Restructuring: Why Is Parasrampuria Dying To Be Sick?

RESTRUCTURING
Why Is Parasrampuria Dying To Be Sick?

Om Parakash Parasrampuria, Chairman, Parasrampuria Synthetics If the filament yarn-maker loses the right to be legally sick, liquidation may be the only alternative.

By Ranju Sarkar

...The net worth of the company (Parasrampuria Synthetics) works out to Rs 28,313 lakh, which exceeds the accumulated losses (Rs 21,228 lakh). The company, therefore, in our opinion, does not come under the purview of Section 3 (1) (O) of the Sick Industrial Companies Act (SICA), 1985.
The Industrial Development Bank Of India (IDBI), October, 1998

...The IDBI's conclusion is that the first respondent-company does not come under the purview of Section 2 (1) (A) of SICA. It is, therefore, appropriate that the Board for Industrial & Financial Reconstruction (BIFR) should itself consider this finding of the IDBI and pass such orders as it deems appropriate
Interim Judgement by the Supreme Court on a special leave petition filed by the ICICI versus Parasrampuria Synthetics on February 22, 1999

Case 187/97 at the BIFR is exploding into life. In one corner stands the Rs 161.91-crore Parasrampuria Synthetics, which is defending its right to be declared sick. In the other is the ICICI, which is questioning Parasrampuria Synthetics' presumption.

At the end of countless rounds, the fight is far from over. Sure, the Parasrampurias may claim a moral victory as the Supreme Court's interim judgement has referred the case back to the BIFR. But the ICICI, which argues that it is fighting a symbolic case against errant promoters, has made it clear that it would like to pursue the case to its logical conclusion. And that could mean liquidation for Parasrampuria Synthetics.

K. Morparia, Sr GM, ICICI It all began in September, 1997, when the company's board referred it to the BIFR. Thanks to two alterations in its accounting policies, Parasrampuria Synthetics had shown losses of Rs 318.15 crore in 1996-97, which wiped out its net worth. This was challenged by the ICICI. While Om Prakash Parasrampuria, Chairman, Parasrampuria Synthetics, did not speak to BT, says Alok Parasrampuria, 34, Joint Managing Director, Parasrampuria Synthetics: "I would like to understand what my options were. Either I kept my plants running, or I wound up the company."

Not surprisingly, the financial institutions don't buy that argument. Says Kalpana Morparia, 48, Senior General Manager, ICICI: "You cannot take advantage of your own laws. If you change the accounting policies to thwart the legitimate remedy of a creditor, your very action can be challenged on the grounds of (being) mala fide." If the ICICI has its way, Parasrampuria Synthetics may well have to face liquidation. While the company owes the ICICI Rs 130 crore, that is a fraction of the Rs 920 crore the Delhi-based synthetics-manufacturer owed all its creditors on December 31, 1998.

While the BIFR will hear both sides out on March 17, 1999, a decision is expected soon after. There are 2 possibilities. One, the BIFR declares the company sick, and asks the promoters to prepare a rehabilitation-package within 3 months. If so, the ICICI will appeal against the order at the Appellate Authority of Industrial & Financial Reconstruction (AAIFR). Alternatively, if the BIFR does not declare the company sick, the ICICI's stand will be vindicated. But Parasrampuria Synthetics could then approach the AAIFR.

Everything, then, hinges on the BIFR's interpretation of the IDBI Report. The IDBI, the BIFR-appointed operating agency, has held that Parasrampuria Synthetics did not contravene the law. However, it has also conceded that Parasrampuria Synthetics did not exhaust all the options before adopting its new accounting policy--specifically, the changes in the depreciation norms from the Straight Line Method to the Written-Down Value Method (which added Rs 83.87 crore to depreciation), and the expenses related to its "abandoned expansion project" (Rs 33 crore)--which allowed it to claim higher losses.

The Report argues that if these were to be withdrawn, the losses of Parasrampuria Synthetics for 1996-97 would work out to Rs 201.47 crore compared to the audited figure of Rs 318.35 crore. And the accumulated losses would stand at Rs 212.28 crore. Since this is lower than the company's Rs 283.13-crore net worth, the IDBI Report too has concluded that Parasrampuria Synthetics is not sick. Differs Rajiv Mahajan, 48, CFO, Parasrampuria Synthetics: "The laws of the Institute of Chartered Accountants of India provide the management exclusive rights to adopt any accounting policy." True.

Parasrampuria Synthetics' optimism also stems from precedence. For instance, in 1996-97, Real Value Appliances and Prakash Industries changed their depreciation accounting norms from the Straight Line Method to the Written-Down Value Method. And the financial institutions approved. Consequently, both Real Value and Prakash Industries were declared sick. Says the ICICI's Morparia: "Parasrampuria Synthetics changed its accounting policies, which questions the very nature of the reference."

However, more often than not, courts rule by precedence. Argues Parasrampuria: "The attitude of the (financial) institutions should be to see if a company can be rehabilitated. Liquidation should come as a last resort." He alleges that, despite submitting 3 rehabilitation proposals to the ICICI, the institution has been indifferent, to them. History explains things. The first signs of the face-off emerged in March, 1996, 3 months before a Parasrampuria Synthetics' Rs 135-crore public-cum-rights issue. This was to part-fund the company's Rs 534.85-crore plans to increase its polyester yarn-manufacturing capacity five-fold.

Reacting, albeit belatedly, to the slowdown in the synthetic fibres market, the financial institutions reduced their exposure to the issue. Says Parasrampuria: "Suddenly, if you say, `We don't trust you,' it surprises us, it surprises other stakeholders." Thanks to the underwriting, though, the issue managed to sail through while the promoters, together with their associates, were forced to subscribe to an additional 25 per cent. The financial institutions' viewpoint: Parasrampuria Synthetics had defaulted on loans and interest payments since May, 1995.

Moreover, a due diligence of the project cost revealed that the capital expenditure had been inflated by Rs 150 crore. Simultaneously, the ICICI, then the lead financier, roped in S.B. Billimoria & Co. to conduct a concurrent audit of the company. Its findings: total outstandings between March and July, 1996, just before the public issue, had shot up by Rs 58.03 crore to Rs 223.58 crore. And 86 per cent of the outstandings were divided between 4 companies: asp Investments (Rs 106.79 crore), Snowhite Intra (Rs 73.71 crore), Parasrampuria Industries (Rs 37.38 crore), and Rajasthan Polyester (Rs 5.86 crore), the last 2 being group companies.

The financial institutions, finally, pulled the plug in September, 1996. They declined to release the remaining tranche of term-loans--only Rs 187.30 crore of the Rs 362.30 crore had been disbursed--while the banks froze working capital. Parasrampuria Synthetics was forced to abandon its capacity-expansion project. And exactly 12 months later, it was knocking at the doors of the BIFR. Says Parasrampuria: "We have done what we thought was in the best interests of the company. If the company had been wound up, the ICICI, along with our other creditors, also would not have received any money."

While the financial institutions beg to differ, they agree that Parasrampuria Synthetics could have a grouse that it was not treated like a last-mile project when other companies, despite defaulting, were. Interestingly, the financial institutions say that while supporting last-mile projects, they make a mistake 8 out of 10 times. Although the financial institutions have taken up the gauntlet, going by the precedents set--and the fact that Parasrampuria Synthetics has 26,000 workers--they may well be fighting a losing battle to tackle corporate India's synthetic debts.

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