Modern Foods - Disinvestment and After

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Post Sale Drama Contd...

The Union complained that HLL had already started pruning the existing manpower. They were also apprehensive about the fate of the employees belonging to the backward classes as most of them were taken purely on the basis of their "reserved" status.⁷

Turning Around MFIL After HLL acquired MFIL, MFIL's losses went up. By December 2000, MFIL's accumulated losses increased to Rs 470 million (in 1998-99, MFIL made losses of around Rs 69 million) as against its networth of Rs 330 million. In early 2001, MFIL was referred to the Board of Industrial and Financial Reconstruction as more than 50% of its networth had been eroded by its losses. Officials of MFIL alleged that HLL wanted MFIL to be referred to BIFR so as to get some relief from banks and financial institutions. They further contended that if HLL had used the Rs 200 million it infused into MFIL as preference share capital instead of loans, MFIL would not have become sick. However, HLL officials said that they had little choice but to go to the BIFR, because MFIL's accumulated losses had exceeded 50 percent of its peak net worth, over a four year period.

According to section 23 of the Sick Industries Act (SICA) if a company's accumulated losses over four years exceed 50 percent of net worth, then it has to be declared sick and referred to BIFR. However, analysts felt that HLL could have prevented MFIL from entering the BFIR's ambit. According to one analyst, "If the amount that HLL brought in was brought as equity or preference capital before December 31, 2000, Modern Food could have escaped the clutches of the BFIR." MFIL officials alleged that referring MFIL to the BIFR was a strategy for retrenching employees and closing unviable units.

However, Gunender Kapur, Executive Director (Foods), HLL was of the opinion that taking MFIL to the BIFR was just a 'technicality'; he was confident that in two years MFIL would be able to post a cash profit as a result of the turnaround strategy initiated by HLL. HLL officials also claimed that between February and December 2000, MFIL's sales had doubled.

In 2001, HLL set a two-year timeframe to turn around MFIL. The turnaround included providing financial assistance to distribution channels and introducing better-quality bread ingredients to improve quality. HLL had already pumped in around Rs 200 million in MFIL by way of secured loans and corporate guarantees. HLL officials claimed that MFIL's sales had more than doubled since it was acquired. Said Kapur, "While we have already achieved a turnaround in sales, a turnaround in financial terms (profitability) will happen in the next two years."

The increase in sales (actual figures not revealed) was mainly due to an increase in the number of outlets that sold MFIL bread. In Mumbai, the number of outlets increased to about 250 from 100, and crossed the 400-mark in New Delhi. Ever since HLL took over the company, it seemed to have focussed on improving the quality of the product and its distribution It also helped MFIL leverage on HLL's strengths in areas such as wheat procurement, communication, treasury, and training.

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7] Under the GoI's reservation policy, a significant percentage of jobs in PSUs are reserved for people from socially backward classes.