CASESTUDIESFOR

SECURITYANALYSISANDPORTFOLIOMANAGEMENT
Introduction

Case1:TheCoimbatoreBypassRoadProject

TheCoimbatoreBypasswasthefirstroadprojecttobeimplementedinSouthIndiaonBOT1
(build,operateandtransfer)basis.Theprojectwasapioneeringinitiative,whichincorporated
privatesectorparticipationandlevyoftollonuserstoensuresustainabilityinthelongrun.The
road ran between Neelambur on the Salem side of NH47 Tamilnadu and in Kerala2,
MadukkaraionthePalghatside.Theprojectinvolvedconstructionofa28kmlongtwolane
bypassroad,the32.2mnewAthupalambridgeacrosstheriverNoyal,therailwayoverbridgeat
ChettipalayamTamilnaduandthemaintenanceoftheoldbridgeatAthupalam,allinthestate
ofTamilnadu.Larsen&Toubro(L&T)3wasauthorizedtocollectandretainthefeefromusers
ofthenewandoldAthupalambridges.Thebypasswasexpectedtoeasethetrafficcongestion
in Coimbatore city, Tamilnadu and the SalemCochin national highway running between
TamilnaduandKerala.Theshippers,mostlyexportorientedunitsrelyingontheCochinport
forshipments,wereothermajorbeneficiariesastransportationtimecouldbesavedusingthe
newroad.
ConstructionwasstartedinJanuary1998andcompletedin22months4time.TheAthupalam
bridge was opened for traffic in December 1998 and the bypass became operative from
January19,2000.TheprojectcostwasaboutRs.1.04bn.Theprojectconcessionperiodwasfor
12years,andwasexpectedtosetaprecedentforassessmentoftrafficriskpatternsinthe
countryfortollbasedroads.
However, the project ran into problems when users refused to pay the toll for the old
Athupalambridge.Theyarguedthattheoldbridgewasalreadyinexistence.Asforthebypass
andthenewAthupalambridge,theyfeltthatthetollrateswereonthehigherside.Theyalso
complainedthatL&Thadnottakenthemintoconfidencebeforecomingoutwiththetollrates.
FinancingoftheProject
In the 1970s,the Tamilnadu government planned the Coimbatore bypass roadto ease the
trafficcongestioninCoimbatoreandtheNH47betweenSalemandCochin.However,dueto
paucity of funds, the project had to be dropped. In 1995, the Government of India (GoI)
liberalizeditspoliciesandopeneduptheroadsectorforprivateinvestments.InSeptember
1995,theGoIthroughitsMinistryofSurfaceTransport(MoST)5invitedtendersfromthe
privatesectortofinanceandimplementtheconstruction,operationandmaintenanceofthe
CoimbatorebypassroadprojectonBOT(build,operateandtransfer)scheme.Astheproject
wasnotviableonitsown,theGoIafterstudyingthevariousoptions,widenedthescopeby
includingtheconstructionofanadditionaltwolanebridgeonriverNoyalontheNH47.A
concessionagreementfortheintegratedprojectofbypassandabridgeatAthupalamonNH47
wassignedonOctober3,1997betweentheMoST,thegovernmentofTamilnaduandL&T.
L&Tsetupaspecialpurposevehicle(SPV)L&TTransportationInfrastructureLtd.(LTTIL),
toimplementtheproject.L&Theld100%equityinLTTIL.LTTILimplementedtheprojecton
BOTbasis,withtherevenueaccruingdirectlytoit.TheprojectwasconstructedbyL&TECC
(EngineeringConstructionCorporation)group,thelargestconstructionorganizationinIndia.
L&TRambollConsultingEngineers,ajointventurebetweenL&TandRambollofDenmark,

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wasemployedforqualitycontrolsupervisionandreviewofthecriticalpavementdesign.The
projectwasfinancedbysharecapitalofRs416mnandtermloanofRs620mn,withadebt
equityratioof1.5:1.AspertheagreementwiththeTamilnadugovernment,L&Thadtoholda
minimumequityof26%attheendof30years.
RevenueGeneration
L&Tpointedoutthattheprojecthelpedvehiclessavefuelandvehicleoperatingcostsdueto
reductionofdistanceby2.5kmandfreeflowtraffic,besidestime.Otherbenefitstothebypass
usersincludedlesspollution,pleasantdrive,goodwaysideamenitiesandlastly,safety.
L&Tgavespecialemphasistosafetyaspectoftheroad.Crashbarrierswereprovidedonthe
highembankmentoftheroad,alongwiththermoplasticroadmarkings.Trafficsignalswere
erected at the junctions of Neelambur (Tamilnadu), Madukkarai (Kerala), Trichy Road
(Tamilnadu),andPollachiRoad(Kerala).Speedbreakerswereerectedatsuitablelocationson
themajordistrictroadscrossingthebypasstoregulatethespeedofvehicles.Retroreflective
signboardswerealsoprovidedtoilluminatejunctionsforbettervisibilityatnights.L&Talso
setuptraumacarewithambulancefacilityatthebypass.TheIndianRailwaysaskedL&Tto
build a rail overbridge instead of a crossing for the bypass8. However, L&T successfully
arguedthatitwasnotpartoftheoriginalproject.Inordertorecovertheadditionalcosts,an
alternativefundingmethodhadtobeselectedtokeepthefixedcoststoberecoveredfromthe
projectatlow.Hence,withtheconsentofthestategovernment,L&Tdecidedtotolltheold
AthupalamBridge,whichdidnotcomewithintherouteofthebypass.L&Talsointendedto
provide necessary amenities for travelers such as petrol pumps, parking facilities, service
stations,restaurants,drinkingwaterfacility,publictelephoneboothsetc.Thedevelopmentof
therealestatewastobetakenupsoon.Tollplazasofinternationalstandardswereanother
attraction.
Challenges
L&TfacedproblemswiththetollingoftheoldAthupalambridge,whichdidnotcomewithin
therouteofthebypass.Thisbridgewasanalreadyexistingfacilitybeingusedbytheincoming
trafficfromKeralatoTamilnadu.Transportoperatorshadinitiallyrefusedtopaythetolls.The
bulkusersofthebridgeincludingthestatetransportcorporationsofTamilnaduandKeralahad
refusedtopaythetolls.
The Tamilnadu state government too backtracked and sought concessional tariff for state
transport buses on the plea that the transport department was in the red. The Tamilnadu
governmentwaswillingtopayonlyRs.50perbusformakingmorethanthreetripsaday
insteadoftheoriginallyplannedRs.15perbuspertrip.L&Tagreedtothesubsidizedtollrate
ontheconditionthatthestategovernmentcompensatedtherevenuelossessustainedbythe
company.TheCoimbatoreDistrictBusOwnersAssociation(CDBOA)andtheLorryOwners
Associationrefusedtopayeventhesubsidizedtariff.
TheCDBOAhadeventakentheissuetoMadras10HighCourtagainstthetariffbuttheCourt
directedtheprivateoperatorstopaythetollcharges.However,theyrefusedtocomplywiththe
court'sorders.SinceDecember1998,L&Twasunabletocollectthetollsfromroadusersand
thisresultedinalossofRs.74.1mnasofJune2000.ThisincludedRs.11.4mnduefromthe
Tamilnadugovernmenttowardsreimbursementoflossesincurredoutofthesubsidizedtoll
paymentforthestatetransportbuses.NRNaramsimhan,GM(developmentalprojects)L&T

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

feltthatunlessthestategovernmentgaveL&Tpowerstodealstrictlywiththenonpayers,it
wouldbeimpossibletorecovertheinvestment.HefeltL&Tmightevenrequestthestate
governmenttotakeovertheproject.
L&Tcontemplatedoninvokingtheforcemajeureclause11andpullingoutoftheproject.L&T
wasalsoundertremendouspressurefromthefinancialinstitutions,whichhadlentmoney,to
createadditionalsecurities.MoSThadaskedthestategovernmenttotakeaquickdecisionasa
delaywouldhaveanadverseimpactonotherBOTprojectsinthestate.
QuestionsforDiscussion
1. Discusstheimplicationsofthestategovernment'spoorsupporttotheproject,onthefuture
investmentintheconcernedstate?Givereasons.
2. What is the role of innovative financial instruments like takeout financing in the
infrastructuresector?
Case2:TheCRBScam:DoomedDepositors
May18,1997hundredsofangry,frustratedandscaredpeoplestoodoutsidetheReserve
BankofIndia's(RBI)Mumbaiheadquartersunderthescorchingsun.Theywerewaitingfor
ChainRoopBhansali(Bhansali),theheadoftheCRBGroupofcompaniestoarrive.Three
daysearliertheRBIhadgivenBhansali72hourstocomeupwithaplantorepayhisliabilities
followingover400complaintsfromdepositorsinhiscompany'sfinancialschemes.
MosttopofficialsofCRBwereuntraceablefromthesecondweekofMayitself.TheCentral
BureauofInvestigation(CBI)lockedandsealedtheofficesoftheCRBGroupandarrestedsix
persons,includingfourdirectors(twofromBikanerandtwofromMumbai)ofthesatellite
companiesofthegroup,afinancialcontrollerinMumbaiandarelativeandcloseassociateof
BhansaliinDelhi.TheCBIalsoconductedsimultaneoussearchesat16placesinMumbai,
threeinNewDelhi,oneeachinChennaiandAhmedabadandtwoplaceseachinCalcutta,
Jhunjunu,SujangarhandBikaner.TheCBIfrozethebankaccountsofthegroupcompanies
andseizedincriminatingfilesandotherdocumentsfromtheresidenceofthevicepresidentof
theCRBgroupinMumbai.
FollowingrumorsthatBhansalihadfledIndiaandwashidinginHongKongorCanada,the
CBI sought Interpol's assistance to trace his whereabouts. RBIfiled a windinguppetition
claimingthatthecontinuanceoftheCRBGroupwasnotintheinterestofthepublicand
depositors.TheorderprohibitedCRBfromselling,transferring,mortgagingordealinginany
mannerwithitsassetsandfromacceptingpublicdeposits.Inresponse,Bhansalisentaletterto
theRBI.Thoughitwasnotsignedbyhim,thelettersaidthattheRBIorderhadledtothe
deterioration of the company's financial position. It added that the company was facing
tremendousproblemswithpaymentstofixeddepositors.Theletterfurthersaidthat'wehave,
alsoexpressedthatinviewoftheprecarioussituationwhichisfastgoingoutofourcontrol,
beforeitbecomesunmanageable,ourcaseshouldbeconsideredsympathetically.'Thisletter
ledtheinvestorstobelievethatBhansaliwouldcomeoutofhidingandworkoutawaytoget
outofthemess.
However,Bhansalididnotshowup.WiththeexpiryoftheRBIdeadline,theCRBGroup
collapsed,shatteringthedreamsofthousandsofinvestorsacrossthecountry.

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Borninajutetrader'shouseinCalcutta,Bhansaliwasastudiousperson.Afterobtaininga
degreeincommerce,BhansalicompletedCharteredAccountancyin1980.Inthesameyear,he
startedafinancialconsultancyfirm,CRBConsultancy.ThroughBhansali'spersonalcontacts,
CRB Consultancy soon managed to secure the business of providing issue management
servicestoafewwellknowncompaniesinCalcutta.Overtheyears,Bhansaliacquiredother
degreesaswellincludingACS,Ph.D.,MIIA(US)andadiplomainJournalism.Thoughhe
madealotofmoney,BhansalifounditdifficulttofindrecognitioninCalcutta.Hethenmoved
toNewDelhitojoinoneofthecountry'sleadingregistrarsofcompanies.Howeverwhen
Bhansali was caught shortcharging the registrar's clients, he had to leave. Bhansali then
established'CRBConsultants,'aprivatelimitedcompanyinNewDelhiin1985.In1992,the
nameofthecompanywaschangedtoCRBCapitalMarkets(CRBCaps)anditwasconverted
intoapubliclimitedcompany.
Thecompanyofferedvariousservicesincludingmerchantbanking,leasingandhirepurchase,
billdiscountingandcorporatefundsmanagement,fixeddepositandresourcesmobilization,
mutualfundsandassetmanagement,internationalfinanceandforexoperations.CRBCapswas
alsoveryactiveinstockbrokinghavingacardbothontheBSEandtheNSE.Thecompany
raisedoverRs176crorefromthepublicbyJanuary1995.TheA+ratinggivenbyCAREand
upfrontcashincentivesof710%attractedinvestorsinhordestoBhansali'sschemes.Bhansali's
connectionswithreligiousleadersandpoliticalpartiesalsohelpedinattractinginvestors.
AnotherCRBcompany,CRBCorporationLtd.,(originallysetupasagranitemanufacturing
company,itsactivities veeredintofinancelater),raisedanotherRs84crorethroughthree
publicissuesbetweenMay1993andDecember1995.CRBShareCustodialServicesraised
anotherRs100croreinJanuary1995.InAugust1994,BhansalilaunchedCRBMutualFunds
(CRBMF)whichraisedRs230crorefromthemarketthroughitsArihantMangalGrowth
Scheme.AnotherRs180crorewasraisedfrominvestorsthroughfixeddeposits.
Bhansali'sempiresoonflourishedwiththetotalincomeincreasingfromRs1.2crorein1991to
Rs103crorein1995.Leasingandhirepurchase,oneofthegroup'sthrustareas,shotupfroma
paltryRs2lakhin1991toRs16croreinSeptember1994.
Mediaanalystspointedoutthatthegroup'sglobaloutlookandtimelyforeigncollaborations
wereresponsibleforitssuccess.CRBsjointventureswithDaewooSecuritiesandKeystone
Groupmetwithreasonablesuccess.SidKhanna,managingpartner,AndersenConsulting,who
hadbeenadvisingCRBongroupstrategyopinedthatBhansalihadaneducatedandpragmatic
viewofglobalization.Inthemid1990s,Bhansalihadevenpublishedabookletonhimself,
extollinghisvirtuesandachievementstitled'DrC.R.BhansaliMakingTheDifference.'
Evenatthisjuncture,mediareportsclaimedthatCRBhadusedmanynotsosavvymethodsto
achieveitsends.QuestionswereraisedwhenCRBCaps'networthwentupfromRs2crorein
1992toRs430crorein1996.Giventhecompany'ssmallscaleofoperations,thisphenomenal
growthwaseyedwithsuspicion.Inmid1996,reportsregardingthefraudsbeingcommittedby
theCRBgroupbeganappearinginthemedia.ThemassgatheringinfrontofRBIinMay1997
wasthefirstmajormanifestationofthe'hatewave'againstCRB.
ThedramatookanewturnwhemtheCBImadearrangementstobringBhansalibacktoIndia
afterinformalnegotiationswithhimandHongKonggovernment.AnFIRwasfiledagainst
CRBasperSection120B,readwithSection420oftheIndianPenalCode(IPC)andSection

