was higher.

Audit analysis of the case revealed that the income realised by the Company through this agreement in initial 24 months ended September 2001 was only Rs.1.36 crore which worked out to Rs.26.91 per square feet (sq. ft.) per month as compared to the rental income of Rs.6.34 core at the rate of Rs.125 per sq. ft. per month projected by Mumbai Regional Office of the Company in May 1998, based on the reported market rent for commercial properties in the BKC. Even based on fair rental value of Rs.83.14 per sq. ft. per month as assessed by a Government registered valuer in October 2000, the Company could have earned a rent of Rs. 4.22 crore during the same period. Considering the fair rental value indicated by the valuer as the basis, the short realisation of rental revenue from SISPL worked out to Rs.2.85 crore in the initial 24 months.

The Management contended (May 2001) that the observation in respect of a fair rental value of Rs.80 per sq. ft. had no relevance as the premises had not been let out and that the Company had entered into a joint venture with the party wherein a minimum assured return had to be jointly agreed to between the parties and that it was not possible to let out the building due to restrictive clauses in the Company’s agreement with MMRDA. The Management also contended that SGC is also supposed to incur a capital expenditure of Rs.1.50 to Rs.2 crore towards interior decoration of the centre.

The contention of the Management is not tenable as:

1. lease agreement entered into by the Company with MMRDA restricted subletting of land and did not prohibit the letting out of the shops constructed on the leased land after obtaining permission of Metropolitan Commissioners of MMRDA;
2. besides, the agreement entered into by the Company with SISPL was a rent agreement between a landlord and the tenant and was a convenient way to favour SGC since the Company :
   (a) did not have a participating interest in the so-called joint venture;
   (b) did not have any right to interfere in the business;
   (c) did not have any share in the profits of SISPL;
   (d) the income received by the Company was a compensation in lieu of rental value of the space placed at the disposal of SISPL.
3. the capital expenditure incurred by SISPL on interior decoration of the four floors was to be incurred to suit the specific requirement of the business activity to be carried out by then and as such the expenditure incurred by SISPL was not for fulfilment of an obligation to the Company.

Thus, decision of the Company to enter into an agreement with SISPL for running the business centre in the Company’s building resulted in loss of Rs.1.43 crore per annum. The maximum income that could be realised by the Company was at the rate of Rs.1.16 crore per annum during the period April 2001 to September 2001 and thus a recurring loss of Rs.95 lakh per annum is likely to be borne by the Company in the next thirteen years.

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

MMTC Limited (Company) signed (June 1994) a Memorandum of Understanding (MOU) with M/s. Medchel Chemicals and Pharmaceuticals Pvt. Limited (MCPL), Secunderabad for import and supply of DL2-Amino Butanol (raw material) for manufacture of Ethambutol Hydrochloride (finished product) for exports. As per the MOU, sale of the raw material to MCPL was to be effected on high seas basis but the raw material was to remain in the custody of the Company until payment. MCPL was required to lift each consignment against payment by demand draft/pay order. MCPL was responsible for manufacturing of the finished product and securing orders for export to be executed through the Company.

On 19 September 1994, the Management made certain amendments in the MOU, which were detrimental to the interests of the Company. Under the modified MOU,

1. MCPL was authorised to take delivery of unlimited quantity of the raw material on credit basis against (i) cheques instead of demand drafts/pay orders for the value of the material lifted and (ii) execution of an indemnity in favour of the Company;
2. though exports were to be executed on ‘Account MMTC’, the Company also accepted responsibility along with MCPL for securing export orders, realisation of the export proceeds for recovery of its dues towards raw material and service charges etc.; and
3. the Company was authorised to present the cheques to its bankers for realisation of the dues only if MCPL failed in effecting exports within the time stipulated.

The Company issued raw material worth Rs.4.23 crore in 7 consignments during 19 September 1994 to 25 March 1995 under the provisions of amended MOU.

