Centre and MP to ignore public financing norms in Maheshwar

Centre and Madhya Pradesh government unite to ignore public financing norms and serious financial irregularities to inject public money in favorite S.Kumar's Maheshwar Project

People of the Narmada valley determined to fight this unholy alliance - " We shall not allow another Enron"

Mumbai Court removes injunction against NBA

In a recent and shocking development, the Digvijay Singh government of Madhya Pradesh and the Government of India have chosen to set aside all norms regarding public financing of Projects, in order to bulldoze the Indian public financial institutions to yet once again inject large sums of public money into S.Kumar's Maheshwar Project. It has come to light that Shri Digvijay Singh, Chief Minister, Madhya Pradesh, Shri Geete, Minister of Power, GOI and Minster of State for Finance, GOI met on the 4th of March 2003 in a high level meeting and set aside minimum requirements of public financing such as debt equity ratios, infusion of promoter's contribution, the need to stop institutional financing in case of defaults and legal suits, to offer their support to the Maheshwar Project promoted by the S.Kumars. The governments had full and specific knowledge of serious financial irregularities and practices of the S.Kumars and the ongoing legal proceedings on and attachment of the Maheshwar Project properties. Despite this, their determination was clear - the S.Kumars were to be financed at any cost, and the costs were to be paid from public money. In the process, these public representatives who are responsible for the regulation and the safety of public funds displayed their utter contempt for public interest and public money in their concern for a private corporate.

The government representatives rode roughshod over the concerns of the Indian public financial institutions regarding the financing of the controversial Maheshwar Project and chose to virtually order the Life Insurance Corporation of India to hand over Rs. 100 crores of public money to the S.Kumars so that the company can pay off it's huge outstanding default in repayments to the Power Finance Corporation, a repayment that is crucial if the PFC is now to offer the S.Kumars company - the SMHPCL the further facility of a credit enhancement guarantee. The Rs. 100 crores will be in the shape of "advance" subscription to an Optionally Fully Convertible Debentures to be issued by the SMHPCL. The LIC Board had earlier refused to make any such advance payment.

The apex politicians were meeting with the heads of financial institutions in order to tie up the finances of the Maheshwar Project including the arrangements for the debentures to be issued by the SMHPCL. As per the minutes of the meeting of 4th of March 2003, the Managing Director of LIC stated that the LIC had agreed to contribute to the subscription of Rs. 100 crores to the debentures proposed to be issued by the SMHPCL only on the condition that the OFCDs are rated by the CRISIL at AAA(SO), secondly, provided the PFC provides credit enhancement guarantee to the Project, and only if the lenders confirm their support to the Project.

It may be recalled that till very recently, the SMHPCL were the PFC's third largest defaulter. Obviously, since the S.Kumars had defaulted on the money already borrowed by them from the PFC on a very large scale, it would not be possible and in fact illegal for the Power Finance Corporation to give the S.Kumars a credit enhancement guarantee or any more public monies. The LIC had been earlier approached to help the S.Kumars out of this situation by giving an advance subscription of Rs. 100 crores. However, apparently it had refused to do so. Unfortunately, instead of insisting that the S.Kumars must pay back these defaults on public money at once, especially, if they were seeking to receive a credit enhancement guarantee, the Minister of State for Finance, GOI said that he " desired that the proposal be reconsidered by the LIC Board, so that the PFC could be paid, construction restarted and the PFC could also issue guarantee for OFCD to back up GOM guarantee." Thus, although the a priori condition of the LIC contribution to the S.Kumars debentures was the PFC credit enhancement guarantee must be in place, the LIC is being forced to pay the entire sum in advance at the "desire" of the Honorable Minister so that it becomes possible for the PFC to issue such a credit enhancement guarantee.

It may be recalled that the Tarapore Committee that had been set up to investigate the UTI imbroglio that had cost millions of small investors very dearly and had resulted in the imminent collapse of the Indian economy, had identified and censured the "evergreening" practices of various financial institutions in which they extend loans to corporates who have defaulted on previous loans in order to wipe off their defaults, as one of the major reasons for the UTI crisis. These evergreening practices are also responsible for the huge accumulation of Non-performing assets in this country. However, now a Minister of the Central government responsible for public finance has virtually ordered another public financial institution - the LIC to pay out crores of rupees of public money to wipe out the existing huge defaults of the private company - the S.Kumars on the Power Finance Corporation, rather than asking the defaulting company to pay up. Clearly this is not only highhanded and dictatorial, it also blatantly illegal.

It may also be noted that the Policy on Private Participation in the Power sector issued by the Ministry of Power through gazette notification of 22nd October 1991 stipulated that " at least 11% of the total outlay must come through promoter's contribution." That is a project outlay of Rs. 2233 crores necessitates a minimum promoter's contribution of Rs. 245 crores. The meeting minutes also record that the Managing Director of SBI also insisted that it was imperative that in addition to attempts to tie up funds for equity through debentures, the Promoter must infuse its own share of balance equity of around Rs. 82 crores. In fact, Mr. Batra, MD, SBI went further to caution the meeting against taking any steps that could reduce the debt - equity ratio below the established banking norms. However the S.Kumars seem to have a completely different view of how much contribution they need to make. The meeting minutes record that " with respect to equity being brought in by the promoter, Shri Kasliwal informed that only an amount of Rs. 41 crores remained for which also arrangements had been made and that the amounts would be infused in due course. " Yet, there seems to be no discussion in the meeting about the order of magnitude difference in the estimate of promoter's contribution. In fact, the Secretary (Power), GOI merely concludes that the Promoter will infuse balance equity in a time bound manner. Thus, the promoter will pay his contribution " in due course" and " in a time bound manner ", but the LIC will have to be milked for an advance subscription to the debentures, without fulfillment of any of the stipulated conditions, so that the S.Kumars defaults can be paid off and the construction work started. Clearly, the promoter is let off the hook both in respect of bringing in the adequate amount of promoter's contribution as well as taking responsibility for its defaults because of strong political patronage.