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

13(2)readwithSection13(1)DofthePreventionofCorruptionAct(PCA).Bhansaliwas
chargedwithfraud,cheatingandsiphoningoffoffundsfromSBI.
Bhansaliwasreportedtohavespecializedinsettingupdummyinvestmentcompanies.Heused
to sell these dummy companies to buyers. He capitalized on the 1985 boom in leasing
companies to become cash rich. He had established good contacts in the Registrar of
Companies and the Controller of Capital Issues offices. He registered companies with
practicallynoequityandthenstagemanagedthedummycompany'smaidenpublicissuewitha
fewhundredinvestors,largelyfromCalcutta'scloseknitMarwariJaincommunity.Havinghad
acompanylistedonthestockexchange,Bhansalithensolditforaprofittobusinessmenwho
neededdummypubliclimitedcompaniesinahurry.
Bhansaliusedhisownmoneytorigsharepricesinordertoraisemoremoneyfromthemarkets
intwoways.Firstly,heboughthisownstockthroughprivatefinancecompaniesownedby
him.Secondly,heusedhisotherpubliccompaniestobuyintoeachotherascrossholdings.
Forinstance,bothCRBCapitalMarketsandCRBShareCustodianServicesfeaturedinthelist
oftop10companiesinwhichCRBMutualFundsinvestedin199495.CRBShareCustodian
investedRs15croreintoCRBCapitalMarkets,whichinturninvestedRs17croreinCRB
MutualFunds.Thelatterheld24lakhsharesofCRBCorporation,whichagainhadaRs16
croreinvestmentinCRBCapitalMarkets.
Thisway,BhansalimanagedtokeepthesharepricesofCRBcompaniesartificiallyinflated.
Also,hewasabletoposthandsomeprofitsforgroupcompanies,thoughhenevermarkedits
investmentstothemarket.CRBCapsreportedthatthemarketvalueofitsinvestmentsrose
fromRs76croretoRs109crorein199596.Also,CRBCorporation'sincomemorethan
doubledbetween1994and1996.AnalystshoweversaidthattheactualworthofBhansali's
companieswasmuchbelowwhatwasstated,consideringthatmostofthemwerebadstocks.
SourceswithinthecompanyrevealedthatBhansaliinvestedinthreeclassesofcompanies:his
ownprivatelyownedcompanies,privatecompaniesownedbyhisfriendsandthoseonthe
boardsofhiscompanies,andmanysmallcompanieswhoseissuesweremanagedbyCRB
Capital,butwhichcouldnotgetfullsubscription.Manyofthesecompaniesweretheones
Bhansaliinvestedintogeneratepaperprofitsforthegroup.ItwasBhansali'spracticetobuy
IPOsofcompaniesatamuchlowerpricethantheissuepriceandthenenteringintoaready
forwarddealwithafinancecompany.Asperthisdeal,Bhansalisoldtheholdingsatahigher
price,promisingtobuyitbackafterayear'stimeathigherprice.Themoneygeneratedthus
wasshownasprofitsinthebooksofCRBCapsorCRBCorporationasprofitsfromsaleof
investment. This procedure was repeated over and over again, keeping the books of the
companiesartificiallyinflated.Thehigherprofitsreflectedinthesharepricecontinuingto
remainhigh,whichinturnmeantthatraisingmoneyfromthepublicinthefuturewaseasier.
Thecompanyalsocouldmanagetogethighercreditratings,ensuringasteadyfixeddeposit
andbankcreditinflow.Fortheothercompaniesinvolved,thebenefitwasinformoftheIPO
pricegoinguponthebourses.
ThisfinancialwizardryinthebookswasmadepossiblewiththehelpofBhansali'strusted
firmsofauditors,D.P.Bhaiya&Coand,Jain&SwaikabotholdfriendsfromCalcutta.Both
thesefirms wererathernotorious andJain&Swaikawasinfactreportedtobe'available
againstafeetofixalmostanysetofaccounts.InMay1996,CRBCapsopenedacurrent
account in SBI's main Mumbai branch, for payment of interest, dividend and redemption
cheques.Thepaymentwarrantscouldbepresentedatanyofthe4,000SBIbranchesfor

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payment.However,Bhansaliwasgrantedonlyacurrentaccountfacilityanddidnotenjoyany
overdraftfacility.Hewasexpectedtodepositcashupfrontintothecurrentaccount,alongwith
alistofpaymentsthathadtobehonored.Clamingthatthelogisticsofpaymentwerevery
complexandthatitwasnotpossibleforeverybranchtocheckwiththeheadofficebefore
honoringadividendwarrant,thebranchesgraduallybegantreatingtheseinstrumentsjustlikea
demanddraft.Foraboutninemonths,thesetupworkedverywell.However,inMarch1997,
SBIrealizedthattheaccounthadbeenoverdrawntotheextentofafewcrores.Bhansaliwas
calledtotheSBIofficeandaskedtoremitthedifferenceimmediately,whichhepromptlydid.
Thesamesituationaroseagainwithinthenextfortnight.SBIthenissuedacirculartoallits
branchesaskingthemtostophonoringanywarrantsofCRBCapitalMarkets.SBIalsoalleged
thatBhansalihadprinted1,800fakedividendwarrants,whichweredrawninfavoroffriends
andrelativesandpresentedatvariousSBIbranches.
BhansaliusedbenamiaccountsinChennai,CalcuttaandtownsinRajasthantoencashthe
interestwarrantsandfixeddepositrepayments.Theseamountswerethentransferredtoother
accountslikeRedStonePropertiesPvt.Ltd.,BahubaliCommercialCompanyLtd.,Chamatkar
InvestmentsPvt.Ltd.allinChennaifromwheretheywerewithdrawn.Althoughitwas
speculatedthatBhansaliintendedtopocketthecashandflee,Bhansali'slawyerclaimedthatthe
overdrawnsumwentbackintoCRBCapstopayinterestandrepayprincipaltofixeddeposit
holders.BhansalididadmittooverdrawingfromhisSBIaccountfollowingliquidityproblems
atCRBCaps.However,heclaimedthathehadnofraudulentintentions.Hislawyerinsisted
thattheSBIaccountwasanordinaryoneandnotoftheescrowor'predeposit'type.Therewas
nomandatoryrequirementtodepositmoneywithSBIbeforeissuingouttheinterestwarrants
andintheeventofanyoverdraft,itwastobetreatedasanormalaccountwithoverdraft
facility,wheretheoverdrawnamountcouldberepaidwithinterest.
SBIofficialsmetBhansaliinApril1997andaskedhimtoimmediatelydepositRs10croreand
submit postdated cheques to cover CRB's outstanding liability of Rs 47 crore. SBI then
attemptedtoobtainBhansali'scooperationinabidtorecovertheentireamountowedtothe
bankbyAprilend.Inaddition,SBIaskedBhansalitoregisterallpropertyownedbyhimand
hiscompaniesascollateralinfavorofthebank.Inthesamemonth,Bhansali'spropertyin
Jaipur,RajasthanwastransferredinSBI'sname.Bhansalihowever,didnotpaythemoneySBI
hadaskedfor.Further,BhansalivaluedhispropertyatoverRs60crore,whileSBIclaimedthat
the bank's own valuation turned out to be far less. It seemed that SBI had knowingly
overlookedCRBCaps'impendingbankruptcyinordertorecoverasmuchcashaspossible
beforethematterreachedthejudiciary.
SBI justified this saying that justice in its normal course would have invariably taken an
extremelylongperiod.ItwasonlywhenBhansalicouldnotpaythefirstinstalmentofRs10
crorethatSBIinformedtheRBI.Bhansali'slawyersalsoclaimedthattheSBIandtheRBI
aggravated the situation by prohibiting CRB Caps from accepting fresh deposits and then
announcingittothepublic,whichresultedinapanicamongdepositors.
The collapse of the CRB group seemed to be a fraud allowed by supervisors despite the
regulationsinplace.Thelackofclearcommunicationchannelsbetweenthebanks,RBIandthe
governmentseemedtohaveworkedtoBhansali'sadvantagetoagreatextent.Frequentclashes
occurredbetweenRBIandSEBIinthemedia,withbothofthemtryingtoprovehowtheother
wasresponsiblefornotactingearlyenough.

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TheRBIclaimedthatithadnopowerstoexaminetheassetqualityoftheCRBgroupand
therebywasnotinapositiontopassanyjudgmentonthecharacterofassetgenerationor
deploymentofthefundsraisedbythegroup.Thebankfurtherclaimedthatthepowerswere
grantedonlyinMarch1997,whentheRBIActof1934was amendedtoincludespecific
provisionsforthepurpose.Thebankalsostatedthatithadbeguntoexaminetheliabilitiesand
nottheassets.However,mediareportswerequicktorefuteRBI'sclaims.ABusinessIndia
reportclaimedthatthebank,contrarytotheviewsofitsmanagement,didhavethepowers
vestedintheActtocallforthebooksofanyNBFCandexamineitsassetsideasperSection45
LandN.
While SEBI gave a status report to RBI on CRB's mutual fund and broking businesses
mentioning the irregularities found, RBI went ahead with its approval of CRB's banking
ventureastheirregularitiespertainedtothemutualfundbusinessonly.SEBIalsoclaimedthat
sinceithadnotpassedanyjudgmentonthegroupasawhole,itcouldnotbeblamed.
ThewaytheCRBMFissuewashandledwasquotedinthemediaasanexampleofa'good
collaborativeeffort'betweentheRBIandtheSEBI.InDecember1994,SEBIinitiatedaroutine
investigationtoexaminetheextenttowhichthecompanycompliedwiththeSEBI(Mutual
Fund)Regulations,1993.ThetaskwasentrustedtoM.P.Chitale&Co,afirmofchartered
accountants,whichproducedtheChitaleReportinJanuary1995,whereinsevereirregularities
werefound.ThoughanenquirywasconductedbySEBI,CRBMFwaseventuallypunished
withonlyaninemonthretrospectivebantoapproachthemarketsformorefunds.Withinafew
daysaftertheCRBMFsuspensionperiodended,Bhansalisecuredthebankinglicensefrom
RBI.ThisraisedquestionsastowhySEBIdidnotsendthefulldetailsontheextentofthe
violationscommittedbyCRBtoRBI.Reactingtothis,SEBIchiefMehtasaid,"TheRBInever
askedforit."
DespiteSEBI'sintimationinDecember1995regardingtheCRBMFproblems,theRBIdidnot
investigateintothecompany'sactivities.InOctober1996,theTourismFinanceCorporationof
India(TFCI)lodgedacomplaintagainstwiththeRBICRBCapsclaimingdefaultsonloan
repayments. RBI first issued CRB an interim showcause notice on why it should not be
bannedfromacceptingfixeddepositsinNovember1996.Theinspectiontooktwomonthsto
complete. In February 1997, a final show cause notice was issued, which took two more
monthstogothroughthelegalprocess,duringwhichtimeCRBcollectedafurtherRs20crore
infixeddeposits.Finally,aftertheSBIcomplaints,RBIissuedabanoncollectionoffixed
depositsbyCRBinApril1997.IttookRBIsixweekstoissuethewindingupnoticeand
appoint a liquidator. During this period, Bhansali was reported to have destroyed all the
evidenceinhispossessionandwithdrawnwhatevermoneywasstillleftinthebanksbefore
fleeingtoHongKong.TheCRBscamtookthewholenationbystorm.Atonepoint,theUnion
financeministryheldameetingeverydaytogettothebrasstacksoftheCRBfiasco.Ina
meeting withSEBI,the finance ministercriticizedtheregulatorseverely. The government
asked the RBI to prepare a panel of auditors asking to explore the possibility of making
auditingofNBFCsaprerequisitetoregistration.
InOctober1998,theSEBIappointedanadministratorforCRB'sArihantschemefinalizeda
schemeforpaymenttotheunitholders.Underthescheme,theinvestorswereprematurelypaid
Rs4.95perunit,whichwasitsNAVasof31March1998.Whentheadministratorhadtaken
over,theassetsoftheschemecomprisedthefund'sfrozenbankaccountsworthRs81lakh,
plussomedividendsfrominvestments.Besides,therewerealargenumberoflisted(butthinly
traded)andunlistedsharesamountingtoRs17.5crore.Accordingtotheschemesuggested,a

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sumofRs1.07crorewaspaidtoall19,396unitholderstotheextentof300unitseach13,245
whoheldupto300unitsandcomprised68%oftheunitholderswerepaidoff.
Nonindividualunitholderswhohadover10,000unitswerealsopaidfor300units.Inthe
secondstage,thesewerepaidoutofthesaleproceedsfromthelistedsecurities.Finally,after
disposingoftheentireunlistedandnontradedshares,otherunitholderswerepaidoff.Thus,
unitholderswereabletogetalmost50%oftheinitialsuminvested.
Thescamhadfarreachingimpactsontheeconomyandonthebankingsectorinparticular.
Banks,alreadysufferingfromlowcreditofftakeandborrowers'suspicionwereafraidontwo
countspossibilityofformationoffreshnonperformingassets,andtheincreasingstresson
accountability.Thescamplayedanimportantpartinthedeclininginvestorconfidence,poor
performanceofNBFCsandahostofotherproblemsailingthefinancialmarkets.VinodBaid,
promoter,PrudentialCapitalMarketsseemedtohavesummedupthesituationaptly,"Few
peoplerealizeitbuttheCRBcollapsehasdoneagreatdealofgoodtothecountry.Ithas
stoppedinvestorsfromseeingadsandfeedingmoneyintothefixeddepositwhirlpool."
BhansaliwasarrestedassoonashelandedinDelhi.Bhansali'sadvocatehowevermaintained
thathisclienthadsurrenderedhimselftoCBIofficials'assoonashecametoknowthathewas
embroiledinanallegedcaseoffraudbythecompany,whichwasbeinginvestigatedbythe
CBI.HealsoclaimedthatBhansali'didnotfleethecountry'butwasonabusinesstriptoHong
KongandhadinformedhiswhereaboutstoafriendinDelhi,wholaterinformedtheCBI.
Bhansalihowevermaintainedthathewasfalselyimplicatedandsaidthatinvestigationsshould
beproperlydonesothathedidnotbecomethescapegoat.
Case3:TheAnubhavPlantationsScam
On2ndDecember1998,thousandsofpeoplefromplaceslikeShimla,Trichy,Sangliand
severalotherIndiancitiesandtownsconvergedattheNewWoodlandsHotelinChennai.All
of them were investors in the collapsed Anubhav group's teak plantation schemes, and a
majorityofthemwereonthebrinkofbankruptcy.TheyhadcometoChennaiinresponsetoa
letterfromanadvocateinvitingthemtocomeandcheckalltherecordsandthebalancesheetof
thecompany.Theinvestorscouldbeseeneverywheresittingonthepavements,standing
aroundthebuilding,walkingupanddowntheroadsallofthemtenseandworried.
TheinvestorshadsensedwrongdoingsatAnubhavwhenthechequesissuedtosomeofthem
bouncedinmid1998.Manydepositors,whowenttothegroup'sofficestocollecttheirdeposit
amountaftermaturity,foundthedoorslockedandlodgedcomplaintswiththepolice.Later,
thousandsofinvestorsdemonstratedinfrontofthecompany'sheadquartersinChennai.Butthe
main accused, C. Natesan, Chairman, Anubhav Group (Natesan), had already gone
underground.
TheAnubhavgroupofcompanieswaseventuallyfoundtohavedupedinvestorsofoverRs400
crore.Asdetailsaboutthe'GreatPlantationScamofthe1990s'wererevealedinthemedia,
Natesan'smodusoperandishockedthosewhoheldtheAnubhavgroupinhighregard.
PlantingtheDream
AcommercegraduatefromChennai'sVivekanandaCollegeandacharteredaccountancy
coursedropout,Natesanwasamanwhodreamtbig.Hisostentatiouslifestyle,hiscars,andhis

