Department of Disinvestment- Privatised PSUs

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Modern Food Industries (India) Limited (MFIL)

MFIL was incorporated as Modern Bakeries (India) limited in 1965. It had 2042 employees as on 31.1.2000. It went through minor restructuring during 1991-94 when its Ujjain Plant was closed, the Silchar project was abandoned and the production of Rasika drink was curtailed. The company was referred to Disinvestment Commission in 1996. In February 1997, the Commission recommended 100% sale of the company, treating it in the non-core sector. While making this recommendation, the Disinvestment Commission cited under- utilisation of the production facilities, large work force, low productivity and limited flexibility in decision-making, as some of its weaknesses.

In September 1997, the Government approved 50% disinvestment to a Strategic Partner through competitive global bidding. In October 1998, ANZ Investment bank was appointed as the Global Advisor for assisting in disinvestment. In January 1999, the Government decided to raise the disinvestment level to 74%, and an advertisement, inviting Expression of Interest from the prospective Strategic Partners, was issued in April 1999.

Pursuant to the advertisement and other marketing efforts by the Advisor, 10 parties submitted Expressions of Interest. Out of these, only 4 conducted the due diligence of the company, which included visits to Data Room, interaction with the management of the MFIL, and site visits. After due diligence, only 2 parties remained in the field, and on the last day for submission of the financial bid (15.10.99), the only bid received was that from Hindustan Lever Limited (HLL). The Government approved the selection of HLL as the strategic partner in January 2000, and the deal was closed on 31.1.2000.

As per the accounting procedure prior to disinvestment (31.1.2000), MFIL did not make any provisions for old receivables outstanding for more than 5 years. After privatisation, the new management provided for all outstanding receivables that were over 3 years old, on the ground that it was warranted by the strict application of the accepted accounting principles. The revised accounts, thus prepared, showed an accumulated loss of Rs. 3099.97 lakh, and Net Worth Rs. 201 lakh. Since the Net Worth of the company got eroded by more than 50% of its peak Net Worth (Rs. 1756.79 lakhs) during the immediately preceding four financial years, MFIL had to file a report with the BIFR in accordance with the requirements of Sick Industrial Companies (Special Provisions) Act, 1985.

The following Table shows the highlights of the Strategic Sale.

	PRIOR TO SALE			AFTER SALE
1.	Authorised share capital Paid up capital Losses 1998-99 Losses 1999-00 **(Inclusive of an amount of Rs. 35.19 cr. towards provisions made for previous years.) Number of employees	Rs. 15.00 cr. Rs. 13.01 cr. Rs. 6.87 cr Rs. 48.23 cr ** 2042	1.	74% of the shares sold for Rs. 105.45 cr. and further Rs. 20 cr. Invested by HLL in the company.
2.	Net Worth (and total expected realisation) as per DPE Survey 1998-99 Value of assets as per 31.3.99 accounts: Gross Net Market value of land & building as per Government valuer (unrestricted use)	Rs. 28.51 cr. Rs. 38.76 cr. Rs. 18.99 cr. Rs. 109.00 cr.	2.	Thus, the Government gained by selling Rs. 1000 shares for Rs. 11,490, i.e.more than 11 times the face value & 3.68 times the Book Value.
3.	Valuation of 100% equity by different methods - as done by global advisors	Rs. 30 cr. to Rs. 70 cr.	3.	HLL's share value went up from Rs. 2138 on 30th Dec. (prior to sale) to Rs. 3247 on 25th Feb. (post sale).
	.		4.	The employees of a company incurring losses became HLL employees - an efficient company. The Shareholders' Agreement envisages:" the parties envision that all employees of the company on the date hereof will continue in the employment of the company."
			5	Company referred to BIFR, which was inevitable. Now HLL will pick up the bill for restructuring.

Post - Disinvestment Scenario

	The decline in the sales of Modern Bread, which continued till the beginning of 2000, has been arrested. Weekly sales in December 2000 were around 44 lakhs SL, which is a 100% increase over the figure of April 2000.
	As on 31.12.2000, HLL has extended secured corporate loans to MFIL to the extent of Rs. 16.5 crores for meeting the requirement of funds for working capital and capital expenditure.
	HLL has provided a corporate guarantee to MFIL's banker, viz., Punjab National Bank, which has helped the Company in getting the interest rate reduced considerably to the extent of 3-4% of its earlier borrowing cost.
	Steps have been taken to improve the quality of bread, its packaging and marketing with trade-promotion activities, and to train the manpower in quality control systems.
	November,2002 wages have increased by an average of Rs.1800 per employee.
	Rs. 30 crore has been spent VRS Rs. 7 crore infused for safety & hygiene purposes at various manufacturing locations
	The Government was also entitled to ‘Put’ its share of remaining equity of 26 % at Fair Market Value for 2 years from 31^st January 01 to 30^th January 03. The Government has exercised this option and thereby received Rs. 44.07 crore on 28^th November 02.