National Development Finance Corporation (NDFC), the largest
DFI in the public sector, has failed in reviving National Fibres Limited (NFL).
It seems that now the unit will be handed over to Corporate and Industrial
Restructuring Corporation (CIRC) which will sell it as one unit. It will be a
test case for CIRC to find out a credible buyer. One has to watch how the
efforts to save 'hardware' yield results. However, it will be more important to
see how the interest of hundreds of employees is protected who have been getting
half the salary since June last year.
NFL was one of the most profitable public sector unit working
under Federal Chemical and Ceramics Corporation. It was privatized in 1992
through sale of 51 per cent shares to Schon Group. Schon Group made part payment
and submitted bank guarantees for the remaining amount and got the management
control. Later on the Group not only refused to pay the balance amount but
siphoned over half a billion rupee from the unit. The unit was closed down for
the first time after takeover by Schon Group in 1995. As unit approached virtual
closure, NDFC acquired the management control through a court order in October
1998. The Court gave NDFC two years to revive the unit and to subsequently sell
it. NDFC failed in reviving the unit in more than 30 months. At present
employees are being paid half the salary due to official lay-off since June last
NDFC has been trying to give an impression that the unit
could not be revived due to non-cooperation of other lenders. Whereas, it seems
that NDFC nominated team hardly made any effort to revive the unit.
The reason for this conclusion is the fact that NDFC despite
enjoying management control and being the largest DFI could have revived the
unit. NDFC was in a position to restart commercial production without the
support of other lenders had it was serious.
According to the information the two major lenders, Habib
Bank Limited (HBL) and Allied Bank of Pakistan Limited (ABL), had agreed to
contribute their share which they never did. While it may be true that for the
disbursement of funds some rituals have to be followed, the fact is neither HBL
contributed its share nor gave any plausible reason for not releasing the
amount. It seems that NDFC nominated team wasted time in convincing the other
lenders, to extend funds without adequate hedging — which HBL and ABL were not
willing to do — but could not convince NDFC to provide the full required
According to some financial experts the amounts, to be
received from HBL and ABL, were peanuts for NDFC. It should have injected an
equivalent amount as make shift arrangement, brought the unit in full operation
and then once again approached the same lenders. Had the unit was in full
operation and HBL and ABL were not willing to inject funds, any other financial
institution would have extended fresh credit to NFL on its own qualification.
However, this option was not exercised and NDFC decided to suspend production
activities on the pretext 'lack of working capital etc.' Since the announcement
of lay-off, HBL is contributing around Rs 1.8 million per month towards payment
of salary of staff and lately ABL has also provided some funds.
Therefore, it is necessary to understand why the lenders
refrained from extending fresh credit but agreed to contribute towards salary
disbursement? Financial experts say that after Schon Group has ripped off the
unit and also by the takeover of management by NDFC, NFL's debt has gone too
high and debt servicing has become un-sustainable. Financial structuring could
have not resolved the issue and some of the debts have to be written off. Under
the existing conditions no financial institution was ready to take the hit. In
this particular case NDFC emerged to be the biggest loosers. Most of its lending
is not adequately covered through collateral. It did try to convince HBL to
allow pari pasu charge which was not denied. Besides loans, NDFC has the
substantial equity stake in NFL. Therefore, the only recourse available to NDFC,
to recover the sunk amount, was through sale of its shares — which is not
worth more than the piece of paper.
As against NDFC, both HBL and ABL were covered to a large
extent. It also appears that either HBL did not have faith in revival programme
prepared by NDFC nominated team or was bent upon sale of NFL. Therefore, it is
also necessary to find out the possible motives. According to the information,
HBL is not only worried about the money extended to NFL but fears encashment of
a bank guarantee of over Rs 400 million issued on behalf of Schon Group in
favour of Privatization Commission. Though this guarantee has not been encashed
by the Commission as yet, in case the Commission decides to call this guarantee,
HBL stands to loose this amount. Therefore, HBL management wants sale of NFL to
minimize its losses as well as close the chapter.
Whereas NDFC was initially keen in retaining management
control, reviving the unit and then its sale. However, it is surprising that
NDFC did not allow NFL management to contest a decree petition filed by HBL. The
court verdict enables HBL to go for the execution of this decree and sale the
unit. Since it will be a 'forced sale' all the lenders will be able to recover
only a part of outstanding amounts in their respective names. NDFC will be the
By acts, NDFC nominated team has tried to create an
impression that NFL is not a economically viable unit. It is no secret that this
team failed to convince NDFC to provide the full amount necessary for restarting
commercial production. However, when one looks at their activities the situation
becomes more complicated. It is on record that a yarn merchant from Faisalabad
paid NDFC nominated team millions of rupees as advance — to be adjusted
against actual sale of yarn. Under this arrangement yarn was produced for
awhile, though at lower capacity utilization. This arrangement was successful
for awhile but led to other complications and virtual shut down of the unit. The
reasons for discontinuation of production activities were said to be: demand
notices for excise duty, disconnection of electricity etc.
According to some information, the said yarn merchant had
paid over Rs 40 million to NDFC as advance. This point should have been an eye
opener for NDFC. One may ask, if an individual could assume risk of such a
magnitude why NDFC did not come forward and insisted on extension of funds by
other lenders? The acts of NFL's top level management, comprising of less than a
dozen people, remain questionable — whether they are working for the revival
of NFL or are there to make personal gains only. It appears that this group has
been working for the liquidation and ultimate sale of NFL to buy it out.
As it has become clear now that NFL will be sold, it is
imperative to take certain precautionary measures. This include: sale of NFL as
'compact unit', measures to safeguard the interest of employees, probe into the
activities of NFL's top management and the irregularities performed at HBL.
Since NDFC emerges to be solely responsible for the current state of affairs,
CIRC must ensure payment of full salary of employees, for the lay-off period,
before offering the unit for sale.
The impression created by some that NFL is not a economically
viable unit is incorrect. The plant is fully intact and capable of commencing
production within weeks. The basic problems are: working capital and
disconnected electricity connection. Settlement of excise duty case pertains to
NDFC tenure and has to be resolved before sale of this unit. NDFC should also
pay outstanding electricity and other utility bills.
The total liabilities of NFL exceeds Rs 1.2 billion, most of
the shares transferred in the name of Schon Group are still intact, HBL and ABL
have charge on assets, all the lenders are covered to a large extent. However,
financial analysts expects sale of NFL at around Rs 800 million and the balance
has to be written-off. Therefore, CIRC as well as Accountability Bureau must
investigate who were responsible for sale of NFL to Schon Group and issue of
bank guarantees without proper collateral by HBL. Responsible people at
Privatization Commission should also be brought to task who have not encashed
the bank guarantee of Schon Group when they defaulted.
The prevailing state of affairs at NFL is a clear example of
lack of governance and accountability. As the present government claims to
continue accountability and ample evidence are available, all those who were
involved in virtual distraction of a national asset must be prosecuted and
punished. Some of the immediate measures are: putting the names of NFL's top
brars on exit control list and bringing back Riaz Niazi, immediate arrest of
those who have been alleged for misappropriation and corruption, confiscation of
shares of Schon Group in NFL.
At the same time CIRC must ensure that this time NFL is sold
to a credible investor who is serious in continuing production activities at the
plant — survival of around 1000 families is directly dependent on NFL. The
unit should not be sold to a buyer who is interested in real estate or scrap.
The demand and supply position of man-made fibre indicates not only bright
prospects for new buyer but also offer opportunities for expansion.