Audit of the implementation of the amended MOU revealed that the Company violated the provisions of this MOU as:

1. the Company accepted post-dated cheques instead of normal cheques for the raw material issued and violated the express directive (August 1992) of the Chairman and Managing Director (CMD) of the Company also that had banned the acceptance of such cheques;
2. the raw material issued was not got hypothecated in favour of the Company through the indemnities obtained from the party;
3. dues against MCPL as on 19 November 1994 amounted to Rs.14.35 lakh. Despite this, the Company continued to deliver the raw material to MCPL on unsecured credit till 25 March 1995 and by that date, the dues rose to Rs.2.72 crore. The Company presented the cheques for realisation on various dates between 28 April 1995 and 25 May 1995;
4. the Company favoured MCPL further by permitting it to negotiate the export documents directly and minimised thereby the control the Company had on the realisation of the dues from the export proceeds. As a result, the Company could not recover its dues in respect of the raw material issued from fifth consignment (23 December 1994) onwards; and
5. the Company appointed a clearing and handling agent (CHA) nominated by MCPL. As a result, seventh and eighth consignments of the raw material valuing Rs.1.22 crore were delivered directly at the factory of MCPL by a transporter arranged by the CHA, though the Company for this material had received no cheques or indemnities. This indicated lack of supervision and control on the imported material by the Company.

Six cheques for Rs.2.28 crore that had been received by the Company from MCPL for supply of the raw material were dishonoured (May 1995) by the bank when presented (April/May 1995) for encashment by the Company. Having failed to realise its dues, the Company finally initiated (January 1997) legal proceedings against MCPL. The chances of recovery of the dues were bleak as there were no fixed assets in the name of the party. In 1998-99, the Company declared the entire dues of Rs.2.72 crore as doubtful of recovery.

Thus, adverse modification in the MOU signed with the party in this deal coupled with lapses in custody of the raw material imported and lack of control in realisation of its export proceeds resulted in non-recovery of dues of Rs.2.72 crore from the party.

The Management stated (April 2000) that all possible action was taken against MCPL for recovery of dues. They also stated that acceptance of post-dated cheques, as security was not against the directive of the CMD. The reply of the Management is not tenable as the CMD’s directive was clear that no post-dated cheques should be accepted for payment and acceptance of post-dated cheques as security would naturally be covered by the same.

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

MMTC Limited (Company) imported 750 MT of Chilean copper wire bars in June 1995 for sale on high-seas basis to various parties including 200 MT to M/s. S.S Wire Products (India) Private Limited (M/s. SS Wire) at the rate of Rs.93,000 per MT. As per sale agreement, M/s. SS Wire was required to make full payment for the material within seven days from the date of intimation by the Company or two days prior to the expected time of arrival of the vessel, whichever was earlier. The material imported by the Company arrived at Mumbai port on 28 June 1995 and remained in the custody of Bombay Port Trust (BPT) till August 1995 attracting demurrage but the buyer neither made any payment nor approached the Company for taking delivery of the copper imported for them whereas the Corporate Office of Company had authorised its bank on 6 June 1995 to release the payment to the foreign supplier.

Between June and August 1995, a Manager in Mumbai regional office of the Company handed over the documents to the party without (i) intimating the authorities; (ii) receiving any payment/document of financial security; and (iii) raising invoice on the party for the sale of the material. On the basis of the documents, the party lifted the entire 200 MT of copper from the BPT during August and September 1995. The Company came to know about this event only in July 1996 at the time of closure of the accounts of the regional office for the year 1995-96. The Manager admitted (August 1996) his act of having handed-over the documents to the party and the Company treated (August 1996) the sale of copper valuing Rs.1.86 crore as an unsecured credit sale to M/s. SS Wire.

The Company pursued M/s. SS Wire in August 1996, November 1996, December 1996 and January 1997 for recovery of the amount but the latter neither replied nor made any payment. Subsequently, after realising that the chances of recovery of the amount were very bleak, the Company declared the dues of Rs.1.86 crore as doubtful of recovery in its annual accounts for the year 1998-99.

On conclusion (January 1998) of an enquiry ordered (January 1997) by the Company into this case, the charges of gross misconduct levelled against the Manager were established and the said Manager was reverted to the post of Deputy Manager at the minimum of the pay scale with effect from 21 October 1999 and one third of his basic pay was recovered towards the pecuniary loss caused by him to the Company.