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

plushofficeinChennai'supmarketRoyapettahareawerefrequentlycitedbythemediaas
examplesofhislavishtastes.Natesanstartedhiscareerin1983bylaunchingaconsultancy
firm,'YoursFaithfullyConsultancy.'In1984,henteredtheconstructionbusinesswiththree
partners.Threeyearslater,heclosedthisventureandsetuptheAnubhavFoundation.In1992,
AnubhavPlantationsLtd.(Anubhav)wasfloatedasapubliclimitedcompany.Overtheyears,
theAnubhavumbrellaexpandedtoincludevariousothercompaniessuchasAnubhavHomes
Ltd.,AnubhavResortsLtd.,AnubhavFinance&Investments,AnubhavCommunications&
Advertising(Pvt.)Ltd.,AnubhavRoyalOrchards&Exports,AnubhavHirePurchaseLtd.,
Anubhav Green Farms & Resorts (Pvt.) Ltd., Anubhav Agro, Anubhav Security Bureau,
AnubhavInteriorsandAnubhavHealthClub.By1998,AnubhavhadbecomeaRs250crore
groupwhich,apartfromitsteakplantationschemes,wasinvolvedinthetimeshare,finance,
andrealestatebusinesses.Thesecompanieswerebackedbyanationwideinfrastructureof91
officesandover1,800employees.
Natesanhadplanstoforwardintegratefromteakintofurnitureandtogetimportedmachinery
to make it. However, his growth strategy was focused mainly on mobilizing funds from
investors.Thegrouphadalreadyraisedvastsumsofmoneyfromthepublicintheformof
fixeddeposits,teakunits,andacombinationoffixeddepositsandteakunits.Natesanwas
extremelysecretiveaboutthefinancialperformanceofhisgroup.
In the plantations business, Anubhav was the market leader. It operated through four
companies:AnubhavAgrotech,AnubhavGreenFarms&Resorts,AnubhavPlantations,and
AnubhavRoyalOrchardsExports.NatesanhadassociatedAnubhavwiththeWorldWideFund
ForNature2(WWF)andthusconveyedapositiveimageofhiscompanytothemediaandthe
investors.Besidesthehighreturns,theinvestorswerealsoattractedbythecourteous,helpful
behaviorofthefirm'semployees.(Unliketheindifferenttreatmenttheyreceivedfrompublic
sector bank officials). Since the interest earned on plantation schemes was treated as
agriculturalincome,itwasexemptfromtax.Asaresult,Anubhav'sschemesbecamevery
popular and attracted thousands of investors. Moreover, since the unit value of the teak
schemeswasverysmall,investorscouldeasilyaffordthem.
Anubhavseemedtohaveworkedoutitsschemesverywell,includingplanstoservicethe
annual payment obligations. In 1998, the land prices in the interior Tamil Nadu, where
Anubhav'splantationsweresituatedwerequitelow,averagingRs35,000for43,560sft.Thus,
thecostofa300sftpieceoflandofferedtotheinvestorworkedouttojustRs240.3Adding
anotherRs10forthesaplingsandotherexpenses,theunit'spriceworkedouttoRs250,while
AnubhavwaschargingRs6000forit.EvenifAnubhavplacedthismoneyinrelativelysafe
investments,earning15%,itwouldreceiveRs862.50ayear,fallingonlyRs137.50shortof
thepaybackliabilityofRs1000.AsfortheRs3lakhpaymentafter20years,Anubhavhad
estimatedthateachofthethreetreeswouldgrowtoavolumeof1.13cubicmeters,witheach
cubicmeterfetchingapriceofRs88,286,amountingtoRs2.99lakhforthethreetrees.Thus,
assumingthatAnubhav'spriceandvolumeestimateswerecorrect,itwouldhavebeenina
positiontofulfillitspromisestoitsinvestors.StudiesregardingAnubhav'scashflowsalso
pointedoutthatinvestorscouldrelyontheseschemes.
However,officialsfromtheRevenue&ForestDepartmentofMaharashtra(RFDM)stated,"It
willbeamiracleiftheycanachieveit(theirprojections).Thetimberyieldoftreeswithagirth
of60cmandabovewillbemerely5.10cubicfeetpertreein15years,evenifoneusesquality
soil."

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

IndustryandmarketwatchershadalwaysbeenskepticalabouttheAnubhavgroup.Sources
commentedthatNatesan'sbusinesswashighlyspeculativeandthathehadneverdone'solid'
assetbasedbusinesslikeleasingorhirepurchase.Amarketwatchersaid,"Youcanneverrun
thisbusinessonasustainedbasisofferinginterestratesof2530%.Whateverheclaims,his
assetsarefartoosmallcomparedtohisliabilities."
average,whileRs35lakhwascontributedfromthepromoter'sside,thepublicfundsraised
wereusuallyaboveRs300crore.Mostofthesecompaniesdidnotevenhavesufficientcrop
insurance.Also,theofferdocumentsofthesecompaniesdidnothighlighttherisksinvolved.
The lack of industry regulation made it virtually impossible for the average investor to
distinguishbetweenaflybynightoperatorandagenuineplayer.
TableII
TheRisksinPlantationSchemesACrisilReport
Overdependenceonretailfunds Inadequateequitybaseresultinginhighleverage

Nondisclosureofpromoters'
stake
Hugeassetliabilitygap

Duediligenceforpublicraisingoffundsnotdone
Erraticcashinflows

Noaccesstoorganizedsources

Exposedtovagariesofnature
offunding
Excessiveexpenditurefor
Inadequatecashinflowsleadingtolowdebtservicing
raisingresources
capability
Lackofstandardaccountingpracticesgivescompaniestheopportunitytofollow
liberalaccountingpolicies
Most of these companies were reluctant to provide information about themselves. During
investigationsconductedbyBusinessIndia,officialsatParasrampuriaPlantationsrefusedto
eventalktothemagazine.However,whenthemagazinesentpeopleposingasinvestors,the
responsewasextremelyenthusiastic.Investigationsregardingtheschemesbeingofferedby
variouscompaniesacrossthecountryindicatedthatthingsweredefinitelyoutofjoint.Even
thosecompanieswhotalkedtothemagazine'sreporterswerenotabletoconvincinglyanswer
thequestionsposedtothem.
Onemajorissueconcerningtheseplantationschemeswasthevaluationoftheteakandtheteak
units.MostofthecompaniesweresellingtheteaktreesatRs15002000pertree.Thiswas
significantlyhigherthantheRs1015figurequotedbyNABARD,whichhadyearsofproven
experienceinagriculture.Reactingtothis,theplantationcompaniessaidthatforestcultivation
wastotallydifferentfromrunningprivateplantations,whichspentalotmoreonirrigationand
fertilizers.InastudyconductedbytheMaharashtraRevenueandForestDepartment(MRFD)
onprivateplantations,thetotalcostofraisingandharvestingateaktreewasestimatedtobe
aroundRs400.EvenifoneignoredNABARD'sfigures,theplantationcompanieswerestill
charging the investors at least four to five times more than what experts thought was
reasonable. However, the plantation people rejected these estimates. Natesan said, "These
estimates are incorrect. Our charge of about Rs 1500 per tree has been arrived at after
reckoningmaintenance,pruning,weeding,evensecurity."
Another debatable issue concerned the future yield of timber per tree and its price. The
assumptionsofyieldandthepriceofteak1520yearslaterwerecriticalforcomputingthe

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

expectedreturnoninvestment.AstudybytheIndianInstituteofForestManagement,Bhopal,
concludedthattheyieldprojectionsofprivateteakcompanieswerenearlyseventimesthe
highestknownyieldsinatimeframeof2025years.AnotherstudybyMaharashtraforestry
officialsrevealedthatwhileyoungteaktreesuptoaboutsixyearsoldrespondedspectacularly
toincreasedirrigationandsoilnutrients,theefficacyoftheinputsdeclinednotablyastrees
agedbeyondsevenyears.AMRFDofficialcommented,"Evenifonereckonssiteswiththe
bestqualitysoil,thetimberyieldoftreeswithagirthof60cmandabovein15yearswouldbe
about5.1cubicfeetpertree."
Natesan dismissed these claims as being 'absurd and wrong.' He quoted the figures of
Anubhav's50acreplantationinBhavnagarinGujarat,whichhad65,000teaktrees.Hesaid,
"Overaperiodofsixyears,wehavealreadyobtainedayieldof89cubicfeet.Eventhoughthe
girth of the trees would be lower at six years than at 20 years, I am very clear that my
observations are correct and that Anubhav's claims are in fact conservative. We have set
recordsbygrowingteaktreesto32feetinheightinonly22months,whichwouldhavetaken
sixyearstoattainunderforestconditions."Anubhavclaimedthattheyieldofitstreeswouldbe
40cubicfeet.Expertsclaimedthattheyieldnormwouldbe10to15cubicfeetoftimberper
treeovera20yeartimeframe.Theyalsoestimatedtheinternalrateofreturn(IRR)5tobe30%
forateakplantationproject.WhiletheIRRofaprojectwiththebestqualitysoil(gradeI)was
estimatedtobe32%,forinferiorsoilqualities,gradeIIandIII,thefigureswere23%and13%
respectively.Thus,theIRRthattheplantationcompaniesclaimedtooffer2540%was
regardedashighlyunrealistic.
Regarding the price of timber upon the maturity of the schemes, most of the plantation
companiesclaimedthattheyhadtakenthemostconservativepricesbyassumingthefuture
pricetobethesameormarginallyhigherthanthecurrentprice.
Theseclaimswererefutedbyexperts,whosaidthatwithsubstitutessuchasplastic,plywood
andparticleboardbecomingpopularintheWest,thedemandforwoodcoulddecreaseinthe
future.Thesteadyincreaseinteakpricesduring199298wasprojectedtobeunsustainable
becauseofincreasingsupply.MRFDstudiesrevealedthatteakpriceswoulddropsharplyafter
2009.Anofficialsaid,"Iexpectafallinpricesaftertheyear2009.Infact,bytheyear2015,I
expectthepriceofteaktimber,particularlythoseofgirth6075cm,todeclinetolessthanhalf
ofthepriceprevailingintheyear2009."
Plantationcompanies'procedureswerealsoflawed.Thesecompaniesdidnotdirectlyownthe
land,theyonlysupervisedthesaledeedbetweentheownerofthelandandtheinvestors.
Investors were issued certificates indicating the extent of ownership and, in most cases,
receivedonlyphotocopiesoftheoriginalsaledeed.Thecertificateswereissuedunderthe
commonsealofthecompany,butwereunstamped,raisingsuspicionsaboutthecommitment
ofthecompany.Mostofthecompaniesinvariablylinkedthetransferabilityofthesecertificates
totransferoflandbacktothem.Thus,inspiteofpayingfortheland,investorsdidnotget
absolutetitletothelandandwereinnopositiontotransfertheirrightstothelandalongwith
thetimber.Inthisentireprocedure,plantationcompaniesheldallthecards.Thecertificates
issuedunderteaktreeschemeswerenotdeliveredtoinvestorsuntilthreemonthsafterthe
paymentofthefinalinstalment.Theconcernedcompanytookthesecertificatesbackthree
months prior to the closure of the schemes. In the interim, if the investors defaulted, the
companyhadtherighttoholdbackthecertificate.Butifthecompanydefaulted,theinvestor
coulddoverylittlelegallysincethecertificateswerewiththecompany.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

Accordingtoestimates,morethan4500plantationcompanieshadraisedoverRs25,000crore
fromthepublicduringthe1990s.Thelaxityoftheconcernedregulatoryauthoritieswasa
majorfactorbehindthesescams.
Intheearly1990s,settingupafinancecompanywasverysimpleastherewasnosupervisory
authority for sole trading or partnership firms, nor did they fall under any regulatory
framework.Thisgavethemacompetitiveadvantagevisavistheothernonbankingfinancial
companies(NBFCs).Thoughtherewasalimitonthenumberofdepositorsthesesoletrading
orpartnershipcompanieswereallowedtohave,therewasnoceilingontheamountofdeposits
theycouldcollect.AsperthePartnershipAct,apartnerinonecompanycouldbeapartnerin
numerousotherpartnershipfirms.6Further,theRBIdidnothavethepowerstofixaceilingon
the interest offered by these firms on deposits. Thus, these finance companies offered
unbelievablyhighinterestratesaswellasenormouscashincentives,giftsandprizestoentice
depositors.
Nobodycouldscrutinizethedeploymentoffundsbythesefirmsastheyneitherreleasedany
balancesheets,norsubmittedregularreportstotheRBI.Asagriculturalcompaniesdidnot
comeundertheRBI'spurview,itwaseasyfortheseschemestoflourish.
In November 1997, the Union Ministry of Environment and Forests set up an inter
departmentalgrouptoexaminetheveracityoftheclaimsmadebyvariousprivateplantations.
Their findings were later examined by an interministerial group, which included the
environment,lawandfinanceministries.SEBIwasinvitedbytheMinistryofFinancetowork
outacomprehensiveregulatoryframeworkfortheindustry.
FollowingthepublicuproaroverthefailureofcompaniessuchastheDSJGroupandthe
Parasrampuria Group, SEBI appointed a committee under the chairmanship of S.A. Dave
(former chairman of UTI and SEBI's first chairman) to frame a comprehensive set of
regulations.SEBIthenissuedasetofdirectivesregardingmandatoryregistrationandcredit
rating.Only540companiescompliedwiththeregistrationrequirement.
SEBIthenappointedcharteredaccountantstoauditthebooksofthetop50ofthesecompanies
andthereafterissuedshowcausenoticesto11ofthemfornoncooperation.Companiesthat
did notfile forregistrationwere barredfromraising freshfunds fromthepublictill they
compliedwiththedirectives.
Meanwhile,intheabsenceofprecedents,theratingagenciesprimarilytookintoaccountthe
sustainabilityofthebusinessthroughitsperyearyieldandtheabilityofthecompanytobe
abletoraiserevenueindependentoffreshcollections.Theratingsalsofactoredinthesolvency
andoperationalcapabilitiesofthemanagementandtheabilityofthecompanytorealizehigh
yieldsovertheyears.Almostallthecompaniesfailedthetestandwereassignedagradepoint
of5(indicatingveryhighrisk)byvariousratingagencies.
Anubhavwastheonlycompanythatreceivedagradepointof4(unsatisfactorygrade)from
Duff&Phelps (Duff&Phelps' saidthatintheabsenceofapastmodelandlackofany
standardizedpolicyinthebalancesheet,theratingtookintoaccountprojectedcashflows,
keepinginmindthenatureoftheriskinvolved.)Oftheratedcompanies,22wereplacedinthe
noninvestmentgrade.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

