Modern Foods Industries Limited: A Case Study

Modern Foods Industries Limited: A Case Study

Nandita Markandan & H B Soumya

A brief history

Modern Foods India Limited was set up under the Colombo assistance plan. It was wholly a Central Government owned PSU. Prior to disinvestment the authorised capital of the company was Rs. 15.00 crore and the paid up capital was Rs. 13.01crore. In its diversification programme, the following operations were undertaken:

- Transfer of the Fruit Juice Bottling plant at Delhi.- Transfer of solvent extraction plant at Ujjain.- Transfer of maize mill at Faridabad.- Launching of '77 Cola, '77 Orange and Lime Lemon Tingles.- Proposal to set up pineapple juice concentrate plant at Silchar.- Fruit and Vegetable pulping plant at Bhagalpur.However, huge losses were incurred in these activities. The company's earnings were eaten away by these activities. E.g. the plant at Bhagalpur mainly focussed on mango pulping but was located far away from the mango producing orchards. The excess expenditure on transporting mangoes to the plant had made the entire system unfeasible.

Hence, an exercise for reconstruction of its operations was undertaken, which constituted the following:

- Shutting down of the solvent plant at Ujjain.- Abandoning of the pineapple juice concentrate plant at Silchar - Reconstruction of the fruit juice bottling plant at Delhi to make "Rasika."

- Conversion of the maize mill into a roller mill.- Conversion of the plant at Bhagalpur to manufacture energy foods.- Ancilliaration was adopted where the company needed extra capacity to meet market demands over and above the production capacity of the company's plants.- Franchising of small-scale industries that put up bakery units under their brand name was adopted, provided a royalty of 1.5% of the turnover was paid

Reason behind privatisation

100% disinvestment was recommended by the disinvestment commission, as MFIL was not a core industry. Further, its production facilities were being underutilised. A large labour force, relatively low labour productivity and limited flexibility in decision making were other reasons for concern.

However only 50% 0f the disinvestment was approved by the cabinet in its meeting. An inter ministerial group consisting of representatives of the administrative department, department of public enterprises and department of economic affairs and the chief executive of MFIL was appointed and ANZ Grindlays bank was selected as the global advisor.

It was found that 50% disinvestment would not have got an attractive offer. Evaluation of the company at 50% would be substantially lower. Therefore, the government decided disinvestment of 74% of the company.

The reasons for privatisation were as follows:

1. Continuing operations under the existing scenario, the costs would have tremendous costs.

2. A Net worth erosion by 20% in a year.3. An investment of Rs. 80 crore in machinery would be required to turn the company around.

3. Management skills would have to be changed which would be very difficult.5. Taxpayer money would be removed from a very volatile business.6. Taxpayers would gain Rs. 109 crore.

4. MFIL would not become a BIFR company.

Method of selection

A committee comprising of the following was set up:

  1. Joint secretary (DEA)
  2. Joint secretary (DPA)
  3. Joint secretary (FPI)4. Director (FPI)5. Representative of ANZ6. Representative of AS & FA (FPI) as its chairman.

The following accounts were taken into account:

1. Assessment report of ANZ

2. Valuation report of MFIL by ANZ3. Valuation report of MFIL by independent valuer4. Draft share purchase5. Shareholders agreement6. Performance report by MFILDifferent methods of valuations may be used to value a company at the time of privatisation. For MFIL the discounting capital flow method was used. The Net Assets method would not be appropriate in this case as it is used only when the assets of the company are being liquidated.

Method of evaluation

The entire company was valued by ANZ Grindleys (which was the Government's valuer) at 78.55 crore while HLL's valuer, ICICI investments estimated the same at 165.47-15.95 crore (net of external debt). On January 31, 2000, HLL paid Rs. 105.45 crore for 74% of the shares along with an agreement to invest a further Rs. 20 crore in MFIL. However, it seems that the only bidder for MFIL was HLL. (Nestle initially seems to have shown interest, and had even valued MFIL at 65 crore but later backed out.) MFIL seems to have sold for more than the valuer's price.

Protection from asset stripping

Even though only 26% of the shares would be owned by the Government (74% has been privatised), it would keep the veto power with itself. For any large-scale sale of land or other assets the Government 's approval would still be required. This has been done to prevent asset stripping. If and when the government decided to sell its 26% an agreement was to be worked out whereby no real estate deal could take place for a specified period of time.