The Company filed (December 1997) a criminal case against the party under Section 420 of the Indian Penal Code in a Court in Mumbai and also filed (August 1999) a civil suit against the party for recovery of the dues. The dues had not been recovered so far (August 2001).

It was observed in Audit that the loss was contributed by the following weaknesses in internal control, and lapses on the part of the Management:

1. Though the Company claimed to have put in place a system of periodical reconciliation of sales/closing stock of non-ferrous metals (NFM), the irregularity was only pointed out at the time of annual reconciliation of the closing stock for NFM in July 1996 and, thus, the Company could not detect this loss for almost one year;
2. Procedure for documentation, receipt and custody of the valuable negotiable documents relating to high-seas sales had not been prescribed;
3. Absence of division of responsibilities resulted in assignment of multiple functions to a single person i.e. the said Manager right from signing of the sale agreements with the party to the ultimate possession of negotiable documents for receipt of material from the BPT. This enabled the Manager to give special concession to the buyer;
4. The loss was further facilitated by despatch of the documents by the corporate office directly to the Manager instead of despatching the same to the head of the regional office, i.e. General Manager incharge for his knowledge and control over such valuable documents;
5. The Corporate office of the Company was also instrumental in forwarding notices bearing “rubber stamp” instead of “signatures” purported to have been issued by BPT about the availability of copper with BPT as on 7 October 1995 when the party had already got the copper released from the BPT between August and September1995; and
6. As sale of copper worth Rs.1.86 crore on handing over of the documents to the party without receiving payment became an unsecured credit sale, approval of the Board of Directors (BOD) required in terms of the Company’s credit policy was not obtained before passing accounting entry to this effect in the accounts. Similarly, the BOD was not apprised of the matter specifically at the time of declaring these dues as doubtful of recovery.

The Management stated (March and May 2000) that the concerned officer handed over the documents without the receipt of the sale value and without the approval of the competent authority and action had been taken against him. They also stated that legal action had been initiated against the party for recovery of this amount.

However the fact remains that Company took 17 months in filing a criminal case and 37 months in filing a civil suit against the party after the loss was detected. As regards action taken by the Company against the concerned manager, the following points merit consideration:

1. As against the loss of Rs.1.86 crore caused to the Company by the employee, the reduction in rank and recovery of one third of the basic pay caused a loss of Rs.1.43 lakh (approx.) to him till his superannuation (July 2000). The official superannuated with full retirement benefits;
2. Despite prima-facie suspicion of collusion and fraud, the Company did not refer the case to any investigating agency for investigation and criminal prosecution; and
3. Given the prevailing weaknesses in the systems of internal control relating to high-seas sales, there is no assurance against similar cases remaining undetected by MMTC.

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

With a view to bring about economy in the expenditure on foreign travel by the officers of the Public Sector Undertakings (PSUs), the Department of Public Enterprises (DPE) issued (September 1995) instructions according to which the consolidated amount (US$ 350 per day for the Cheif General Managers and below. US$ 500 per day for the Chairman and Managing Director and the Directors.) paid to each official in respect of foreign travel as per the guidelines of the Reserve Bank of India (RBI) was to cover room rent, taxi charges, entertainment, if any, official telephone calls, other contingent expenditure apart from daily allowance. This consolidated amount was only an upper limit of foreign exchange an officer can draw and was not the entitlement on foreign tour. On return from tour, the officials were required to render accounts for all items of expenditure other than daily allowance. The rates of daily allowance are regulated in accordance with the rates prescribed by the Ministry of External Affairs. Any unspent foreign exchange was to be refunded. These instructions also envisaged the adoption of the above guidelines by all the PSUs.

MMTC Limited (Company) adopted these instructions/guidelines in November 1995 for compliance but desired to seek clarifications from the DPE for implementing these instructions in the Company in a modified manner. However, without obtaining any relaxation from the DPE, the Company implemented its own modified guidelines on 19 January 1996 for regulating the bills of the officials relating to foreign travel. The modified guidelines were in contravention of the DPE instructions adopted by the Board as these instructions stipulated for submission of vouchers for room rent only, covering 25 per cent of the consolidated amount instead of insisting for submission of vouchers for the entire amount (other than the daily allowance) spent on taxi charges, entertainment, telephone calls and other contingent expenses.

