CHAPTER 3
MINISTRY OF COMMERCE

MMTC Limited

3.1    Import and domestic distribution of fertilisers

MMTC Limited (Company) was the canalising agency for import of fertilisers from 1970 onwards and was undertaking the import of fertilisers as per the requirements specified by the Department of Fertilisers (DOF) under the Ministry of Chemicals and Fertilisers. Consequent upon the decontrol and decanalisation of phosphatic and potassic fertilisers in August 1992, the Company began importing Di Ammonia Phosphate (DAP), Single Super Phosphate (SSP) and Muriate of Potash (MOP) and distributing the same through distributors appointed by them. The Company, however, continued to procure urea as per the requirements of DOF. The Company ventured into domestic distribution of fertilisers during 1994-95. From 1995-96 onwards, it entered into pool handling (Domestic distribution of urea imported on behalf of the Government) arrangements of imported urea on a commercial scale for distribution in the domestic market. Fertilisers distributed in the domestic markets were received in bulk at the ports, unloaded from the vessels, bagged under the Company’s trade name and despatched to consuming centres for final distribution to the farmers through appointed dealers/distributors.

The review covers the fertiliser transactions of the Company, bringing out the trading performance of the Company for the years 1993-94 to 1999-2000. Almost all the regional offices (ROs) carried out some activities relating to import and domestic distribution of fertilisers but the major activities in this area were carried out by six ROs at Delhi, Kolkata, Chennai, Ahmedabad, Mumbai and Hyderabad. Out of the above, the ROs at Delhi, Ahmedabad, Chennai and Visakhapatnam were selected for test check by Audit. The Company’s trading activities in fertilisers can be mainly classified under the following categories:

1. Import of non-canalised fertilisers;
2. Pool handling of imported urea;
3. Domestic distribution of non-canalised fertilisers and pool urea; and
4. Import of canalised urea on behalf of Government.

The working of the Company in respect of these areas has been discussed in the succeeding paragraphs.

3.1.3.1    The Company did not draw up any procurement plan for import of fertilisers for distribution/domestic sale before commencement of each cropping season by obtaining the projected sales figures from the various ROs and taking into consideration, the anticipated domestic consumption of fertilisers. No annual sales/purchase budget was drawn up by the Company.

The Management stated (September 1999) that the Company definitely made plans for import of fertilisers for distribution/domestic sale. They also stated that before going into each purchase, a justification was included in the related Sale/Purchase Committee (SPC) note. The Ministry stated (June 2001) that as a matter of fact all decisions of purchase of fertilisers were always preceded by detailed study and procurement plan based on market feed back. Moreover, the justification for purchases based on demand was always contained in the proposals before SPC. The contention of the Management/ Ministry is not tenable because the Company’s fertiliser division itself had confirmed (July 1999) that they were not aware of any annual procurement plan for these years. Further, preparation of justifications in SPC notes on adhoc basis for each purchase was not a substitute for overall annual procurement planning.

3.1.3.2    As evident from Annexure-II and Annexure-III, the Company’s share in import of DAP during 1993-94 (25240 MT) with reference to all India import (1569000 MT) of this fertiliser was 1.59 per cent. Due to lack of planning in the procurement plans without taking into account the prospects of marketing, the Company resorted to heavy imports of this fertiliser during 1994-95 (54962 MT) and 1995-96 (228109 MT) in its endeavour to achieve the targets of imports and raised the Company’s share of imports to 6.94 per cent and 15.45 per cent respectively. As a result of heavy imports in excess of requirement and Company’s failure in marketing this quantity, the Company did not import any quantity of DAP during 1996-97. During the subsequent three years ended 1999-2000, the Company’s share of import in DAP ranged between moderate levels of 3.35 to 4.80 per cent.

Similarly, the Company’s share in import of MOP commenced with 7.40 per cent in 1994-95 (157446 MT). Despite having not been able to market this quantity, the Company maintained the trend with the import of 145346 MT of MOP in 1995-96 registering 6.15 per cent share with reference to all India imports of this fertiliser.

Excessive imports of the fertilisers in disregard to marketing arrangements resulted in avoidable piling up of inventory and inventory-carrying cost as discussed in the subsequent paragraphs of the review.