Needlesstosay,bythetimethesemeasureswereputinplace,thedamagehadbeendoneand
themoneyinvestedbytheinvestorshadvanishedforever.
With the stock markets performing badly and banks cutting back on interest on deposits,
plantationschemesappearedveryattractiveforinvestorsimpatientforreturnsandwillingto
takerisks.Aninvestorcommented,"Whydopeopleinvestinthesekindsoffirms?Because
people want to make more money, fast. What do we get from the nationalized banks as
interest? A mere 57%! Whereas Anubhav was paying 2124% interest. Why can't the
governmentpaybetterinterest?"
Explaining why these schemes were so attractive to the public as well as the finance
companies,Natesancommented,"Weoffer24%foralldepositsofthreeyearsandabove.This
isnothighwhencomparedtotheinterestchargedonloansbybanks.Iborrowfrombanksat
18%.WhenIdothat,Ihavetooffersecurityforasimilaramount.Thatpushesupmyeffective
costto36%.ThereforeitstillworksoutcheaperwhenIofferhighinteresttomydepositors."
FollowingthefailureofmajorplayerssuchasAnubhav,amajorityoftheplantationcompanies
vanishedovernight.Courtproceedingscontinuedforyearsagainsttheaccusedfromvarious
companies,evenafterNatesanwasreleasedonbail.
Case4:TheBuybackoption
In October 2000, Royal Philips Electronics of Netherlands (Philips), the Dutch parent of
PhilipsIndiaLimited,announceditsfirstoffertobuybackthesharesofitsIndiansubsidiary.
Theopenofferwas initiallymadefor23%oftheoutstandingsharesheldbyinstitutional
investors,privatebodies2andthegeneralpublic.TheofferwasmadeatRs.105,apremiumof
46%overthethenprevailingstockmarketprice.Withthis,Philipsbecameoneofthefirst
multinational(MNCs)companiesinIndiatoofferbuybackoptiontoitsshareholders.
Soonafter,thebuybackoptionwasofferedbyseveralmultinationalcompanies(MNCs)to
increasetheirstakeintheirIndianventures.SomeofthesecompanieswereCadburyIndia,Otis
Elevators,CarrierAircon,ReckittBenkiseretc.Fundmanagerswhichheldthesecompanies'
stocksfeltthatallowingbuybackofshareswasoneofmostfavorabledevelopmentsinthe
Indianstockmarkets.Itprovidedamuchneededexitoptionforshareholdersindepressed
marketconditions.Buybackbythecompanyusuallyindicatedthatthemanagementfeltthatits
stockwasundervalued.
Thisresultedinanincreaseintheprice,bringingitclosertotheintrinsicvalueandproviding
investors withahigherpricefortheirinvestmentinthecompany.However,criticsofthe
buybackoptionclaimedthatlargemultinationalshadutilizedthebuybackoptiontorepurchase
the entire floating stock from the market with the objective of delisting from the stock
exchangeandeliminatinganinvestmentopportunityforinvestors.Moreover,mostMNCsthat
offeredbuybackoptionreportedasteepdeclineinthetradingvolumesofthesharesoftheir
Indian ventures. The declining liquidity of these shares prompted critics to say that the
GovernmentofIndia'sattempttorevivecapitalmarketsbyallowingbuybackofshareshad
failed.
TheBuybackAct
ThebuybackordinancewasintroducedbytheGovernmentofIndia(GOI)onOctober31,
1998.Themajorobjectiveofthebuybackordinancewastorevivethecapitalmarketsand

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

protectcompaniesfromhostiletakeoverbids.4Thebuybackofshareswasgovernedbythe
SecuritiesandExchangeBoardofIndia's(SEBI)BuyBackofSecuritiesRegulation,1998,and
Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and
TakeoverRegulations,1997.
Theordinancewasissuedalongwithasetofconditions6intendedtopreventitsmisuseby
companiesandprotecttheinterestsofinvestors.AccordingtoguidelinesissuedunderSEBI's
BuyBackofSecuritiesRegulation,1998,acompanycouldbuybackitssharesfromexisting
shareholdersonaproportionatebasis:Throughtenderoffer.
1
2

Fromtheopenmarket,throughthebookbuildingprocessorthestockexchange.
Fromoddlotholders

Theordinanceallowedcompaniestobuybacksharestotheextentof25percentoftheirpaid
upcapitalandfreereservesinafinancialyear.Thebuybackhadtobefinancedonlyoutofthe
company's free reserves, securities premium account, or proceeds of any earlier issue
specificallymadewiththepurposeofbuyingbackshares.Theordinancealsopreventeda
company that had defaulted in the repayment of deposits, redemption of debentures or
preference shares, and repayment to financial institutions from buying back its shares.
Moreover,a company was notallowedto buybackits shares from anypersonthrougha
negotiated deal, whether through a stock exchange, spot transactions, or any private
arrangement.
Italsoallowedthepromotersofacompanytomakeanopenoffer11(similartoanacquisition
ofshares)topurchasethesharesofitssubsidiary.Thisallowedforeignpromoterstoutilize
theirsurplusfundsandmakeanopenoffertoacquirea100%stakeintheirIndiansubsidiaries.
The buyback of shares was allowed only if the Articles of Association of the company
permittedittodoso.Theordinancealsorequiredthecompanytopassaspecialresolutionata
generalmeetingandobtaintheshareholders'approvalforthebuyback.Inaddition,companies
werenotallowedtomakeapublicorrightsissueofequityshareswithinaperiodof24months
fromthedayofcompletingthebuyback,exceptbywayofbonusissuesandconversionof
warrants,preferencesharesordebentures.
Theordinancedidnotleadtoincreasedbuybackactivitybymultinationalcompanies.Inthe
financialyear19992000,onlysixMNCscameoutwithbuybackoffers,andintheyear2000
2001,onlyeightmorecompaniesofferedtobuybackshares.Accordingtotheanalysts,thelow
level of buyback activity in 1999 and 2000 could be attributed to the fact that buyback
regulations were very elaborate and discouraged companies from making use of buyback
option(ReferExhibitIforthebuybackprocessandExhibitIIformethodsofbuyback).The
lackofinterestinthebuybackoptioncouldalsobetheresultofSEBI'srestrictiveregulations.
Somecompaniescomplainedthattheprocessofbuybackwasdelayedbecausethelawrequired
them to obtain shareholder approval for offering a buyback. SEBI guidelines prevented
companiesfromraisingfreshequitytofinancetheirprojects.Italsoprohibitedanysubsequent
buybackofferbythesamecompanyonceithadmadeoneforaperiodoftwoyears.These
complaintsandtheneedtorevivethestockmarketsaftertheSeptember11,2001terrorists'
attacksintheUSforcedthegovernmenttomakeamendmentstothebuybackordinance.The
government made amendments to the buyback ordinance in October 2001, relaxing the
buybacknorms.Thenewamendmentsallowedthepromotersofamultinational

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

companytomakeanopenoffertopurchaseupto10%ofitsequitywithoutmakingapublic
announcement. This purchase just required a mere approval from the board of directors.
However,apublicannouncementandshareholderapprovalwerenecessaryforanyofferabove
10%.Theamendmentsalsoreducedthetimelimitforissuingfreshsharesfrom24monthsto6
months.Thesetwochangeswereincorporatedintothebuybackordinance,whichwaspassed
by the government in December 2001 (and subsequently became the Buyback Act). The
amendmentsinthebuybackordinancecoupledwithdepressedstockmarketconditionssawan
increaseinbuybackactivity.MNCs(throughtheopenofferroute)regardedthebuybackoption
asanopportunitytoraisetheirequitystakeintheirIndianventures.
BuybackOfferbyMNCs
Inthefinancialyear20012002,twentyMNCsmadebuybackoffers.Someofthewellknown
MNCswhichofferedtobuybacktheirshareswerePhilipsIndiaLimited(Philips),Cadbury
IndiaLimited(Cadbury),BritanniaIndustriesLimited(Britannia),CarrierAircon(Carrier)and
OtisElevators(Otis).Allthesecompaniesmadeopenoffersforthenonpromotershareholding
intheirIndiansubsidiaries.Tobuybackshares,CadburypaidRs9billion,PhilipsRs2billion,
andCarrier,OtisandReckittBenkiserallpaidoverRs1billion(ReferTableIforMNC
buybacks).
Accordingtoanalysts,theincreasedbuybackactivitybyMNCswasduetothreereasons.They
feltthatthesharepricesofmostMNCswereunderpricedanddidnotreflectthetruevalueof
thecompany.Moreover,thebuybackofsharesallowedMNCstoconverttheirIndianventures
into wholly owned subsidiaries (WOS). It also allowed them to delist the shares of these
venturesfromthestockmarketsandthusprotectthemfromthevolatilityofthestockmarkets
(causedbyscamsandothermarketmanipulations)
TableIMNCBuybackOfferDetails
Issuer

Method

Opening
Date

PhilipsIndiaLimited*
PhilipsIndiaLimited@
CadburyIndiaLimited
CarrierAircon
OtisElevator*
OtisElevator@
ReckittBenkiser
Britannia

OpenOffer
OpenOffer
OpenOffer
OpenOffer
OpenOffer
OpenOffer
OpenOffer
OpenOffer

13Nov00
21Nov01
13Dec01
2Jul01
18May01
18Oct02
14May02
Sep01

Closing
Date

Price

12Dec00

Mar02
31Jul01
9Jul01
16Nov02
13Jun02

Rs.105
Rs.105
Rs.500
Rs.100
Rs.280
Rs.320
Rs.250
Rs.750

%ofShares
offeredfor
Buyback
49.00%
17.34%
49.00%
49.00%
31.10%
19.38%
49.00%
49.00%

AnalystsalsofeltthatMNCshadusedthebuybackofsharesasamethodfordistributing
surpluscashtotheirshareholders.Buybackalsoactedasatoolforcreatingwealthforthe
shareholders.Thebuybackofsharesimprovedacompany'sreturnonequity(ROE),andthis
improvementwouldultimatelybereflectedinahigherpriceearningratio.Buybackbythe
companyusuallyindicatedthatthemanagementfeltthatthestockwasundervalued.Itresulted
inanincreaseinstockprice,bringingitclosertotheintrinsicvalue.Forexample,whenPhilips
announceditsfirstbuybackofferatamaximumpriceofRs.105inOctober2000,itsshares
weretradingataroundRs60.Thebuybackannouncementresultedinanincreaseintheshare

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

price toRs 90even before the buyback offer opened onNovember 13, 2000.Hence, the
buybackoffergaveshareholdersanexitoptionthatpaidthemapremiumovertheprebuyback
shareprice.However,inspiteofthebenefitsofbuyback,asectionofanalystsandinvestors
feltthatitwasbeingmisusedbyMNCs.
InvestorGrievances
AnalystsfeltthatthebuybackoptionmaybemisusedbyMNCstoincreasetheirequitystakes
intheirIndianventures,escapepublicscrutinyandaccountabilityandpreventthemfromthe
Indian regulatory environment. Moreover, the option to convert their Indian ventures into
whollyownedsubsidiariesanddelisttheirsharesfromthestockmarketsprovidedMNCswith
completecontrolovertheirIndianventures,allowedthemtorepatriateprofitsandmakemore
independentinvestmentdecisions.
Asectionofinvestorsfeltthatgovernmentregulationsmusthaveprovidedthemwithachoice.
However,minorityshareholdersclaimedthattheyhadnooptionandwereforcedtoselltheir
sharesonceMNCsboughtbacksharesfromthemajorityshareholders.Forexample,because
LifeInsuranceCorporation(LIC)andtheGeneralInsuranceCorporation(GIC),whotogether
helda21%stakeinPhilips,surrenderedtheirshareswhenPhilipsmadeitsfirstbuybackoffer,
theminorityshareholderswereforcedtosurrendertheremainingshareswhenPhilipsmadea
secondofferinNovember2001(ReferTableII).
Reportedly,investorsfearedlosinganexitoptionincasethesharesgetdelisted.Moreover,
duringthesecondoffer,thetradingvolumeofsharesfelltolessthan(onanaverage)500
sharesperdaysinceDecember2001.
TableII
ShareHoldingPatterninPhilipsIndiaLimited
ShareHoldingPatternason(%)
ForeignPromoters
InstitutionalInvestors
PrivateBodies
GeneralPublic

30/06/2002
92.34
0.07
0.14
7.4

31/03/2002
91.47
0.07
0.18
8.22

31/12/2001
82.86
0.85
1.49
14.67

Source:www.indiainfoline.com
Similarly,whenCadburymadeabuybackoffer,publicshareholdingfellfrom26.67%tojust
7.32% within six months after the majority shareholders surrendered their shares (Refer
TableIII).
Moreover,inthiscase,investorsfeltthatthepremiumofferedbyCadburySchweppes,theUK
basedparentcompanyofCadbury,waslow.TheofferwaspricedatRs500,whichrepresented
apremiumof24%ontheaveragehighandlowpricesoverthepast26weekspriortotheoffer.
However,Cadbury'sstockhadbeentradingatpricesinexcessofRs500in1999and2000
(ReferTableIV),withanaverageP/Emultipleof60in1999and54inMarch2000.Moreover,
Cadbury'sthirdquarter(OctobertoDecember2001)saleshadincreasedby11.2%comparedto
thesameperiodin2000,whileitsprofitshadincreasedby5.2%.Hence,investorsfeltthatthe
priceofferedforthebuybackhadnottakenintoconsiderationthefuturepotential