A scrutiny in Audit of 205 foreign travel cases of the officials of the Company for the period from 1996-97 to 1999-2000 revealed that the expenses other than the daily allowance were paid to the officials without insisting for submission of requisite vouchers. An analysis of these cases revealed that in 176 cases, claims were admitted against production of vouchers for less than 50 per cent of the expenses; in 27 cases, vouchers for even less than 25 per cent of the amount were obtained. In 8 cases no vouchers were obtained. Admitting the claims without production of supporting vouchers was, thus, against the DPE instructions and led to inadmissible payment of Rs.1.08 crore. This included Rs.39.70 lakh paid to the CMDs and Directors of the Company in 12 and 47 cases respectively.

The Management stated (April 2000) that on a reference, DPE had clarified that the basic objective of the new instructions was to bring about transparency in the total expenditure incurred by the officials of the PSUs and added that the only requirement of these instructions was to put down the expenditure incurred by the officials in writing. The Management also contended that the office order issued by the Company was in accordance with the instructions of the DPE. The reply of the Management is not tenable as putting down the expenditure in writing without the supporting vouchers was against the spirit of the DPE's instructions as well as established accounting principles. Thus, the basic objective of DPE’s instructions of bringing about transparency in expenditure stood defeated.

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

Following a visit of a delegation of M/s. Government Trading Company, Iran (importer) in the last week of August 1998 to Kolkata, the General Manager incharge of Kolkata Regional Office of MMTC Limited (Company) offered to sell 500 MT of tea worth Rs.4.73 crore, though he was competent to make offer for a value not exceeding Rs.2 crore in each case. On return to Iran, the importer accepted the offer and placed an order with the Company on 3 September 1998 for supply of 500 MT of unblended Assam tea valuing US $ 1.11 million (equivalent to Rs. 4.73 crore (Increased to Rs.4.96 crore in October 1998)) during October 1998 to December 1998. As per condition of the supply order, importer was to open a letter of credit (LC) in favour of the Company subject to the Company offering an unconditional performance bank guarantee (PBG) to the importer equal to 5 per cent of the value of the order within seven days of the receipt of the order.

As the offer to sell the tea had been made without the approval of the competent authority viz. Sales and Purchase Committee of Directors (SPCD), the Company approached the SPCD on 11 September 1998 for obtaining post facto approval for sale of tea to the importer. SPCD accorded approval subject to the condition that no purchase of tea should be made unless the importer opens LC. The Company furnished the unconditional PBG to the importer for US$ 0.06 million (equivalent to Rs.23.63 lakh (Increased to Rs.24.82 lakh in October 1998 on increase in the value of order)) on 16 September 1998 valid till January 1999.

Violating the condition imposed by the SPCD, the Company purchased 49.149 MT of tea at Rs.40.31 lakh and had reserved another 170.571 MT by 30 November 1998 for purchase though no LC was received from the importer. Instead of taking any action for this violation, the SPCD waived (30 November 1998) the pre-condition regarding opening of LC by the importer. Also, the SPCD was given to understand by the purchase committee consisting of a Technical Advisor, a Deputy General Manager and a Deputy Manager of the Company that the Company would be able to sell the tea in domestic market for profit in case the importer did not open LC. However, SPCD also stipulated that the tea purchased was to be disposed off in the domestic market if LC was not received within 60 days. The Company purchased a total of 226.45 MT of tea valuing Rs.2 crore during 15 October and 2 December 1998 on the advice of the technical advisor who is also one of the members of the purchase committee and specifically appointed by the Company’s Regional Office in Kolkata for execution of this export order.

On 31 March 1999 i.e. after 4 months of the procurement, when the Management considered the sale of tea in the domestic market because of non-receipt of the LC from the importer, the purchase committee apprised the Management that sale of tea in domestic market would be a losing proposition in view of incidence of expenses relating to quality inspection, brokerage payable to registered brokers, sales tax etc., and recommended to postpone the sale till the end of June 1999.