The Ministry stated (June 2001) that as the Company’s share of import of DAP/MOP went up during 1995-96, it ventured for full-fledged domestic distribution of fertilisers. Therefore, building up of stocks was essential for positioning the fertilisers at the point of sales before the season. However, due to subsequent market conditions and other logistical factors the sales were not as expected. As such the stocks had to be carried over to subsequent seasons and further imports reduced. The reply of the Ministry is not convincing as heavy procurements were made by the Company only to achieve the targets for imports without considering the market trends.

3.1.3.2.1    The Company had not prepared any purchase manual of its own. However, the Board had delegated powers to the SPC to consider and approve all commercial transactions exceeding the value of Rs.5 crore. Further, the Company also approved (December 1995) a policy according to which no ex-post facto approval was allowed in regard to purchases. However, in contravention of the above, in most of the cases (a) no open tenders were invited; and (b) purchases above the value of Rs.5 crore were made without taking approval of the SPC. As a result, ex-post facto approvals of SPC were obtained in a number of cases.

The Management, in its reply (September 1999) which was also endorsed (June 2000) by the Ministry, stated that wherever approvals of the SPC were not obtained due to urgency, ex-post facto approvals were taken. The fact remains that the Management did not follow its policy regarding standardisation of purchase proposals.

3.1.3.3.1    During the year 1994-95, the Company purchased a quantity of 54962 MT of DAP valuing Rs.42.15 crore and 157446 MT of MOP valuing Rs.49.93 crore, out of which, sales amounted to only 27134 MT of DAP valuing Rs.21.14 crore and 15307 MT of MOP valuing Rs.5.02 crore, leaving unsold stocks of 32989 MT of DAP valuing Rs.26.43 crore and 140620 MT of MOP valuing Rs.58.98 crore as on 31 March 1995 (Annexure-II).

3.1.3.3.2    Additional tonnage of 228109 MT of DAP valuing Rs.186.19 crore and 145346 MT of MOP valuing Rs.51.53 crore were purchased during 1995-96, out of which sales amounted to 114897 MT of DAP valuing Rs.107.76 crore and 137156 MT of MOP valuing Rs.52.25 crore were effected. Thus, the closing stock was 142568 MT of DAP valuing Rs.131.40 crore and 147650 MT of MOP valuing Rs.72.29 crore (Annexure-II).

3.1.3.3.3    Despite having huge stocks at the end of the year 1994-95, the Company went into heavy purchases in the following year, due to which stock accumulations at the end of the year 1995-96 increased considerably, resulting in heavy inventory carrying cost amounting to Rs.26.91 crore during the years 1994-95 to 1996-97 in respect of DAP and MOP (Annexure-II).

The Management stated (September 1999) that in order to achieve corporate targets, it was necessary to make the purchases. The Management’s reply overlooks the fact that trying to achieve purchase targets, while facing the risk of accumulating stocks, was not a commercially judicious decision and resulted in heavy inventory carrying cost.

The Ministry also stated (June 2001) that the imports made during 1995-96 were, mainly, for domestic distribution during the Kharif and Rabi Season. Prior procurement was essential to position the products well in advance as per plan of distribution for domestic fertilisers. It was further clarified that the purchases were not being made to fulfill purchase plan only but to meet the market requirement which, however, did not materialize due to subsequent developments in the domestic market of fertiliser and logistical problems.

The reply of the Ministry is not tenable in view of the fact that the Company could have deferred the shipments (Report of the Subgroup headed by the CMD as constituted by the Board of Directors in their 287th meeting to study the draft Audit Report) and prevented accumulation of stocks, as the fact of pace of movement of stock was below expectations and position of unsold stocks at the end of 1994-95 was in its knowledge. While allowing the imports of the fertilisers, the Management did not take into account the availability of these fertilisers in the country.

3.1.3.3.4    The Company entered into a contract with M/s. Cargil Fertilisers Inc. USA (seller) in June 1995 for the import of two consignments of cargo of DAP. Each consignment was to be of a minimum of 22500 MT and a maximum of 33000 MT at seller’s option, with the delivery schedule of one shipment each in August and September 1995 at US $ 241.80 PMT and US$ 243.80 PMT respectively. The rates were enhanced to US$ 250.30 PMT and US$ 252.30 PMT respectively in August 1995 with 180 days free credit from the date of bill of lading. However, in terms of the contract, the seller did not guarantee any date or period for arrival of cargo in India.

