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Friday, Oct 11, 2002

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`Fudged accounts' surface to stump Shourie

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PRIVATE strategic investors who have acquired control over non-listed, loss-making, fully-Government-owned PSUs have detected "accounting irregularities'' allegedly committed by the erstwhile managements, creating a big problem for the Disinvestment Ministry.

Losses have been covered up through clever accounting manipulations to show a much lower loss. The result was that the Government would have to pay a much higher post-closure adjustment amount than the one anticipated by the Disinvestment Ministry due to variations in the net current asset of the company when the accounts are finalised for the year, Government sources said.

For instance, the Disinvestment Ministry had estimated that Paradeep Phosphates Ltd (PPL) was incurring a net loss of Rs 10-Rs 12 crore per month at the time of strategic sale on February 14 this year.

But, Zuari Maroc Phosphates Private Ltd, which acquired 74 per cent stake in PPL for a consideration worth Rs 151.70 crore has recently informed the Government that the net loss of PPL during the year (from April 1, 2001 to February 4, 2002) when the company was sold was about Rs 25 crore per month, and not as estimated by the Disinvestment Ministry.

On the basis of this estimate, Zuari Maroc Phosphates was believed to have submitted a post-closure adjustment claim for an amount which is almost equivalent to its bid price of Rs 151.70 crore, the sources said.

If the claim were agreed to, the Government would end up selling PPL to Zuari Maroc virtually free in what the Disinvestment Minister, Mr Arun Shourie, refers to as "negative bidding'' with regard to loss-making PSUs and prevent further bleeding of public resources.

The case of HTL Ltd is even curiouser. The Government had sold 74 per cent equity in HTL Ltd to Himachal Futuristic Communications Ltd (HFCL) for Rs 55 crore on October 5, 2001.

While HTL Ltd had shown a marginal net profit of about Rs 2.01 crore in its last published financial accounts (2000-2001) under the PSU management, the new owner HFCL Ltd was understood to have told the Government that the company had been incurring losses. HFCL Ltd has now submitted a post-closure adjustment claim to the Government to compensate them for the variations in the net current asset.

As per the post-closure adjustment clause, the Government will have to make good the losses incurred by the PSU being sold during the year when the strategic sale takes place in proportion to the equity transferred.

Though the claims submitted by Zuari Maroc and HFCL Ltd could be contested on the grounds that it was inflated and mis-judged, the Government's disinvestment managers admit that there was an element of truth in accusations that PSU chiefs resort to `fudging of accounts' to show the company in a much better shape.

Based on their experience in dealing with PSUs in the past, they say that the top management often takes undue advantage of various provisions including the `deferred revenue expenditure' head in the books of accounts to show a much lower net loss or even marginal profits when these companies have been incurring heavy losses in the past.

"In order to show-case their achievements in turning around loss-making PSUs and enhance their career prospects, the top brass are often seen taking the assistance of the DRE head,'' the source said.

However, industry sources said that the claims of Zuari Maroc Phosphates and HFCL Ltd could be a little over-ambitious. "The new private owners will try and book more losses knowing fully well that they can recover a higher amount by invoking the post-closure adjustment clause,'' an industry official said.

Given this backdrop, the Disinvestment Ministry had sought to drop the post-closure clause from future divestment deals on loss-making PSUs put up for sale, but bidders had resisted this move, threatening to withdraw and putting the process in jeopardy.

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