On the request of the importer, the Company extended the validity of PBG till 15 May 1999 and, thus, closed its option of domestic sale of tea. In April/May 1999, the Company could export only 21 MT of tea to another party in Dubai for Rs.18.03 lakh realising only Rs.87.93 per Kg as against the procurement price alone of Rs.92.82 per Kg.

The balance 205 MT of the tea that was not sold, deteriorated in quality and on sale in February 2000 i.e. after 14 to 17 months of procurement, the Company could realise Rs.1.39 crore at the rate of only Rs.67.91 per Kg against the average procurement price of Rs.88.15 per Kg after incurring expenditure of Rs.7.37 lakh towards godown rent, insurance premium, bank charges and other miscellaneous expenses. Thus, against the total procurement cost of Rs.2.07 crore, the Company realised Rs.1.57 crore and sustained loss of Rs.50 lakh apart from loss of interest of Rs.45 lakh on capital that remained blocked.

The Management stated (July 2000) that the deal was finalised by way of furnishing PBG after obtaining approval of SPCD and they wished to ensure procurement of tea within projected cost and delivery schedule in anticipation of timely receipt of LC.

Reply of the Management is not acceptable as the Company procured tea for export despite the fact that the importer did not open LC. The Company failed to adhere to the condition laid by SPCD to sell the tea in the domestic market within 60 days of approval if the importer did not open the LC. This led to non-disposal of tea in domestic market and subsequent loss of quality in storage that resulted in loss in the entire transaction.

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

In order to supply imported thermal coal from the Gujarat ports upto stockyards of the Punjab State Electricity Board (PSEB) at various stations, MMTC Limited (Company), solicited (July 1999) tender enquiries from its empanelled handling agents for stevedoring, handling, clearing, forwarding and transportation of the coal. In August 1999, M/s. Adani Ports Limited (APL) who was not an empanelled agent, approached the Company and offered a consolidated rate of Rs.1275 per metric tonne (PMT) for rendering the aforesaid services from Mundra port (Gujarat) as an agent of the Company. The Company entered into a contract with APL in January 2000 for a period of 5 months for handling of 2 lakh MT of coal from Mundra port to the stockyard at Ropar at a negotiated rate of Rs.1270 PMT. APL handled a total quantity of 1,81,777.39 MT of coal during January to April 2000 without resorting to barging operations.

However, it was observed in Audit that:

1. The Company had agreed to make payment to APL at the rate of Rs.1270 PMT in consideration of, among other things, barging operations, if required, in the process of ultimate delivery of the coal upto the said stockyard at Ropar. During negotiation, the Management failed to bring down the rate payable to APL in view of the known fact that barging operations were not required to be undertaken by the party at Mundra port as that port was suitable for direct berthing of vessels.
2. Under similar contracts entered into by the Company in September 1999 with three empanelled parties for obtaining such services during the period from September 1999 to May 2000 from Navalakhi and Pipavav ports of Gujarat upto PSEB’s stockyards at various stations including Ropar, the Company paid a consolidated rate of Rs.1275 PMT which was inclusive of Rs.40 PMT in consideration of the fact that the handling operations at these port involved barging operations. Hence, the Company should have agreed to pay not more than Rs.1235 PMT to APL.

Thus, failure on the part of the Management in negotiating the rate payable to APL in the best interest of the Company resulted in unwarranted payment of Rs.63.62 lakh.

The Management stated (March 2001) that (i) though APL had to spend an additional amount on road bridging to load this cargo into railway wagons, the overall rate was not increased and; (ii) the Company had saved around Rs.1.90 crore on railway freight as the Railways had withdrawn their 10 per cent discount on the movement of coal with effect from 1 December 1999 and the same was borne by APL. The reply of the Management is not tenable since as per the contract entered into with APL, (i) road bridging as well as transportation through rail rakes/wagons upto Ropar were included in the scope of work of the contract in consideration of the agreed rate of payment of Rs.1270 PMT; and (ii) this rate was inclusive of the railway freight and no additional payment was to be made by the Company to the party for any escalation in railway freight borne by the latter.

