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National Fibres being offered for sale

NDFC's failure to revive the unit creates uncertainty for employees

 Apr 23 - 29, 2001

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 year.

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 amount.

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 biggest looser.

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.

National Fibres Limited

National Fibres Limted (NFL), the first ever polyester staple fibre plant in Pakistan, was established in 1982. Till its privatization in 1992, NFL was the most profitable unit of FCCL. The transfer of management to Schon Group in 1992 started the downfall of the unit. And the 30 months period under NDFC management put the last nail in coffin. While the regular employees were not paid salaries for months, the blue-eyed kids were paid handsome salaries. In the name of production of 'Black Fibre' a drama was staged by the then CEO, Riaz Niazi and his associates. Niazi was issued a show cause notice by NDFC but managed to go out of Pakistan. The stage is being set for the sale of NFL through recently established Corporate and Industrial Restructuring Corporation (CIRC). All the lenders will be forced to write off huge amounts and close the chapter for ever. While CIRC's intentions may be good, it should not overlooked the fact that the closure of NFL is a story of white-collar crime where ample evidence are available.