The first shipment of 28897.96 MT of DAP was despatched on 4 September 1995 by the seller against the lot of August 1995. The second shipment was despatched on 21 September 1995 with a quantity of 22755.92 MT against the September lot. Although the vessel arrived at Kandla on 23 October 1995, it could not get a berth upto 15 December 1995, due to heavy congestion at the port. At this stage, the position was reviewed and it was observed that the availability of DAP in the country was in excess of the requirement. The SPC, therefore, decided to sell the cargo on high seas on ‘no-profit no-loss’ basis and absorb the demurrage incurred upto 17 December 1995. The Company realised an amount of Rs.15.87 crore after adjusting demurrage and other losses against the cost price of Rs.18.04 crore. The Company, thus, sustained a loss of Rs.2.16 crore in the transaction.

At the time of entering into the contract (June 1995), the Company had a stock of 41390 MT of DAP and that at the time of amendment of the contract (August 1995), the Company had a stock of 159285 MT of DAP available with it. Thus, considering the low sales of DAP during the previous years as well as during 1995-96 and the availability of 159258 MT of stock with it, the decision to import more DAP and set out a plan for marketing 3 lakh MT of DAP during 1995-96 was overoptimistic.

The Management stated (September 1999) that in order to avoid further losses to the Company, it was decided to sell the material on ‘no-profit no-loss’ basis. The Ministry stated (June 2001) that had the Company decided to receive the said cargo the loss could have been much higher on account of heavy demurrage and subsequent problem in disposal of stocks due to lack of demand for DAP in the country. The fact remains that the Company should not have opted for the import, which resulted in an avoidable loss of Rs.2.16 crore.

3.1.3.3.5    Majority of vessels carrying fertilisers, handled at Kandla port, completed discharge during August-November 1995. Subsequently, bulk cargo was despatched to hinterland areas, which took 2 to 9 months to reach their destinations.

The Management, while accepting the delay, stated (September 1999) that it was mainly due to unseasonal rains, congestion at Kandla Port and delay in allotment of rakes. The Ministry stated (June 2001) that the circumstances, were unforeseen in nature and, therefore, such situations, could not have been anticipated in advance and planned. The replies are not tenable as delay in respect of only 2 vessels out of 7 cargos of DAP and MOP was due to unseasonal rains. The Company could not clear the other cargos due to (a) rebagging of cargos necessitated by the extremely poor quality of HDPE bags supplied by the suppliers and (b) non-removal of fertilisers from a previous cargo, as the Company could not arrange trucks well in time. This also showed lack of planning at the time of fixation of the delivery schedule, keeping in view the congestion at the port, already known to the Management and making necessary prior arrangements for rakes well in time.

3.1.3.4.1    Working results of the Company in respect of MOP, DAP and SSP for the last six years ending 31 March 2000 (Annexure-IV) show that the Company incurred recurring losses in disposal of SSP in all the six years. Except in the case of DAP during 1994-95, 1998-99 and 1999-2000 and in the case of MOP during the years 1995-96, 1997-98 and 1998-99, the Company sustained heavy losses during these six years. These losses were attributable, mainly, to higher cost of procurement and distribution. Excessive purchases resulted in piling up of inventory. Consequently, the Company had to bear avoidable inventory carrying cost besides loss in selling the fertilisers at reduced selling prices.

The Ministry stated (June 2001) that the reduction in maximum retail price (MRP) by the Government during 1995-96 and 1996-97 particularly for Rabi period, which was the main consuming period of DAP and MOP, was unforeseen. The Company had to sell the maximum tonnage during the above period to avoid inventory carrying cost and further reduction of MRP.

The reply is not tenable in view of the fact that the scheme of special concession on phosphatic and potassic fertilisers was continued during 1995-96 and the Government further increased the rate of special concession from 6 July 1996.

3.1.3.4.2    During 1995-96, the Company imported four vessels of DAP (107470 MT) from two suppliers viz. M/s. Arab Potash Company (APC), Jordan and M/s. Cargil of USA. Letters of credit (LCs) were opened under Banker’s Acceptance Facility (BAF) with 180 days credit. The Company paid Rs.11.03 crore due to the exchange fluctuation in the currency. Had the Company opted for forward cover to hedge the fluctuations in currency, the Company could have saved a net amount of Rs.7 crore after adjustment of forward cover charges.