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

MMTC Limited (Company) entered (September 1994) into a Memorandum of Understanding (MOU) with M/s. Samarth Auto Care Private Limited (SAC) for import of tyre-sealant (An unproven chemical product of proprietary nature to be used as an anti-puncture tyre sealant) on behalf of the latter against a bank guarantee (BG) equal to 10 per cent of the cost (Value of import plus customs duty.). The Company was to earn service charges at 3 per cent of the cost. The MOU provided that in this import transaction, the Company would be seller and SAC a buyer. SAC was to take delivery of the goods either on high-seas basis or on ex-godown basis, against payment as early as possible but not later than the due date for payment by the Company to the foreign supplier. Delivery of the goods on high-seas basis makes the buyer (SAC) liable to pay customs duty and other levies, after paying the cost of the goods to the importer.

The Company imported the sealant from M/s. Tiretyte International Inc., USA, being the manufacturer and the Principal (M/s. SAC claimed to be sole selling distributor of M/s. Tiretyte International Inc. for India, Pakistan, Bangladesh, and Nepal) of M/s. SAC. Though the Company had envisaged (September 1994) increasing the volume of import gradually depending upon the market response, it obtained BGs of Rs.10.50 lakh from the party and imported two consignments of 800 cans of the sealant and 50 Tiretyte injection pump kits each at a total landed cost of Rs.1.22 crore in November1994/January 1995 and February 1995/March 1995 against letters of credit opened in October 1994 and November 1994 respectively by the Company.

SAC took delivery of 50 injection pump kits in December 1994 out of the first consignment. Rest of the material i.e. 800 cans of sealant was got cleared from customs and stored (February 1995) by the Company in its godown at the request of SAC. SAC took delivery (April and October 1995) of 625 cans on ex-godown basis from this consignment after making payment. The Company kept (March 1995) the second consignment in a bonded warehouse at the request of SAC. SAC did not lift the remaining quantity (975 cans and 50 kits) and informed (September 1996) the Company that the former was not in a position to sell the sealant as it did not meet the required standard and the local climatic conditions. The Company encashed (October 1996) the bank guarantees of Rs.10.50 lakh.

After almost two years of the import of the tyre-sealant, by which time (i) the Company had come to know that the tyre-sealant did not conform to the required standard; and (ii) SAC had declined to lift the material, the Company got 800 cans of this chemical product debonded in January 1997 on payment of customs duty (Rs.27.65 lakh) and other charges (Rs.3.01 lakh). The Company could not sell the product in open market despite advertisement (January1997). SAC also refused (August1997) finally to lift the sealant on the ground that the material was of no use to them, as it would have lost its properties. The Company absorbed the loss in its accounts for the year 1998-99 through de-valuation of the stock. The Board of Directors was not apprised specifically about this loss in accounts.

Thus, injudicious financing of import of an unproven chemical product in quick succession on behalf of a customer without adjudging the market response and also without safeguarding the Company’s interest resulted in a loss of Rs.61.16 lakh to the Company, apart from loss of service charges (Rs.0.89 lakh).

After admitting (October 1999) that SAC had approached the Company for financing the import of the sealant, the Management denied (July 2000) to have extended any financial assistance to the party and added that it was a simple case of import and sale on back-to-back sale arrangement. The Management also contended that to ensure no risk devolved on the Company, the earnest money deposit of agreed percentage was obtained and an agreement had been signed.

The reply of the Management is not acceptable as the Company:

1. acceded to the requests of the buyer in importing two consignments of the product at short spells of time without adjudging its acceptance in the market;
2. did not opt for a safer option of selling the material to the party on high-seas basis to make the party liable for paying customs duty;
3. got the material cleared from customs by paying customs duty without ensuring its lifting by SAC; and
4. back-to-back sale arrangement was also defective as no impeccable financial arrangement like opening of a letter of credit by SAC in favour of the Company existed.