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

profits ofthecompanyandwasnotattractivetoshareholderswhohadbeenholdingtheir
sharesforalongerterm.
Asaresultofdepressedstockmarketconditions,investors(inmostcases)receivedalow
buybackprice.ThepriceatwhichtheopenoffersweremadebyMNCscausedgreatconcern
tobothinvestorsandregulators(ReferExhibitIIIfordetailsofpricingparametersofopen
offers).
TableIII
ShareHoldingPatterninCadburyIndiaLimited
ShareHoldingPatternason(%)
ForeignPromoters
InstitutionalInvestors
PrivateBodies
GeneralPublic

30/06/2002
90.25
0.10
2.25
7.32

31/03/2002
51.00
0.22
33.18
15.46

31/12/2001
51.00
20.36
1.71
26.67

Source:www.indiainfoline.com
In many cases, minority shareholders had expressed their opposition to the use of
discriminatorypricingbyMNCsforbuyingbackshares.Forexample,OtisElevatorsbought
back23.9%oftheequitystakefromtheMahindragroupatRs.375pershareinOctober1999,
butmadeabuybackopenofferforonlyRs.280fortheremaining31%ofthesharesheldby
theIndianpublicinMay2001.
TableIVSharePricesonFirstOpenOfferbyMNCs

CompanyName
Philips
Cadbury
CarrierAircon
OtisElevator
ReckittBenkiser

Priceon
Maximum Buyback Premium Price1year Price2year Priceon
Offer
Date
offered priortoBD priortoBD 1Jul02
Price
(BD)
105
90.5
46%
110
148
103
500
483
5.90%
589
566
493
100
98
53%
88
218
99
280
175
41.40%
315
306
287
250
245
5%
211
190.5
235
Source:www.myiris.com

Analystsalsofeltthatthebuybackoptionwasnotbeneficialforsmallinvestors.Allowing
MNCstodelisttheirsharesfromthestockmarketwoulddepriveIndianshareholdersofgood
investmentopportunities.Forexample,infewcompaniesincludingPhilips,Carrier,Reckitt,
CadburyandWartsila,thepromoter'sstakehadalmostcrossed90%(ReferTableV).Though
thesecompanieshadnotdelistedtheirsharesfromthestockmarkets,therewashardlyany
tradinginthesecompanies'stocks.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

TableVShareholdingPatternason30/6/2002(In%)
Name
PhilipsIndiaLimited
Cadbury
CarrierAircon#
OtisElevator
ReckittBenkiser*
Wartsila

Foreign Institutional General

Promoter andOther Public
Investors
92.34
7.4
0.26
90.25
2.43
7.32
91.16
8.84

80.62
9.21
10.18
82.84
15.93
1.23
88.13
6.37
5.49

Analysts argued that like China and Indonesia, India must revert back to a system that
preventedmultinationalsfromdelistingtheirsharesfromthestockexchangebyprescribinga
minimum amount of floating stock. The buyback by MNCs not only affected the small
shareholders,italsohadanimpactonthestockexchanges.Thebuybackoffloatingstock
resultedinadeclineinthetradingvolumes.Forexample,theDelhiStockExchangewasbadly
affectedasMNCsaccountedformorethan90%ofthevolumetradedand85%ofthelisting
feesearnedbytheexchangebeforethebuybackactwasintroduced.Giventhenegativeimpact
oftheBuybackAct,marketobserversfeltthattheacthadfailedtorevivethecapitalmarkets.

BuyorNottoBuyback?
ThedilemmathatfacedsmallinvestorsinIndiawaswhetherthebuybackoption,alongwith
theSEBIguidelines,actuallyprotectedtheirinterestsandofferedthemanexitoptionatafair
price or was it a tool that provided them with no options allowing large MNCs to gain
completecontroloftheirsubsidiaries.
InvestorsfeltthattheregulationsframedbySEBIdidnothaveprovisionsforpreventinggood
stocks from delisting. Moreover, the buyback price, which was determined using the
parametersspecifiedintheSEBITakeoverCode,didnotconsiderthefuturepotentialofthe
stock(ReferExhibitIIIfordetailsofpricingparametersofopenoffers).TheyfeltthatSEBI
shouldhavelookedatvariousfinancialparameterssuchasfuturecashflows,valueofbrands
andthevalueoffixedassetstodetermineapricingformulaforopenofferswhichensuredthat
investors whohadbeenholdingthestockforseveralyearsreceivedafairpricefortheir
investment.

QuestionsforDiscussion
1. WhatweretheobjectivesofthebuybackordinanceissuedbytheGovernmentofIndiain
1998?Describethesalientfeaturesofthebuybackordinance.WhydidMNCswanttobuy
backthesharesoftheirIndianventures?Explain.
2. ThedepressedstockmarketsinIndiaarebeingutilizedbyseverallargeMNCstoincrease
theirstakeintheirIndiansubsidiariesthroughthebuybackofshares.Explainindetailthe
differentmethodsofbuybackavailabletoanorganization.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

3. Accordingtominorityshareholders,MNCshadmisusedthebuybackoption.Explainthe
variousgrievancesofminorityshareholdersregardingthebuybackofshares.
4. Do you think stringent measures should be introduced to protect the interests of small
investors? What should SEBI do to safeguard small investors' interests and resolve their
grievances?
Casestudy5:TheITCclassicstory
TroubledTimes
Inlate1996,almosthalfoftheexecutivesonboardofthetobaccotohotelsmajorITCLtd.
wereinjailonchargesofFERAandexciseviolations.Itwasatthispointthatthedownfallof
ITCClassicFinance(Classic),ITC'sflagshipfinancialservices49%subsidiary,began.
ThescandalsinITChadamassivedamagingeffectontheITCbrandandcorporateimage.The
impactgotreflectedonClassictooanditwasinundatedwithdesperatefixeddepositholders
wantingtowithdrawtheirfunds.FundsworthoverRs50crorewerewithdrawnwithinafew
daysafterthecrisisbrokeout.Thecontinuinguncertaintyonfundflowsintothecompanyand
theerodedvalueofitsportfoliosbeganscaringoffpotentialinvestorsandforeignpartnersas
well.InternationalFinanceCorporation(IFC),whichwastoprovideacreditof$45millionto
Classic,alsoheldbacktheoffertill'thingsclearedup.'
AnalystswerequicktoraisefingersatClassic'snegativecashflows,itshugeassetliability
mismatch and the slow process ofdivestment of stakes held by Classic in the ITC group
companies.Liketheproverbial'finalnailinthecoffin,'ClassicdeclaredaRs285crorelossin
June1997,whichalmostwipedoutitsentirenetworth.
Meanwhile,troublesmountedasredemptionskeptincreasingfromRs750croreinmid1996,
depositscamedowntoRs550croreinMay1997.Fromapeaklevelofonemilliondepositors,
Classicwasleftwithjustsixlakh.ITCgaveClassicaRs75crorecreditlinetomaintaincash
flowtomeettheredemptionpressure.TherewereevenreportsthatClassichadtotakeinter
corporatedeposits1tofundtheoutflow.Thesustaineddownturninthecapitalmarketsduring
199596addedtothecompany'swoesandsoon,keypersonnelbeganleavingthecompany.
Alreadyneckdeepinlegaltroubles,ITCrealizedthatitwouldbebetteroffwithoutClassicto
addtoitsproblems.ITCtheninitiateddiscussionswithDaiwaSecuritiesofJapanandafew
Korean, British and American investment banks for a possible tieup. A Business Today
report2claimedthatITCwasdesperatenottoletClassicgoforliquidation,asthatwouldhave
reflectedbadlyonitsbrandpower.ITCannouncedthatitwasevenwillingtoinfusemore
fundstokeepClassicafloat.
BothGECapitalandtheHindujaGroupevincedinterestinClassic.Sincetheylaiddownvery
stifftermsforthebuyoutandvaluedClassicmuchbelowITC'sexpectations,talksdidnot
proceedfurther.NothingseemedtobeworkingoutinfavorofClassicastherewerenotakers
foracompanywithnonperformingassetsofoverRs350croreandaninvestmentportfolio
thatwas byanystandards anextremelypoorly executed one.Atthis juncture, ICICILtd.
steppedinasthe'knightintheshiningarmor'torescueClassic,takingthecorporateworldand
themediabysurprise.AllthoseinvolvedintheissuekeptaskingthemselvesWhatdidICICI
seeinClassicthatsomanyothercompaniescouldnot?

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

Classicalsohadahugeassetliabilitymismatch.Itsassetfinancingportfoliowasfunctioning
fine till September 1995, when due to a liquidity crunch it had to miss on installment
repayments.Eventually,thevolumeofoverduepaymentsreachedashighasRs300crore.A
Classicexecutivesaid,"Mostofourassetsarewholesaleinnaturewhileourliabilitiesare
retail.Whenthemarketgotgrippedbyapanic,allwantedtheirfunds,butwecannotmakeour
assetsliquidatsuchshortnotice."
In1995,Classichadenteredintoaleaseandbuybackdealofusedelectricitymeterswiththe
RajasthanStateElectricityBoard(RSEB).Later,RSEBdefaultedonleaserentalsworthRs40
crore,forcingClassictomakeprovisionstorepossessthemetersandsettlethelosses.Classic's
realestateforaysalsodidnotprovetobebeneficialforthecompany.Analystsalsoremarked
thatthefactthatovertheyears,Classichadbecomeincreasinglydependentonpublicdeposits.
Publicdeposits,deemedtobearathervolatilesourceoffund,hadtoberesortedtobyClassic
mainlyduetothereluctanceofbankstofundNBFCoperationsduringthatperiod.Thislater
resultedintheheavyredemptionrushputtingastrainonthecompany'scashreserves.
The credit rating agency, Credit Rating Information Serviced Ltd. (CRISIL) downgraded
Classic'sratingforitsfixeddepositschemeandnonconvertibledebenturesfromAAtoA+and
fromFAA+toFAA,respectivelyinJune1996andfurthertoAandFA,respectivelyin
December1996.AninternalCRISILnoterevealedsomeotherimportantissuesthathadledto
Classic's demise. The note stated: "Although the company's asset portfolio remained fairly
welldiversified in terms of the client base/industry spread, the high growth rate, and the
inherent risk in corporate plant and machinery financing had an adverse impact on the
company'sassetquality,resultingindifficultyintimelyrecoveryofduesfromanumberof
clients."ThenotefurthercriticizedClassic'sexposuretothecorporateassetfinancingbusiness
ingeneral,andtothemachinerysegmentinparticular,whichwasinherentlydeemedtobe
risky.
Classicwasalsoreportedtohavemadeatacticalerrorbyshiftingitsfocusfromitsprimary
business of hire purchase and leasing to secondary market operations. The company was
blamedtohaveenteredthelatterarenato'getrichquick'bystockmarketdeals,besidesto
spreadtheriskassociatedwithassetfinancing.In199596,aformerClassicdirectorsaid,
"Onlyabout55%ofClassic'sbusinesswasinhirepurchaseandleasing,whiletherestwasin
stockmarketoperations."
TheMerger
ITCsoonrealizedthatonlyoneofthecountry'sthreemegafinancialinstitutionsIndustrial
DevelopmentBankofIndia(IDBI),IndustrialFinanceCorporationofIndia(IFCI),orICICI
wouldbeinapositiontoabsorbClassic'slossesandbadloans.ITCapproachedIDBIand
ICICIandheldextensivediscussionswithboththeFIs.Eventually,adealwasstruckwith
ICICIataswapratioof1ICICIsharefor15sharesofClassic4.
InJanuary1998,shareholdersofClassicapprovedthecompany'samalgamationwithICICI
with 99.93% of the votes in favor of the resolution. Justifying the merger from ICICI's
perspective,Kamathsaid,"Ourgoalistomovetowardsuniversalbankingwithaspectrumof
financialsolutions.Anyopportunitytomoveclosertothegoalwillbecapitalized."However,a
section of ICICI shareholders, holding shares of both ICICI and ITC Classic, opposed the
mergerresolutionclaimingthatthemergerratiowasunfairandwas'leaked'tothemarket.They
saidthatthepricedroppedandadjustedtothemergerratiomuchbeforethe

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

announcementoftheratiobythecompany.Theyalsoallegedthatifthemarketpriceofthe
sharewasoneoftheconsiderations,thenthefallinthepriceofthesharejustbeforethemerger
wasaclearindicationthattheswapratiowasalreadyinthemarketbeforetheannouncement.
VoiceswerealsoraisedagainstICICI'sdecisiontoretainonlythoseClassicemployeeswhom
itfoundcapableafterinternalevaluations.However,sincethedissentingshareholderswerein
minority,theresolutionwassuccessfullytabled.
ITCanditsaffiliatecompaniessubscribedtoapreferentialshareissueofRs350croreofICICI
aspartofthemergerproposal.ThepreferentialsharecapitalcarriedanominalinterestofRe1
foreveryRs1croreofsharecapitalissuedforaperiodof20years.Theinfusionoffundsin
ICICIbyITCwastotakecareofanyfutureliabilitiesarisingoutofthemerger.Onefourthof
Classic'sassetbaseofRs1,000croreaccountedforinvestmentsinsubsidiariesthatoperatedin
the stockbroking and mutual funds business. As ICICI was not interested in them, ITC
providedRs272croretorepaysecuredcreditors,andtomakeupforthelossesduetothe
declineintheinvestmentsmadebythesesubsidiaries.
ItwasdecidedtoprepayClassic'screditorstoreduceitsinterestburden.ITCalsoassumedthe
liabilitiesandobligationsinrelationtoallguaranteesandindemnitiesissuedbyClassic.ICICI
acceptedtoabsorbtheClassicpersonnelasperitsrequirementsandtherestwereredeployed
bytheITCgroup.
MediareportsclaimedthatpressurefromFIscoupledwithdesperationdroveITCtohand
ClassiconaplattertoICICI.K.V.Kamat,managingdirector,ICICIhadmaintainedrightfrom
thebeginningthathewouldconsiderthedealaslongasitdidnotinvolveanycashoutgo.The
issuesofITCbringinginsubstantialfunds,providingcushionagainstbaddebtsandloansand
acceptingan'unfair'swapratiokeptsurfacinginthemedia.Theonlysilverliningforthe
unhappyClassicshareholders'seemedtobethefactthattheycouldhopeforabetterfuture
withICICI.
TableIGainersandLosers
ICICI

TheUpsides

TheDownsides

Classic
Sellingoffabusiness
Riskfreetakeoverofa
itwasnotkeenon,
retailnetworksinceITC whichenabledBAT
wouldpayRs622crore
toenterfinancial
forITCClassic'sNPA.
servicesonitsown.
Afallinprofitsin
ITCClassic'sNPAs
199798,sinceit
mightbelargerthan
wouldalsohaveto
projected,andits
copewiththeRs800
depositorsmightcash
croreexciseduty
out.
claims.