The Management stated (September 1999) that no forward cover was provided by the bank for covering the payments under the BAF scheme. The reply is not tenable since taking of forward cover was the responsibility of the Company itself and was not to be provided by the bank on their own.

The Ministry stated (June 2001) that the exchange fluctuations of such violent nature were unforeseen. Moreover, as the imports were covered under BAF scheme, forward cover facility was not available for the same. The Ministry’s reply is not correct as risk in respect of unforeseen fluctuation of violent nature in the foreign currency was normally covered by obtaining a forward cover for the period of credit facility on payment of premium to the bank in advance.

3.1.3.4.3    There was a stock of 140620 MT of MOP as on 31 March 1995, which was sufficient for the Kharif 1995 marketing season (The previous year’s sale was 15307 MT for both Rabi and Kharif seasons). Ignoring this fact and departing from established procedures like tendering, comparative analysis of rates, mandatory approval of the SPC etc., the Company ordered for purchase of a further quantity of 125000 MT hurriedly on 29 May 1995 from Israel when the Chairman-cum-Managing Director (CMD) of the Company was on his visit to that country. The Company obtained ex-post facto approval of the SPC on 30 May 1995 i.e. after placement of the purchase order. Of the opening stock of 140620 MT and further purchases of 145346 MT of MOP, the Company could dispose of only 137156 MT of the fertiliser leading to increased closing stock of 147650 MT as on 31 March 1996.

The Ministry stated (June 2001) that the deal with Israel was finalised to meet the requirement of Rabi 1996 (October 1995 to March 1996). Reply of the Ministry overlooked the fact that in view of reduced demand of MOP, the stocks of MOP remained in hand and hence fresh import for Rabi 1996, should have been reviewed in the light of the above. It is pertinent to mention that deal of MOP from Israel was finalised during the visit of CMD to that country in May 1995 whereas the projected demand was to be met during October 1995 to March 1996, and there was no urgency in issuing purchase order without the approval of SPC.

3.1.3.4.4    The Company procured (March 1996) 1720 MT of granulated single super phosphate (GSSP) for export to Bangladesh. The Company’s export licence was valid upto 31 March 1996. Though there was no firm order from Bangladesh, the material was procured and despatched to Kolkata (March 1996) to be kept in the West Bengal State Warehousing Corporation godown with instructions to the RO Kolkata to explore the possibilities of exporting this material to Bangladesh before 31 March 1996. The landed cost of GSSP at Malda was Rs.3279 PMT. The GSSP could not be exported to Bangladesh till November 1996, when an offer from M/s. APNACO Corporation was received for uplifting of material for export to Bangladesh at US$ 96 (Rs.3408) PMT to which the Company did not agree in the hope of getting a better price ranging from US$ 105 to 108 PMT. Meanwhile, the Bangladesh Government imposed a ban (February 1997) on the import of GSSP. The material deteriorated with the passage of time and 1500 MT of substandard GSSP was ultimately sold in the domestic market (February/March 1998) for Rs.30 lakh at a reduced price of Rs.2000 PMT. The remaining 220 MT could fetch (August 1998) just Rs.3.68 lakh at a further reduced rate of Rs.1673 PMT. Thus, the Company sustained a loss of Rs.28.01 lakh on the sale of 1720 MT of GSSP due to procurement of the material in haste without confirmed export orders in hand. This loss could have been avoided, had the Company accepted the offer of APNACO for US$ 96 per MT in November 1996.

The Ministry stated (June 2001) that the procurement of GSSP was planned for export to Bangladesh. However, due to sudden change in the policy of Bangladesh, GSSP could not be exported to Bangladesh and ultimately the material was sold in domestic market, which resulted in loss. Reply of the Ministry is not tenable as the ban on import of GSSP was imposed by the Bangladesh Government much after the procurement of GSSP by the Company.