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

The State Trading Corporation of India Limited

The State Trading Corporation of India Limited (STC) had been working with M/s. Albert and Company, Chennai (associate) for the last two decades. STC had been entering into back to back contracts with the associate for export contracts besides giving cash assistance for the procurement of various commodities. STC, after recovering service charges, had been accounting for the turnover in respect of sales made by the associate directly.

A review of the working of the above arrangements of STC with the associate for the last 10 years for the period ending 31 March 2000 revealed the following:

STC granted cash assistance of Rs.4.46 crore to the associate for the procurement of 1974.55 MT of chillies during 1996-97 and 1997-98. It was noticed that as per the agreement with the associate, STC was to grant cash assistance upto 67.5 and 75 per cent of the procurement cost of chillies during the years 1996-97 and 1997-98 respectively. It was noticed that STC agreed (April 1997) to the proposal of the associate to cover chillies sold by one of its branches to another branch eventhough the above dealing was not strictly in accordance with the cash assistance scheme since both the seller and the buyer were one and the same. It was also noticed that at the time of releasing the cash assistance during the year 1996-97, the average invoice value of the chillies was taken as Rs.36.02 per kg, whereas the average ruling market rate of the chillies was only Rs.28.46 per kg. Similarly, during the year 1997-98, as against the average invoice value of Rs.23.85 per kg as claimed by the associate, the ruling average market price was Rs.16.17 per kg. This resulted in the additional release of cash assistance amounting to Rs.1.04 crore, which was upto 85.02 to 110.60 per cent of the procurement cost of chillies.

The Management stated (June 1999) that the rates should not be linked with the Guntur market rates and export quality chillies always commanded premium rates. The Management, reiterating the above reply, further stated (January and February 2000) that they had procured sannam special i.e. AC best sannam dried red chillies, which had a premium on the rates. The Ministry, while endorsing the reply of the Management, stated (November 2000) that the chillies exported were of premium grade having specific quality parameters. The Ministry also forwarded the rates of Guntur sannam chillies during the period given by the Madras Chillies Merchant Association and stated that the finances released to the associate were below the average price.

The replies are not tenable as the agreement provided for the procurement of sannam general dried red chillies and the associate had procured only those. Similarly, the rates given by the Madras Chillies Merchant Association were also of special variety of chillies and not of the variety for which agreement was entered with the associate.

The agreement (March 1996) for cash assistance for the purchase and sale of chillies for the year 1996-97 stated that the rate of service charges would be 5 per cent of the expected sales price or the actual rate at which the product was sold domestically, in case the same could not be exported, whichever was higher. It was observed that STC failed to incorporate similar clauses in the agreements in respect of export of chillies for 1996-97 and 1997-98. In the case of cash assistance for the export of coriander seeds also, a similar provision was not incorporated in the agreement for 1997-98. This resulted in an avoidable loss of service charges of Rs.20.35 lakh.

The Ministry stated (November 2000) that as STC was not a canalising agency, it was not in a position to impose its terms and conditions on the basis of earlier agreement.

The reply of the Ministry is not tenable as even in the earlier year, when this clause was included, STC was not a canalising agency.

STC as part of its domestic trade, entered (December 1998) into a back to back contract with the associate for supply of 5000 MT of red split lentils to M/s. Tamil Nadu Civil Supplies Corporation Limited, Chennai. It was noticed that STC recovered service charges at the rate of 0.5 per cent as against 5 per cent provided in the guidelines, without obtaining the approval of the Committee of Management (COM). This resulted in undue favour amounting to Rs.53.01 lakh to the associate.

The Management stated (June 1999) that the service charges were reduced from 5 per cent to 0.5 per cent since there was no financial involvement and risk to STC. The Ministry, while endorsing (November 2000) the reply of the Management, stated that STC agreed to reduction in the service charges due to stiff competition after getting ex post facto approval of the competent authority.

The replies are not tenable since the ultimate risk in the contract with the buyer was of STC and not the associate. Moreover, the approval of the COM which was the competent authority to approve the reduction in service charges was not taken.

Thus, granting of cash assistance without properly monitoring the procurement prices and following the guidelines regarding the same resulted in release of excess cash assistance of Rs.1.04 crore and short recovery of service charges and interest of Rs.73.36 lakh.