CHAPTER 9
DEPARTMENT OF FERTILIZERS

Indian Farmers Fertiliser Cooperative Limited

Indian Farmers Fertiliser Cooperative Limited took over the management of a sick sugar factory with a view to diversify its activities and to revive the factory knowing fully well that the reasons of its becoming sick were beyond control and were likely to continue. Besides loss of interest of Rs. 4.84 crore for seven years on the amount of loan of Rs. 4 crore, the recovery of principal amount was also uncertain.

With a view to diversifying it’s activities into the area of sugar manufacturing and other downstream agricultural products Indian Farmers Fertiliser Cooperative Limited (IFFCO) decided (March 1993) to take-over the control of an existing unit and to expand it later even though its bye-laws did not provide for such an activity. For this purpose, instead of exploring the possibility of taking over some profit earning sugar mill in a sugarcane growing area, it selected a sick sugar factory, namely M/s. Nandyal Cooperative Sugar Limited (NCSL) in Andhra Pradesh. This plant, with a capacity of 1250 TCD (tonnes crushed per day) commissioned in 1981, was operating at a poor capacity of 22.5 per cent on an average for the last one decade and had incurred losses ever since its inception. It had remained completely closed during 1990-91 and 1992-93; and also during 1993-94 while the decision was in process.

According to a feasibility study conducted by IFFCO Management, the then minimum economic size of the plant was 2500 TCD and a viable capacity was 5000 TCD plant with a provision for expansion to 10,000 TCD with in 3 to 5 years of commissioning. This plant with a capacity of 1250 TCD, was only half of the minimum economic size and thus not economically viable ab initio. According to IFFCO’s assessment, the main reasons for low capacity utilisation and losses were inadequate local availability of sugarcane owing to poor irrigation facilities in the nearby area, farmer's preference for short duration crops like chilly, turmeric, groundnut, tobacco etc.; and their problem of high harvesting cost due to scarcity of labour which were beyond control of IFFCO and were likely to continue. The sugar factory had accumulated losses of Rs. 21.45 crore till 1993-94 on an equity capital of Rs. 3.57 crore, interest payment and loan repayments had been at default and accumulated long-term liabilities amounted to Rs.18.94 crore. The total liabilities including current liabilities of Rs.1.33 crore, were Rs. 20.27 crore, against an asset base of Rs.2.94 crore. It was estimated that funds of Rs.15 to 18 crore would be required to secure its revival. Financial projections indicated that the IFFCO was not expected to breakeven before the year 1996-97 i.e. after 4 years of operation when it was expected to run on 111 per cent of its rated capacity. In spite of availability of sugarcane being the major constraint in operating the plant, IFFCO prepared the financial projection based on unrealistic crushing of 1 lakh, 1.20 lakh, 1.62 lakh and 1.80 lakh MT of sugarcane per year in the first 4 years of operation and 2 lakh MT thereafter even though it had crushed only 51494 MT during 1991-92, the last year of its operation before take-over.

No cost-benefit analysis was submitted to the Board in spite of one of the Members asking for (in 204th Meeting) the same to be prepared before approving the proposal in principle. The Managing Director, however, apprised the Board about the cost analysis and sugarcane availability before the Board finally approved the project. It was also stated that this would be a pilot project and during the revival plan of this unit no other project of this nature would be taken up by IFFCO unless this unit was successfully revived.

The Government of India approved the proposal (January 1994) as an experimental endeavour, after IFFCO amended its bye-laws (September 1993). IFFCO entered into (March 1994) an agreement with NCSL and provided (March 1994) a loan of Rs.4 crore free of interest for the first five years and thereafter at 7 per cent interest per annum secured by way of registered mortgage of NCSL’s fixed assets. IFFCO also provided management support and incurred Rs. 24.56 lakh towards the salary of the managerial staff. Even after providing financial and managerial assistance the capacity utilisation of the NCSL was in the region of 50 per cent as it crushed only 90855 MT and 79574 MT of sugarcane in 1994-95 and 1995-96 respectively. The factory could not continue production thereafter due to scarcity of sugarcane.

Thus, IFFCO by unnecessarily blocking its funds of Rs.4 crore in an unviable unit had defeated its objective of diversification as a growth strategy. The recovery of the amount of loan of Rs. 4 crore was uncertain since the sugar factory was no more in production. Besides, IFFCO lost Rs. 4.84 crore as interest, which could have been earned on this blocked capital.

The Management while confirming the facts intimated (April 2001) that the loan of Rs.4 crore was likely to be recovered during 2001-2002 once the unit was sold by the Government of Andhra Pradesh. There was no explanation offered for the injudicious investment in an unviable pilot project, which had effectively discredited diversification as a growth strategy for IFFCO.

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