Share purchase agreement

History's lessons

Within 90 days following 31.01.2000, MFIL had to have its accounts audited for the period 1.04.1999- 31.01.2000 by an auditing firm listed on the C & AG's approval panel selected jointly by the Government of India and HLL.

According to the agreement, if the net working capital on the closing date be greater than the net working capital in the year 1999, then HLL would have to pay the Government of India the difference multiplied by 0.74. If the working capital in the year 2000 be lesser than that in the year 1999, then the Government of India would pay HLL the difference multiplied by 0.74.

In case of debt amount, if the closing date debt amount be greater than the 1999 year's debt amount, then the Government of India would pay HLL the 0.74 times the difference and if the closing date debt amount be lesser than the 1999 year debt amount, then HLL would pay the Government of India 0.74 times the difference.

Provisions made for the workers

Provisions were made in the share purchase agreement and shareholders agreement between the government, HLL, and MFIL.

Workers would enjoy protection under the industrial disputes act, 1947.

Retrenchment of workers would be according to the provisions of the Industrial Disputes Act (IDA) 1947, which also includes a clause on the process of retrenchment in the case of transfer of ownership or management. For this the following would be mandatory:

  • Prior notice
  • Government approval
  • Adequate compensation

However this clause would apply only during complete transfer of ownership. (The Government has privatised only 74% of MFIL, but has still assured that any retrenchment will be only under the clauses of the IDA).

The Hind Mazdoor Sabha has been handling the case of the workers of MFIL. Mr Nagpal, the General Secretary verified that not a single worker had been retrenched by HLL and that they did not have any complaints against HLL till date.

HLL's plan for MFIL

  1. HLL also initiated a scheme for revival of MFIL, which consisting of:
  2. Using HLL's strengths in wheat procurement etc. to aid MFIL
  3. HLL has also invested Rs. 20 crore in the revival package.4. Using superior marketing techniques5. Improvements in quality and distribution.6. Improvements in communication and treasur.

Latest developments

In February 2001, HLL was referred to Board of Industrial and Financial Reconstruction (BIFR). This came as a complete surprise as MFIL had nearly doubled its sales in the period after privatisation. No reasons were given by HLL for this action. The BIFR also refused to divulge the reasons on grounds of preserving confidentiality in this matter.

A Company may be referred to the BIFR under the provisions of the Sick Industrial Companies Act (SICA). Clause 22 of this act specifies the conditions under which legal proceedings, contracts etc. may be suspended.

The act states that " the Board may declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such adoptions and in such a manner as may be specified by the Board."

In case of a loss of 50% of net worth a company may be referred to the BIFR. The BIFR has the authority to approve the scheme of revival in case it is put forth. The Board has yet to submit its report. In the meantime one can only hypothesise about the reasons for the submission of MFIL to BIFR and their subsequent action on it.

Lack of transparency

One of the main grievances of the Hind Mazdoor Sabha was the excessive secrecy surrounding this matter both on part of HLL as well as on part of the Government Mr. Nagpal, the General Secretary of the HMS said that he had written repeatedly to the Disinvestment Commission of GOI to request for a copy of the shareholders agreement but to no avail. The Government has withheld information on the same and to date do not have a copy of the shareholders agreement. This delay in obtaining the shareholders' agreement reflects the inherent lack of transparency.

With the Government refusing to reveal as much as the shareholders' agreement, speculations about the fate of MFIL continue to spread. The HLL now claims that the assets that it received from the Government after the agreement fell short by Rs. 30 - 40 crore and hence it desires compensation for this shortfall. Others seem to think that this allegation is a ploy on the part of HLL to acquire the remaining 26% of the shares from the Government. Another line of thought is that since HLL maybe keen on shutting down a few unfeasible plants, but is not authorised to do so, it might be taking shelter under the BIFR umbrella to serve its ends.

Whatever may be the case, in the end, improper implementation of privatisation seems to be the bane of the idea. Issues of valuation, transparency and workers causes need to be addressed in a way satisfactory to all parties in the deal.


1. Malvika Goel, India Today

2. Nagpal, General Secretary, Hind Mazdoor Sabha