Investors
Acquiring,forevery
15sharesinasick
company,1ICICI
sharewhosevalue
wasboundtorise.
AnICICIshare
wouldhavetoriseby
400%ifthepre
mergerITCClassic
sharepricewastobe
realized.

Source:BusinessToday,December22,1997.
AsfarasICICIwasconcerned,itseemedtobeaclear'win'proposition.Thebiggestbenefit
forICICIwasClassic'sretailnetworkcomprisingeightoffices,26outlets,700brokersanda
depositorbaseof7lakhinvestors.ICICIplannedtousethistostrengthentheoperationsof

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

ICICICredit(ICredit),aconsumerfinancesubsidiarythatICICIhadfloatedinApril1997.
Kamathsaid,"Theretailnetworkwillhelpussavetwotothreeyears.Ourestimateofopening
1520branchestoreachamillionpeopleattheretaillevelrequiredatleast23years.This
offercameourway,whichhadtheretailnetworkalreadyinplace."Anadditionalbenefitfor
ICICIwasintheformoftheRs 110croretaxbreakbecauseofClassic's lossesandthe
provisionsforbadloans.ThiswassomethingICICIbadlyneededsinceitsnetprofitsofRs
572croreduringthefirsthalfof199798hadincreasedby71.77%percent.
WhileICICIwashappyovergettingalargedepositbaseofaboutsevenlakh,itseemedto
haveignoredthefactthatthebasewasbuiltonhighinterestratesofferedbyClassicabout
16%.ICICIwasforcedtogivethispromisedinterestwhilethegoingratesweremuchlower.
Also,depositsaggregatingRs550croreweretomatureby1999,threateningtobeacash
outflowburdenonICICI.However,ICICItriedtoaverageouttheinterestoutgobyasking
thedepositorcominginforrenewalstoswitchovertoICICIbooks.
ThiswaseasytodoasthedepositorsgotthesecurityofanAAAratedinstitution.ICICIsoon
beganthe'cleanupoperation'ofClassic'sbalancesheetbysubstitutinghighinterestliabilities.
As75%ofClassic'sclientswereICICIclientsaswell,ICICIwasconfidentofrecovering8
16%oftheoutstandingamountsfromvariousparties.ICICIsourcesclaimedthattheClassic
merger would not affect the dividend or the nonperforming assets of ICICI. This was
supportedbyhisjustificationthatClassicwasacompanywithanassetbaseofjustRs1000
crore,whileICICI'sassetbasewasaslargeasRs41,000crore.

QuestionsforDiscussion
1. AnalyzethereasonsbehindClassic'sfailure.Doyouagreethatthecompany'sdemisewas
largelyduetoITC'spoorhandlingofthecompany?Supportyouranswerwithreasons.
2. ExplainthereasonsbehindICICIagreeingtomergewiththelossmakingClassic.Wasthe
mergertrulyawinwinsituationforboththepartiesinvolved?
3. 'Classicshouldhavestucktoitsleasingandassetfinancingbusinessratherthanentering
secondarymarketoperations.'Criticallycommentontheabovestatement.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

CASESTUDIESFOR
ACCOUNTINGFORMANAGEMENT
CASE1:TISCOTheWorld'sMostCostEffectiveSteelPlant
TataIronandSteelCompany(TISCO)wasestablishedin1907byJNTata1atJamshedpurin
Bihar,India.TISCOofferedawiderangeofproducts(SeeExhibitI)andservicesincluding
Hotrolled/Coldrolled(HR/CR)coils2andsheets,tubes,constructionbars,forgingquality
steel,rods,structurals,stripsandbearings.Italsomanufacturedmaterialhandlingequipment,
ferro alloys and other minerals, software for process controls, and offered cargohandling
services.
Intheearly1980s,TISCOinitiatedamodernizationprogramofitssteelplant(SeeExhibitII).
Explainingtheneedofmodernization,JJIrani,thethenmanagingdirectorofTISCOsaid,
"Wewouldhavebeenfinishedotherwise....youcannotfightamoderndaywarwithweapons
oftheMahabharata.Wewouldhavebeenannihilatedhadwenotmodernized.Werealizedthis
andembarkedonthefourphasesofmodernization.Weaddressedourdrawbackslikethesteel
making process, our weakest link." By mid1990s, TISCO had become India's most cost
effectivesteelplant.ItalsobecameAsia'sfirstandIndia'slargest,integratedsteelproducer
(ISP)intheprivatesector.By2000,eightdivisionsofTataSteelwereISO140014certified,
includingNoamundiIronOperations,WestBokaroCollieries,FerroAlloyPlant,Joda,Sukinda
ChromiteMines,JodaEastIronMines,TubesDivision,andGrowthShop&SteelWorks.
Byearly2000,TISCOhadcompletedfourphasesofthemodernizationprogrammewithan
investmentofaboutRs60billion.ThecompanyhadinvestedRs4billiononconsultancyfees
during1990to2000.ThefifthphaseoftheprogramhadcommencedinApril2000(See
ExhibitIII).
ByApril2001,TISCOhademergedastheworld'slowestcostproducerofsteel.TISCO's
operatingcostatthe'hotmetal'(liquid)stagewas$75pertonne.Thecompany'scostpertonne
offinishedsteelstoodat$152forthefinancialyearendingMarch2001.TheWorldSteel
Dynamics(WSD),inareportstated,"TataSteelisa'worldclass'steelmakertheonlyinIndia
andoneofthefewcompaniesintheworldwithsuchastanding.Thisviewpointisbasedona
varietyofreasonssuchaslowoperatingcosts,specialcompanyculture,goodprofitability,etc."
WSDidentified12companiesasWorldClassSteelMakers,andrankedthembasedoncertain
factors(ReferTableI).AnalystsfeltthatTISCO'sachievementofbecomingthelowestcost
producer of steel was mostly attributed to its implementation of TOP (Total Operational
Performance), a program that focused on improving TISCO's operational practices and
rationalizingprocurementcosts.
TABLEIWSD'sRANKING
Company
TISCO
Usinor(Russia)
Posco(Korea)
CSN(Brazil)
Baosteel(China)

Ranking
1
2
3
4
5

Score
131
129
127
123
121

CompiledbyNChidambaram,Faculty,DoMS,SNSCE
ChinaSteel(China)
Gerdau(Brazil)
Nucor(US)
CarTech
NipponSteel(Japan)
Severstal(Russia)
Dofasco(US)

6
7
8
9
10
10
11

119
118
116
112
111
111
109

Source:www.tatasteel.com
In the early 1990s, TISCO appointed McKinsey and BoozAllen & Hamilton to study its
operationsandsuggestwaystocutcosts.Iraniexplainedtherationale,"Costcuttingmeasures
aremoreimportantinthepresentsituationwhereonecannolongercontrolsteelpriceswhich
aredictatedbyinternationalmarkets."TheconsultantssuggestedTISCOtofocusonvarious
components affecting the cost of steel, which included cost of raw materials, cost of
conversion,fuelrateintheblastfurnaceandminingofcoal.TISCOwasadvisedtousethe
mostmoderntechnologiestocutcostsfurther.
Inthesecondhalfof1998,inassociationwithMcKinsey,TISCOimplementedTOPprogram
atitsGblastfurnace.TOPwaswidelyregarded,asaprogram,whichwouldhaveamaximum
positiveimpacttothebottomline,withminimuminvestment,requiredinminimumtime(See
ExhibitIV).Itaimedachievinglargeimprovementsinthroughput,qualityandcostintheshort
term. In the long run, TOP was expected to enable the TISCO to achieve high rates of
performanceimprovement(SeeExhibitV).
SinceTISCO'sscaleofoperationswasquitelarge,thewholeorganizationwasdividedinto
manageable'units'tofacilitatetheimplementationofTOP.Aunitteamwasformedcomprising
aunitleaderandtwofacilitators.Initially,McKinseyprovidedthefacilitators.Theunitleader
wasresponsiblefortheperformanceofthatparticularunit.Theteamworkedfulltimeonthe
TOPprogramforaperiodof12weeks.Aroundeightunitswereaddressedsimultaneously
duringthe12weeks,andthiswasalsoknownas'Wave.'TheentireWavewasdividedintofive
phases(SeeExhibitVI).Theunitteam'sobjectivewastoexploreideastoreducethecostor
delaysmadebytheunitbyabout40%.Intheprocess,theteamwasexpectedtoidentifyand
understandhoweachcostelementcouldbereduced.Theteamhadtoestablishrelationships
betweenkeyperformanceindicatorsandtheelementsthathadanimpactonthem.Eachteam
wasaskedtosetitselfatargetbasedontheTOPnorms;developideastoimprovefromthe
presentlevelofperformancetothetargetlevel;andimplementthoseideas.
ThePhaseIofaWavewastwoweekslong.Duringthisphase,thecostbasewasexaminedand
the items that had a maximum impact on the bottomline were identified. Individual
components of the larger cost elements were identified by drawing cost trees. The cost
elements,whichcouldbereducedwerehighlightedandthereductiontargetswereset.Inthe
PhaseIIoftheWave,ideaswereexploredtoreachthesettargets.AttheGblastfurnace,
throughputandfuelcostswereidentifiedasthekeyperformanceindicatorsinthePhaseII.
Amongthedifferentindividualcomponentsoffuelcosts,cokeandcoalwerethelargestcost
elements.Theyaccountedforabout50%ofthetotalcosts.Areductiontargetwassettobring
costsdownto570kgsperthm11from610kgsperthm.InthePhaseIIIoftheWave,ideas
weregeneratedtoachievethetargetoutputof3800tonsperday.Consideringthetechno

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

economicfeasibility,36ideaswereshortlisted.Theideaswerethengroupedbasedonthe
capitalexpenditurerequiredforimplementingeachidea.ThePhaseIVoftheWavestarted
withtheimplementationoftheseideas.Simultaneously,theGblastfurnacealsoimplemented
185ideas,whichdidnotrequireanycapitalinvestment.
ByMarch1999,theGblastfurnaceachievedasavingsofRs87millionagainstthetargeted
savingsofRs40million.TISCOsetupapotentialsavingstargetforitsGblastfurnaceat
aboutRs300millionperannum,accountingformorethan10%ofitsprofitsinthefiscal1999.
Bylate1999,TOPwasinPhaseVoftheWave.In2000,similarWaveswerealsoadoptedin
TISCO's shop floors. The TOP program had helped TISCO to shift its focus from just
producingvolumestocostsandquality.Moreover,TOPenabledTISCOtoimprovecustomer
satisfactionandloyalty.
ImplementingBestPractices
In19992001,TISCOtookmeasurestoreducecostsfurtherbyadoptinginnovativestrategies
andothercostcuttingexercises.Forexample,TISCOstoppedusingmanganese,anexpensive
metalusedtoincreasethestrengthandflexibilityofsteel.Thecompanymadeeffortstoreduce
itsproductdeliverytimefrom34weeksin1998to2weeksin2000.Thecompanyaimedto
furtherreducethetimetooneweek.
TISCOalsotookstepstoreduceitsmanpowercosts.Between1996and2000,TISCOreduced
itsworkforcefrom78,000to40,000employees.Analystsopinedthatcuttingitsworkforceby
38,000 employees was not an easy job and the company was able to do it with a lot of
communicationwithemployees.
TISCOhadadoptedPerformanceEthicProgramme(PEP),underwhich,itplannedtopromote
hardworkingyoungpeopletohigherpositionsdependingontheirperformance,ratherthan
followingtheconventionofseniority.Thisexercisewasexpectedtocutthemanagementstaff
from4000to3000.
PEPhadtwocoreelements.Firstly,itproposedaneworganizationalstructure,whichwas
expected to foster growth businesses, introduce more decisionmaking flexibility, clear
accountability,andencourageteamworkamongthemanagersandtheworkforce.Secondly,
PEPproposedtointroduceaPerformanceManagementSystem(PMS).Itwouldidentifyand
rewardstrongperformers,andalsoofferdevelopmentopportunitiesforeachemployee.PMS
wouldalsoensurethateveryemployee'sjobprofilewasclearlydefined.ByintroducingPMS,
TISCO wanted to make performance appraisals transparent and fair and reward the good
performers.
Thecompanyalsoplannedtointroduceanewcompensationpackagebasedonperformance
fromNovember2001.MuthuramanexplainedthebenefitsofPEP,"Youngstersaregetting
highersalarythansomeoftheseniors,andaftertherestructuring,theaverageageofthe
managershasfallenby10years.ThroughPEP,TISCOalsoreducedthehierarchicallevels
from13to5."
nabidtoreducecostsfurther,TISCOusedITasastrategictool.In1999,thecompanyformed
asmallcrossfunctionalinhouseteamconsistingofconsultantsfromArthurDLittleandIBM
GlobalServices.Theteamwasresponsibleforredesigningtwocorebusinessprocessesorder
generationandfulfillmentandmarketingdevelopment.Theprogrambeganwithastudy