The Company diversified into the business of domestic marketing and distribution of pool urea from 1994-95 when it handled 41000 MT of urea of Paradeep Phosphates Limited (PPL). Tenders for domestic distribution of canalised urea called ‘pool urea’, imported at various ports, were invited by DOF every year. The handling agents appointed by DOF were required to handle imported fertilisers on the basis of ownership of material under the overall guidance of DOF. The ownership was to be transferred to the agents while the vessels were on high seas. The handling agents were to make all the arrangements for unloading, bagging and movement of material from the ports. The table below indicates the total quantity of pool urea (port-wise) handled from 1995-96 to 1997-98 subsequent to which the Company withdrew from this trade:

(Quantity in lakh MT)

3.1.4.2.1    The table below indicates the working results of the Company in respect of pool urea during the years 1995-96 to 1999-00:

(Rupees in crore)

*    The figures against these years relate to disposal of old stock of urea.

3.1.4.2.2    The Company sustained recurring losses aggregating Rs.33.98 crore from 1995-96 to 1999-2000 in pool urea without taking into account the inventory-carrying cost of Rs.24.58 crore. The main reasons for the losses in handling pool urea were (i) higher cost of secondary transportation; (ii) higher cost of bags; and (iii) lesser realisation than estimated earnings on account of despatch and freight reimbursements. Despite losing Rs.8.55 crore and Rs.10.33 crore in the 1995-96 and 1996-97, the Company continued with the business till the end of 1997-98 and suffered further losses of Rs.15.10 crore. The Management accepted (September 1999) that the secondary transportation cost was higher as the Company was a new entrant and had to transport the material to distant places as well. They also stated that a conscious decision was taken to enter into the area of pool handling. It was unwise on the part of the Company to continue in this field when it was incurring losses from the very beginning.

The Ministry stated (June 2001) that keeping in view the practical difficulties of pool handling of urea operations together with the profitability, the Management purposely reduced its exposure gradually and closed the operation after 1997-98.

3.1.4.3    During 1995-96, the contract for domestic distribution of urea was bagged by PPL. The Company (MMTC) acted as a consignee agent on behalf of PPL and undertook domestic distribution work. Subsequently, during 1996-97 and 1997-98, the Company secured the contract itself for pool urea.

3.1.4.3.1    It was seen in Audit that the approval of the SPC/Board was not obtained while entering into the business of pool urea in the capacity of consignee agent for and on behalf of PPL during the year 1995-96. The Memorandum of Understanding (MOU) with PPL was signed on 9 November 1995 and the ex-post facto approval of the SPC was obtained on 16 January 1996. Similarly, approvals of the SPC were not obtained before participation in pool urea distribution and marketing for the year 1996-97. For the year 1997-98 also, the SPC accorded ex-post facto approval.

3.1.4.3.2    From the above, it would be seen that the very purpose for which the SPC was constituted and delegated powers by the Board was defeated. The Committee had been giving ex post facto approvals for what had already been done by the Division and that too, in contravention of the policy of the Company regarding ex-post facto approvals.

The Management stated (September 1999) that ex-post facto approvals of the SPC were obtained so as to ensure that only the complete and factual position was placed before the SPC. The contention of the Management is not tenable as seeking ex post-facto approval for matters relating to purchase proposals were in contravention of declared policy guidelines of the SPC. The Ministry stated (June 2001) that once the tender was awarded in favour of MMTC, all the facts were put before SPC and necessary approvals were obtained for the arrangement. The fact remained that the Company entered into the business of pool urea with PPL on 9 November 1995 overruling the deficiencies in the arrangement pointed out by Finance Division of the Company The Ministry did not also clarify the reasons for entering into similar arrangement for the year 1996-97, despite the fact that SPC had given specific directives to obtain prior approval.

3.1.5    Domestic distribution of non-canalised fertilisers and pool urea

The Company started the distribution of non-canalised fertilisers including pool urea on a commercial scale in the domestic market from 1995-96 onwards.

During a test check of cases of appointment of clearing, forwarding and stevedoring agents, it was noticed that:

1. no proper guidelines were laid down by the Company regarding appointment;
2. they were appointed without quotations/tenders being called; and
3. work orders were issued without executing formal agreements.