It may also be noted that this open political interference and highhandedness by the governments in the working of financial institutions and their direction to them to provide the S.Kumars corporate group with further injections of public money is in clear violation of the pre-disbursement condition stipulated by the lead bank - the IFCI in its March 2000 reappraisal report that the S.Kumars must bring back the Rs. 106.4 crores with interest that it had given away to agencies that neither did any assignments on the Project, nor had any approved contracts for this work before any further public funds are disbursed to the Project. The RBI notification of 30th of May 2002 defines diversion and siphoning of funds as the use of public monies for purposes unrelated to the Project purpose. Obviously if large sums of Project funds have been given away to agencies which did no work for the Project and had not contracts to begin with, this can only be termed diversion of funds. By the RBI notification, such diversion and siphoning necessitates that such promoters be debarred from all institutional finance for the next five years and criminal proceedings initiated against them. However, instead of stopping all institutional finance to the S.Kumars for the abuse of public money and initiating criminal proceedings against them, they are being given further amounts of public money, at the insistence of the state and Central governments.

This decision also perversely and completely ignores the fact that legal proceedings are on against the S.Kumars group companies Induj Enertech Limited and Shree Maheshwar Hydel Power Corporation Limited and that the movable and immovable properties of the Maheshwar Project have been under attachment since the 20th of December of 2002. The holding company of the SMHPCL - the Induj Enertech Limited had borrowed Rs. 44.75 crores for the financing of the Maheshwar Project in 1999-2000. As a result of willful default by the S.Kumars on this and another short - term loan of Rs. 8.02 crores taken earlier in 1997-98 from the MPSIDC, the MPSIDC ordered that the recovery of the outstanding sums should be made from the attachment and sale of the movable and immovable properties of the Maheshwar Project. The attachment of the properties was done by the District administration in December 2002. The S.Kumars have now moved the High Court to stop further proceedings, and the case is on. In the meantime, the High Court has restrained the S.Kumars from creating further charge on these " properties under attachment". It may be noted that the RBI notification of May 2002 also insists that willful defaulters may not be given any further public funds.

In addition to a record of multiple willful defaults and actions that can only be interpreted as diversion and the siphoning of public funds, the S.Kumars have not even paid for the Project properties that they took over at the time of privatization in 1992 and have enjoyed for more than a decade since then. The Reports of the CAG of India of 1998 and 2000 note that the Promoters are yet to pay crores of rupees to the state government for these properties.

It may be recalled that when the NBA brought all these issues in to the public domain, the S.Kumars responded by trying to gag public criticism by bringing a Court injunction against the NBA since October 2002. However on the 29th of March, 2003, the City Civil Court disposed off the injunctions and the contempt cases brought in by the S.Kumars.

The Maheshwar Project being built in the Narmada valley has been very controversial from the outset and several foreign investors and utilities deserted the project because of the financial, social and technical flaws. While the Project will submerge and rupture the lives and livelihoods of more than 50,000 farmers, workers and fisherpeople, several reports of the state and Central governments as well as of the German Development Ministry record complete failure of the Promoters to resettle the affected people with agricultural land. In its recent most report of 2002, the Ministry of Environment has state that not a single condition of the clearance has been complied with. On the other hand, the power to be produce by this Project will be inordinately expensive. Even the minutes of the high level meeting of the 4th of March states that the initial cost of Maheshwar power will be Rs. 3.54 per unit and that " much will depend on the lender's confidence". The Madhya Pradesh government is currently unable to pay for NTPC power costed at Rs. 1.70 per unit.

Tragically, these very same public financial institutions had reposed a similar confidence as lenders in the Enron's high cost Dabhol Project. The results are there for all to see. The FI's have now proposed that they write off Rs. 1500 crores of loans given to the Dabhol Project out of public money in order to make the Project viable.

The same story of the collusion state and Central governments at the highest level along with financial institutions in order to favor an undeserving corporate is being repeated in the case of the Maheshwar Project. The Godbole Report that had investigated the Dabhol Report said "The Committee is surprised at the breadth of governance failure which has occurred time, across governments and across agencies. Organs of both the Centre and the State level appear to have been remiss in their functions... every one of the assumptions relating to the benefits of the project have proved to be false, and indeed were false at the time of the assertions..." The Report also states that "the Committee also finds that the financial institutions showed poor judgment and lack of due diligence & the decision of the financial institutions to fund this Project seems to have been based primarily on escrow account given by MSEB, guarantee by the state government and the counter guarantee by the Central government rather than an independent and meticulous appraisal of the project" The story of Maheshwar is eerily similar.

The Narmada Bachao Andolan and the people of the Narmada valley condemns these attempts of the state and Central governments to squander public money and force Indian public financial institutions such as the LIC to take decisions to invest in a Project whose promoters are guilty of willful default, diversion and siphoning of funds, and whose properties are under attachment. The NBA calls on the LIC and the other public Financial institutions to refuse to comply with the illegal and illegitimate demands of the apex political leadership and not to put another paisa into this flawed and controversial project. The NBA asks them to immediately recall public money already invested in the Project and initiate criminal proceedings should be filed against the Promoters in consonance with the RBI rules. The NBA welcomes the City Civil Court decision to lift the injunction against the NBA It also asserts that they will launch a mass movement through out the country exposing and condemning the blatant malpractices of the state and Central governments and their unholy alliance, and reiterates its resolve and determination not to allow another Enron be built - in the shape of the Maheshwar Project.