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

oncostcompetitiveness.Theaimoftheprogramwastoenhancecustomerfocusenabling
bettercreditcontrolandreductionofstocks,therebyreducingthecosts.Afterconsidering
severalpackages,theteamdecidedtouseSAPR/3.TISCOwantedtheteamalsoknownas
ASSET(AchieveSuccessthroughSAPEnabledTransformation)tointegrateSAPintothe
existinginformationsystemandmakeitcompatiblewithfutureSAPimplementations.After
SAPsolutionswereintroducedinTISCO,thebusinessprocessesbecamemoreefficient.Italso
improvedcustomerserviceandproductivity,andreducedcosts.TheintroductionofSAPalso
decreasedmanpowercostfrommorethanUS$200pertonin1998toaboutUS$140perton
in2000.Therewasasignificantreductionininventorythecarryingcost,fromRs190perton
in1999toRs155pertonby2000.Therewerealsosignificantcostsavingsthroughefficient
managementofresources.
TheFuture
AnalystsfeltthatTISCO'smodernizationprogramwasverysuccessful.TheSteelAuthorityof
IndiaLtd.(SAIL)adoptedasimilarprogramwithaninvestmentofRs70billion.However,the
programwasnotsuccessful.Incontrast,inspiteofthedepressedmarketandlowermargins,
thedecreaseintheproductioncostsenabledTISCOtoachieveaprofitaftertaxofRs5.53
billionin20002001,andRs4.22billionin19992000comparedtoRs2.82billionduring
199899(ReferExhibitVII).
TISCOplannedtoenternewareasincludingsettingupofa0.1milliontonferrochromeexport
oriented project. The project was planned in Australia because of the lower power costs.
TISCOwastogetpoweratatariffof1.8centsforabout15yearsthatisaboutonefifthofthe
tariffsinIndia.Poweraccountedfor60%ofthecostofferrochromemanufacturing.
TheFuture
TISCO was also planning to enter titanium mining through alliances with major global
companies.ToprovideemploymenttotheemployeesoptingforVRSatovermannedunits,
TISCO plannedtoenterthecallcenterbusiness inJamshedpur.Todevelopthis business,
TISCO entered into a marketing alliance with Tata International, the trading arm of Tata
Group.TISCOalsoplannedtoexitfromsomeofitsnoncoreactivities.
CriticsfeltthatTISCOmightfaceproblemsduetothedecreaseindemandforsteelinthe
globalandlocalmarketsandincreasingcompetitionfromcheapimports,andantidumping
dutiesimposedonthedomesticsteelmanufacturersbytheUS.Theyfeltthatitwasdoubtful
whethersteel,evenatthelowestcost,woulddeliverreturnshigherthanthecostofcapitalin
India.However,someanalystsremarkedthatinthelongrun,TISCO'sstrategytoexportto
Jordan,IraqandtheSoutheastAsiancountriesmightreducedependenceontheUSmarkets
thushelpingthecompany.Theysaidthatitsentryintovalueaddedproductswasexpectedto
safeguardthecompanyfromthefluctuationsinthesteelprices.
QuestionsforDiscussion
1. TOPwasdescribedas"maximumimpacttothebottomline,withminimuminvestment,in
theminimumtime.WhatwastherationalebehindtheimplementationofTOP?Brieflyanalyze
theprocessandexplaintheadvantagesofTOP.
2. ThecostcuttingmeasuresseemedtohavehelpedTISCOtoalargeextent.ApartfromTOP,
whataretheotherstepstakenbyTISCOforreducingcosts?

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

3.TheloweredproductioncostsenabledTISCOtorecordaprofitduring19992000,despitea
depressedmarketandlowmargins.Doyouthinkthelowcostswouldhelpthecompanyinthe
longrun?Justifyyouranswer.
CASE2:GujaratAmbujaRedefiningOperationalEfficiency
Gujarat Ambuja Cements Ltd. (GACL) was established as Ambuja Cements Private Ltd.
(ACPL)in1981byNarotamSatyanarayan Sekhsaria(Sekhsaria), abusinessman fromthe
western Indian state of Gujarat. Originally a cotton trader, Sekhsaria entered the cement
businessbecauseoffactorssuchasstabledemand,lackofsubstitutesandlimitedcompetition.
WiththesupportofGujaratIndustrialInvestmentCorporations(GIIC1),Sekhsariaandhis
twopartners,SureshandVinodNeotia,setupAPCL.SureshNeotiawasappointedChairman
whileSekhsariawasmadetheManagingDirector.In1983,thecompanyfloatedapublicissue
anditsnamewaschangedtoGACL.Thesameyear,productionstartedata0.7milliontonsper
annum(mtpa)plant,namedAmbujaCements,inAmbujaNagar,Gujarat.GIICsolditsstakein
GACLintwotranches toSekhsariain1987and1990.In1993,GACLcommissionedits
secondcementplantatAmbujaNagar(capacity1mtpa),namedGujambujaCements.
Attractedbybuoyantcementdemandinthenorthernregions,GACLcommissioneda1.5mtpa
plantatSuliinHimachalPradesh(HP),namedAmbujaCementsHimachalUnitin1995.Inthe
same year, GACL floated a wholly owned subsidiary in Mauritius Cement Ambuja
InternationalLtd.(CAIL).Ayearlater,GACLfloatedanothersubsidiary,CeylonAmbuja
Cements(Private)Ltd.,throughwhichitacquiredasmallcompany,MidigamaCement,inSri
Lanka.In1996,GACLsetupitsthird1mtpaplantatAmbujaNagar,namedGujLineII
(capacity1mtpa).GACLalsoestablishedgrindingandpackingunitsatRopar(Punjab)and
Panvel(Maharashtra).In1997,GACLacquiredModiCementssick1.4mtpaplantatRaipur
(MadhyaPradesh)forRs1.66billion.ThisplantwasrenamedAmbujaCementEasternLtd.
Aftertheacquisition,GACLrevampeditsprocessestobringthematparwiththestandardsof
itsotherplants.In1998,GACLacquiredtheNadikudi(around100kmsfromGuntur)and
Proddatur(nearCuddaph)limestoneminesinAndhraPradeshtostrengthenitspresencein
southernIndia.
In December 1999, GACL acquired a51% stake in Delhi basedDLF Cement for Rs 3.5
billion.DLFCementhadstarteditsoperationsin1997inRajasthanwithaplantofcapacity1.4
mtpa.Afterthismerger,GACLbecamethefourthlargestcementmanufacturerinIndiaafter
ACC,L&TandGrasim.Inthesamemonth,GACLalsoacquireda7.2%stakeinAssociated
CementCompanies(ACC)forRs4.55billion.ACCwasthelargestmanufacturerofcementin
India.With14manufacturingunitsinIndia,ithadatotalcapacityofover11mtpa.Itwasone
ofthelargestintegratedcementcompaniesintheworld.
Bythelate1990s,GACLhademergedasoneofthemostenergyefficientandtechnologically
advancedcementmanufacturersinIndia.InDecember2001,GACLbegantrialproductionata
new2mtpaplantinChandrapur,Maharashtra,takingitstotalcapacityto12.5mtpa(Refer
ExhibitI).Forthefinancialyear200001,thecompanyrecordedaturnoverofRs12.52billion
andanetprofitofRs1.5billion(ReferExhibitII).
GACL had a large distribution network of 11,500 outlets. It was one of the first cement
companies in the country to recognize the importance of brand building. The company's
cement,soldundertheGujaratAmbujabrandname,enjoyedgoodbrandequityandsoldata
premium.ThecompanywastheoverallmarketleaderintheIndiancementindustry.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

TableI
IndianCementIndustryCompaniesandtheirMarketshare(2001)
Region
(Mkt.Sizeinmillion
tonnes)
GrasimL&TCombine
GACLACC
JKGroup
IndiaCements
MadrasCements
Lafarge
Others

East South North West

14 23.8 28.1 24.6

20 21
13
37
24 10
36
23

16

22

22

23

33 35
35
40

Total
90.5
22
24
5
5
5
3
36

Source:www.equitymaster.com
GACLwasnotonlythemarketleader,itALSOrankedveryhighontheprofitabilitycriteria.
Itsnewplants,useofbetterqualitylimestone,innovativeenergymanagementefforts,and
strongretailpresenceinMumbai,GujaratandPunjabgaveitastrongedgeoveritspeers.Its
costperrupeeofsaleswasmuchlowerthanmostofitscompetitors,resultinginmuchbetter
operatingmargins(ReferTablesIII,IVandFigureI).
TableIICementCompaniesOperatingMargins
(%)
Grasim
L&T
ACC
IndiaCements
Madras
Cements
GACL

FY97
NA
NA
14
25

FY98
NA
NA
11
24

FY99
14
11
7
25

FY00
13
15
9
23

FY01
17
17
16
24

35

33

31

31

31

36

36

36

36

37

Source:www.equitymaster.com
TableIIICementCompaniesCapacityUtilization(199697)
Company
Grasim
L&T
ACC
IndiaCements
MadrasCements
GACL

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

(in%)
79
87
95
94
98
102

IndustryobserversunanimouslyagreedthatGACLwasthemostefficientcementmanufacturer
mainly because of its operational excellence. The company had done well in spite of the
fluctuationsinthecementindustrybyadoptingaggressiveproductivityimprovementandcost
cutting measures. GACL had won a host of awards for management excellence, quality,
businessstrategyandenvironmentmanagement(ReferExhibitIII).Eversinceitsinception,
thecompanybelievedindoingthingsinaninnovativeandunconventionalway,soastoreap
benefitsinnewways,usingnewmethods.
WorkingHardTowardsOperationalExcellence
Accordingtoanalysts,GACL'sstrategicfarsightednesswasevidentinitsdecisiontolocateits
plants in backward areas, soas totake advantage ofsubstantial sales tax andincome tax
incentives2.GACL's unitsinthestatesofGujarat,HPandPunjabalsoreceivedsales tax
incentives.Thiswaspossibleasallnewinvestmentsincementafter1986enjoyedasalestax
benefitofupto90%ofthevalueoffixedassetsforaperiodof14years.
Togetthesalestaxincentivesonacontinualbasis,companiesneededtoincurconstantcapital
expenditure. Thus, GACL continually expanded capacities in Gujarat and Punjab. The
HimachalPradeshplanthadtheadvantageofprioritizedpowersupplyataguaranteedcostfor
fiveyearsfromthedateofcommissioning.ThedecisiontosetupaplantinHPmadeallthe
moresensebecausetheregionwascementdeficitatthatpointoftime.Also,theplantwas
closertotheminesandthePunjabgrindingunit.AnotherreasonGACLfinalizedtheplant
locationinHPwasthattheareahadsubstantiallimestonedeposits.However,therewerethree
hillsdirectlybetweenthequarriesandthenearestpieceofflatlandlargeenoughfortheplant.
Thoughtheactualdistancewasjustafewkilometresaway,theonlywayexistingwasa17km
stretchofroadfullofpotholes.Thiswouldhaveinvolvedtimedelaysandlargefuelbillsfor
transportingthelimestonetotheplantlocation.GACLengineersdecidedtogetaconveyorbelt
builtacrossthethreevalleys,throughthemountains.Aftermanybigconstructionfirmsrefused
todothejob,GACLbuilttheconveyorbeltonitsown,injust18months.Thedistancewascut
downtojust2.8kmsandthebeltmoved800tonnesoflimestoneeveryhour.
Eventhecompany'slatestplantatChandrapurwassetuptotakeadvantageofsubstantial
salestaxbenefitsforalmost18years.Thisunitwassituatedatthepitheadofcoalmines,to
saveonfreightcosts.GACL'smanagementrealizedthatthetimetakentosetupaplantwas
notentirelyinitshands.Thecompany'sactualworkbeganafterithadidentifiedtheright
location,acquiredthenecessarylicense,powerandwatersupplyconnectionsandmachinery.
From this point onwards, the work at the site was something the company could control.
GACLdecidedtoletitsengineersdefinetheirownjobsandgavethemtheauthoritytotake
onthespotdecisionsregardingcapitalexpenditureandschedulesforachievingtargets.The
engineerswerealsoallowedtosetdaily,weeklyandmonthlytasksforthemselves.
This empowerment of engineers proved to be very advantageous for the company: job
functionsweremoreclearlydefinedandresponsetimewasreducedbyasmuchas90%since
engineers did not have to wait for approvals. GACL's plant engineers placed orders for
machinerywellbeforethesitewaschosen.Sotheequipmentwasreadyforinstallationbythe
timethesiteengineershadacquiredtheland.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

Asaresult,GACLwasabletocutdownsubstantiallyonthecommissioningtimeofitsplants.
The very first plant at Ambuja Nagar was commissioned in just 22 months. This was a
significantachievement,asaplantofsimilarsizenormallytookthreeyearstoinstall.Eventhe
secondplantwascommissionedinarecordtimeof13months.GACLwasabletosavealotof
moneyjustintermsofinflationarycosts.AnilSinghvi(Singhvi),Treasurer,GACLsaid,"By
squeezing the project time, you save 10 per cent on account of inflation alone; plus we
estimatedaninterestcostsavingsofaroundRs250million."
OnceGACLgottheplantsrunning,itrealizedthattocompetewiththeestablishedplayers,
whohadlargerplantsandeconomiesofscale,costcontrolwouldbeimportant.Themajorcost
componentsofcementarefuel(20%),freightandrawmaterial(17%each)andpower(16%),
withothercomponentsaccountingforthebalance30%.GACLdecidedtoadoptatwopronged
strategytoachievetotalcostmanagement(TCM):enhancingplantproductivityandreducing
costsoneachofthecostcomponentsindividually.
EnhancingProductivity
GACLworkedhardtoreduceminingexpenses.Cementcompaniesnormallyoperatetheirown
limestonemines.Mineswerenotonlyextremelydestructiveenvironmentally,theywerealso
expensivetooperate.Theexplosivesusedforminingwereonthenegativelistofimportsand
substantial costs were involved in implementing safety measures. In 1997, GACL sent its
engineerstoAustraliatostudytheextractionofmetals.Ontheirreturn,GACLimplemented
newtechnologiesthatcouldaccesslimestoneinsmallerareaswhereblastingwasnotpossible.
Toreducethenoiseandvibrationthatoccurredduringtheconventionaldrilling,blastingand
crushing process,the company introduced an Australian device called Surface Miner. The
SurfaceMinerwasnotonlyenergyefficient,italsorecoveredmorematerialfromagivenarea.
EnhancingProductivityContd...
GACLengineersfoundthatbyfocusingonkilnoperations,theycouldnotonlyensurecement
quality,butcouldalsoreducepowerconsumption.Acompanyofficialsaid,"Youhaveto
makesurethatthereactivityissuchintheburningzonethatwhateveryouburnisconverted
intoclinker3minerals.Andallthisdependsontheburningprocess,whichwehadnowayof
monitoring from the outside. Inadequate heating yielded inferior quality cement and over
cookingmadetheclinkerhardertogrind."
Intheearly1990s,duringavisittoacementplantinJapan,GACLengineerslearntthatfactors
likeretentiontime(timeelapsedinthekilnandthespeedofburning),temperature,andrateof
cooling could be judged from the microstructure of the clinker minerals. The Japanese
engineersphysicallyscannedtheclinkerpiecesextractedfromthekilnunderamicroscopeto
determineonthebasisoftheirexperience,whethertheclinkerhadbeenheatedtotheright
temperature.Afterundergoingextensivetraining,GACL'sengineerstriedtheaboveprocedure
at their own plants and successfully brought down power costs from 120 units/ton to 90
units/ton.
At GACL's second plant in Ambuja Nagar, kiln productivity ranged between 28003000
tonnes.Whilesettingupthethirdplantinthearea,GACLengineersrealizedthatiftheyhada
largerpreheater(inwhichthelimestonewasheatedbeforebeingfedintothekiln),theywould
be able to put more material into the kiln and thereby increase production. However, the
company'ssupplierofpreheaterssaiditwasnotpossibletomakeabiggerpreheaterwithout

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

modifyingthekiln.Theengineerstoldthesuppliertomakeabiggerpreheater,whilethey
themselvesmodifiedtheexistingkiln.
After spending two month studying the data available on kilns from the other plants, the
engineers eventually worked out a plan for kiln modification. After the above plans were
implemented,thesamekilnbeganproducing3500tonnesperday.Withamarginalinvestment
ofRs24million,theplantwasnowproducing0.17milliontonnesmoreperyear.
To ensure consistency in the quality of material and kiln temperature, GACL installed a
centrallyoperatedcomputerizedprocesscontrolsystem.Thesystemcontrolledaround3,000
operationalparameterstoensurequalityateachstepoftheproductionprocess.Thesystem
utilized raw material management software to evaluate the optimum mix and redesign
accordinglytogetconsistentqualityandoptimumutilizationofrawmaterial.
In 199091, capacity utilization of the first plant at Ambuja Nagar was 140%. However,
GACL'sengineerscontinuedtheirdrivetoimprovecapacityutilizationfurtherandinstalleda
24hourmonitoringsystemandintroducedweeklycheckstocheckfaultsbeforeabreakdown
occurredforcertainkeycomponents.Asaresultofthesemeasures,capacityutilizationwent
upto143%thatyear.GACLdecidedtorunitsplantsnonstopfor40daysagainsttheindustry
averageoffive.ThiswasagaininspiredbythevisittotheJapanesecementplant,whichranfor
100dayscontinuously.Asaresultofalltheseinitiatives,GACLachievedmorethan100%
capacityutilizationduring1999.
GACL's focus onqualitycontrolpractices was manifested inits decisiontointroduce the
practiceofreportingqualityrelateddata48timesadayinsteadofjustonce.Andtoensurethat
bags contained the right quantity of cement, GACL used Zero Error Electronic Rotary
machineswhichcheckedthequantityofcementinrandomlypickedbags.Inthecaseof50kg
bags,GACLpermittedamaximumvariationof200gm.ThecompanyalsoinvestedaroundRs
60 million in pollution control equipment to limit dust and debris in emissions and dust
suppressionandextractionsystemsatbrushingandgrindingunits.
Thesepollutioncontrolmeasuresledtoasignificantdeclineintheplant'srepairbills.Since
dustparticlescausewearandtearofequipment,thedecreaseinsuchparticlesledtoasharpfall
in the number of breakdowns in moving parts and gear boxes. Around 81,000 trees were
plantedinAmbujaNagarandanartificiallakewasalsobuilt.Aportionofanoldquarrywas
reclaimed and converted into a vegetable garden. Because of the stringent environmental
pollutioncontrolnormsatitsplants,GACLwasevenabletomaintainarosegardennearthe
AmbujaNagarplant.TheconveyorbeltsetupfortheHPplantwastotallycoveredandno
limestonedustescapedintothefragileecosystemaroundtheconveyor.Andbecauseallthree
motorsfortheconveyorbeltwerelocatedattheplantsite,therewerenoenginenoisesand
noxiousvaporsalongitsentirelength.
CuttingCosts
POWER
PoweraccountedforalargepartofGACL'scostofproduction.GACLrealizedthatacaptive
powerplantwouldincreasesavingssubstantiallyaspowersourcedfromthepowergridswas
bothunreliableandcostly.SoitsetupfuelbasedcaptivepowerplantsinGujarat(40MW)and
HimachalPradesh(12MW)in1998.GACL'scaptivepowergenerationcostwasonlyRs1.30

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

perkilowatt(excludinginterestanddepreciation),comparedtoRs4.50perkilowattforpower
suppliedbytheElectricityBoards.Soon,thecompanywasnotonlygettingaround60.3%ofits
totalpowerrequirementfromtheseplants,itwasalsosellingtheexcesspoweritgeneratedto
thelocalstategovernments.BSDulani,VicePresident,Operations,attheGujambujaplant
said, "Small measures like modifications in higher capacity motors for fans, coolers etc.
accordingtospecificrequirements(shiftingfromACtoDCdrive,whichallowsregulationof
current) wherever possible, and many other simple steps helped reduce GACL's power
consumptionfrom120units/tonneofcementin1987to8890unitspertonnein1995against
anindustryaverageof121unitspertonne."
FUEL
Coalisanimportantsourceofenergyforthecementindustry.However,whilemostofthecoal
production in India is located in the central and eastern parts, the cement industry is
concentratedinwesternandsouthernparts.Thus,thecostoftransportingcoaltothecement
plantswasveryhigh.Moreover,thequalityofcoalwasalsoverypoor.Cementcompanieshad
todecidewhethertouseimportedcoalorsubstituteslikelignite,naturalgasandoil.
GACLdecidedtoimportcheaper,higherqualitycoalfromSouthAfrica.Thecompanyalso
began importing better quality furnace oil forits diesel generator (DG)sets for its power
requirements.Thisledtoaconsiderablereductionintheoperatingcostsoftheirpowerplants.
GACLconsumedonly96kwhofpowerpertonneofcementagainsttheindustryaverageof
110115kwhpertonne.Thecompany'scoalconsumptionwasalsothelowestintheindustry.
GACLconsumed170kgpertonneofcementwhiletheindustryaveragewas250kgpertonne.
FUELContd...
Sincethecompany'sAmbujaNagarplantswerelocatedintheagriculturalbeltofSaurashtra,
wheregroundnuthuskwasavailableinplenty,GACLengineerstriedtousegroundnuthusk
insteadofcoaltofirethekilnsinoneoftheplants.Theideaworkedwonderfullyandthe
companywasabletobringdowntheoverallcoalconsumptionby3%.Inanotherplant,GACL
replaced coal with crushed sugarcane. The use of sugarcane however, created problems
becausethewatercontentdifferedwitheverybatch,leadingtofluctuationsinkilntemperature.
Sothecompany'sengineersdesignedaspecialmechanicalsystemthatcouldadjusttherateof
feedingtoensureastabletemperatureinthekiln.Intheprocess,GACLbroughttheenergybill
downbyRs20foreverytonneofcrushedsugarcane.GACLalsobeganusingfluorspar,a
wastedumpedbyGujaratMineralDevelopmentCorporationtoreducefuelconsumption.They
modifiedmanyhighercapacitymotorsforfans,coolers,andotherequipmentstoreducepower
requirementsby1to1.5unitspertonne.
ThecompanyalsoreplacedVbeltdrives(whichconsumedmoreenergyduetofriction)with
flatbeltdrives.Eventhoughmechanicalconveyorsgaverisetoproblemslikespillagesand
breakdowns, GACL did not shift to pneumatic conveyors, which consumed more power.
Instead,thecompanydevisedanimprovedversionofthemechanicalconveyortoeliminateits
drawbacks.
FREIGHT
According to analysts, the most successful of GACL's innovative strategies was the
developmentofaseatransportationrouteforitscement.Atacompanymeetingintheearly

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

1990s,aMarketingManagersaid,"Asweallknow,Bombayisthecountry'slargestcement
market.Itconsumesavast2lakhtonnesamonth.Thecityisalso1060kmsawaybyrail.The
transportationandpackingcostsalonewillbephenomenal."Roadtransportwasverycostly
andrailtransportwasnotfeasibleduetothelimitednumberofwagonsavailablewithIndian
Railways.Justwhenitseemedthatthecompanywouldhavetoagreetobeartheroad/rail
transportationcosts,anemployeeintheLogisticsdepartmentsaid,"IcanbringBombaycloser
toourplant."
Thismarkedthebirthoftheideaofusingthesearoute,insteadofland.Thesearoutewould
bringdownthedistanceto315kms.GACLsetupaspecialcelltodevelopthisidea.The
company invested Rs 1 billion to set up modern ports and freighthandling terminals at
MuldwarkaandSurat(southGujarat)andPanvel(nearBombay).Inaddition,itboughtthree
specialships(onedesignedinSingaporeandtheothertwoinIndia)totransportthecement.
Thevessels,custommadeforIndianconditionsandrequirements,hadthecapacitytotransport
2500tonnesofcementeach.TheportterminalatMuldwarkawasanallweatherport,handling
shipswith40,000DWT.5Itwasalsoequippedtoexportclinkerandcementandimportcoal
andfurnaceoil.Afleetoffiveships,withacapacityof2500DWTeach,ferriedbulkcement
tothepackagingunitsfromthisport.ThebulkcementterminalatSurathadbulkcement
unloadingcapacitywithastoragecapacityof15,000tonnes.TheterminalatPanvelhada
storagecapacityof17,500tonnes.
Tofacilitatetransportationbyship,GACLsentcementinsealedroadtankersfromtheplant
site to the shipping terminal, where it was transferred to silos.6 From these silos, it was
transferredintoairtightholdsintheships.Atthedestination,thecementwasunloadedfrom
ship holds and again placed in silos, before being pumped into the sealed road tankers.
Customerswereprovidedsmallstoragetanksintowhichcementwaspumpedfromthesealed
tankers by a fluidization process.7 For customers who preferred bagged cement, GACL
arranged special packing facilities at the unloading terminals. GACL had conveyor belts
runninguptothedispatchyardforloadingthetrucksandwagons.Afleetofaround350self
financedtrucksandarailwaysidingonthefactorypremisesprovidedflexibilityinthemodeof
transportation.
ThecostoftransportingcementtoBombayworkedouttoaboutRs400pertonneascompared
tooverRs1800pertonnebyroad.Sincethecementwasnowbeingmovedinbulk,packaging
costs werealso reduced.Thus,GACLwas ableto saveroughlyRs 160million annually.
Besides, there was far less wastage and spillage, and since the cement was untouched by
humanhand,itofthefinestquality.GACL'sshippingfacilitiesbroughtmanycoastalmarkets
withineasyreachandmadeitoneofthelargestexportersofcement.Becauseoftheport,it
wasnowmuchmoreconvenientforthecompanytoimportcoal.Astrongfocusonlogistics
managementhelpedGACLreducefinishedgoods inventorylevels also.AMumbaidealer
couldobtainstockswithineighthoursbecauseofthecompanyownedjetty.8Thecementwas
packedataplantatthejettyitself,attherateof100tonnesperhour.
TheFuture
The continual capacity buildup in the Indian cement industry led to an excess capacity
situationbythebeginningofthe21stcentury.Duringthesameperiod,growthinthecement
industry declined from 21% (AprilSeptember 1999) to 11% (October 1999March 2000)
becauseofdroughtinmanypartsofthecountry.Pricesdroppedbecausepeoplefearedthat
constructionactivitieswoulddeclineduetothedrought.Atthesametime,thecostof

CompiledbyNChidambaram,Faculty,DoMS,SNSCE

productioncontinuedtoincreasebecauseofhikesinpower,railfreight,andcoalanddiesel
prices.
Asaresultoftheabovefactors,cementcompanieswereaffectednegatively.Accordingto
some analysts, even GACL seemed to have exhausted its armory of costcutting and
productivityenhancingstrategies.ForthethirdquarterendedMarch31,2002,thecompany
registereda9.27%declineinnetprofit.ItsprofitshadcomedownfromRs600milliontoRs
544millionin2002forthesameperiodlastyear.
Thiswasdespitea11%increaseinturnover:Rs4.3billionin2002asagainstRs3.9billionin
2001forthecorrespondingquarter.Theoperatingmarginalsocamedownto32%ascompared
to38%inthepreviousyear.CriticsevencommentedthatGACL'scostefficienciesweremore
drivenbymarketcompulsionsratherthanastrategiccostfocus.GACLhoweverdidnotseem
tobeveryworried,becausethedeclineinprofitabilitywascausedbyfactorsthatwerebeyond
itscontrol.Singhvisaid,"Wehaveputupagoodshowdespitelowcementpricesduringthe
quarter by around Rs 300 per tonne. Lower cement prices have not been reflected in the
bottomline."Atthesametime,thecompanywasnottakingthingslightly.GACLrealizedthat
while its traditional costsaving methods would continue to prove valuable, they were not
enough.Asstatedinthecompany'sDirector'sreport,"Theroutetohigherprofitabilitylay
elsewhere:Namely,bettersalesrealization."Thus,GACL'smarketingteambeganfocusingits
attention on the retail market. The company believed that the retail market offered it the
opportunity to build loyalty through higher standards of service. The company asked its
marketingteamstopushforbetterprices.
Becauseofthesemarketinginitiatives,GACLwasabletomaintainitsmarketshareinGujarat,
evenwhilecommandingahighprice.Thecompanypostedanincreaseinsalesinthehighly
competitiveandcomplexMumbaimarketevenasdemandgrowthsloweddownandprices
declined.Similarly,thisfocusonmarketingledtoan8%increaseinsalesinthenorthern
regionduring199900.GACLcontinuedtoseekwaystoreducecosts.Itplannedtousea
captivethermal(coalbased)powerplanttomeetthepowerrequirementsofitsChandrapur
plant.Asthepowerplantwasclosetocoalmines,thecompanyexpectedthevariablecostof
powertobesignificantlylower.Refutingtheclaimsthatthecompany'sdriveforachieving
operational excellence was totally marketdriven, Singhvi said, "We eat, live and breathe
cement and we are completely focused on the business. We try and bring in global best
practicesintoacommoditybusiness.Thisobsessionisimportantforsurvival."
QuestionsforDiscussion
1. StudytheevolutionofGACLfromasmallstartuptoacementmajorovertheyears.How
fardoyouthinkthecompany'ssuccesscanbeattributedtoitsprojectlocation,designand
implementationdecisions?
2. 'GACL's cost management focus was the biggest factor responsible for its success.'
Critically comment on the above statement and examine the company's approach to cost
reductionandproductivityenhancement.Howdidthisapproachhelpitgainacompetitive
advantageandemergealeaderinthecommoditisedindustry?
3. DoyouthinkthatGACL'seffortsweremoredrivenbymarketcompulsionsthanastrategic
costfocus?WillGACLbeabletosustainitssuperiorperformanceintheyearstocome?Give
reasonstosupportyourstand.

CompiledbyNChidambaram,Faculty,DoMS,SNSCE