The Management stated (September 1999) that the instructions relating to appointment of clearing and handling agents were issued in August 1998. They also stated that in semi-urban/rural areas, agents had to be appointed from locally available options. While accepting that in some cases, agreements were executed at later stages, the Management stated that its interests were not affected due to non-execution of contracts. The Management also confirmed that all these standard formats were generally vetted by their legal department. The reply of the Management is not tenable as non-execution of contracts was a system lapse, which resulted in losses and legal complications as discussed in succeeding paragraph 3.1.5.1.1. Management’s reply clearly brings out the fact that the instructions regarding appointment of agents were issued at a time when the Company had stopped participating in pool handling tenders.

The Ministry stated (June 2001) that in certain locations where rakes were moved to semi urban/ rural areas, clearing and handling agents had to be appointed from the local available options. In such cases, quotations/offers were obtained from parties having experience in handling such rakes and contract awarded to meet the exigencies of work. The Ministry further stated that agreements were finalized with the handling agents but sometime for want of one reason or other, signing of the agreements was delayed. However, with a view to ensuring that the operations were not affected, work orders were issued and agreements were executed subsequently. They also added that the Management had issued instructions (August 1998) wherein proforma for entering into agreement had been devised and circulated to all the Regional Offices. The Ministry’s reply confirms the deficiencies pointed out by Audit and also that instructions regarding appointment of agents were not issued at a time when the Company was in the business of import and domestic distribution of pool urea.

3.1.5.1.1    Excess payments were made to clearing, forwarding and stevedoring agents, recovery of which was not certain, as the  Company was not holding adequate security. Some examples of such cases are discussed below:

3.1.5.1.1.1 M/s. J.M. Bakshi was appointed as a clearing, forwarding and stevedoring agent for handling domestic fertilisers at Kandla Port for 1995-96. The work order for DAP handling was issued without executing any formal agreement.

During 1995-96, 10 ships of urea and 5 ships of DAP were handled by the agent. The agent was found responsible for huge shortages totalling 2306 MT of the fertilisers valuing Rs.1.57 crore (The Company lodged claims for recovery of Rs.1.48 crore for shortages of 2202.49 MT) over and above the allowable shortage of 0.5 per cent. After adjusting the amount of Rs.66.44 lakh payable to the party, the balance of Rs.90.92 lakh was still unrecovered/unadjusted (31 March 2001). Besides that, the agent owed to the Company Rs.17.06 lakh towards railway freight and Rs.4.06 lakh towards wharfage refunds received by him from Kandla Port Trust on behalf of the Company. Thus, funds of the Company totalling Rs.1.12 crore could not be recovered since 1996. Arbitration proceedings against the party were initiated only in May 1999, and were in progress (March 2001).

The Ministry stated (June 2001) that necessary action for recovery of its dues of Rs.1.12 crore would be taken as soon as the arbitration award was announced.

3.1.5.1.1.2    M/s. Sanco Trans Limited was appointed as a clearing, forwarding and stevedoring agent for handling urea on 18 July 1995 and for handling MOP/DAP on 15 September 1995 at Chennai port for the year 1995-96. During the year, the agent handled several vessels of urea and DAP/MOP. The Company incurred a loss of Rs.80.95 lakh in the handling of urea, mainly due to shortages and shortfall in sale price of urea on account of discolouring, caking up attributed by the Management to the negligence of the agent. In case of MOP, the Company had to pay demurrage of Rs.1.03 crore to the supplier due to delay in discharge of the cargo caused by the handling agent. After adjusting the handling charges payable (Rs.1.39 crore) to the party, the net recoverable balance of Rs.45.19 lakh still remained unrecovered (March 2001) apart from loss of interest. Arbitration proceedings were initiated in March 1999 (MOP) and June 1999 (urea), and were in progress (June 2001).

The Management stated (September 1999) that arbitration cases were still pending to recover the above mentioned amount. The Ministry stated (June 2001) that the Company’s claim against the handling agent M/s. Sanco Trans Limited was mainly on account of demurrage for MOP vessel for which settlement with the suppliers was made in January 1999 and its claim for urea could be quantified only on liquidation of urea stocks. Accordingly, arbitration proceedings were initiated against M/s. Sanco Trans Limited only in March 1999 and June 1999 for MOP and urea respectively. The Ministry’s reply does not address the issues relating to loss that arose due to shortage and shortfall in sale price of urea on account of discolouring, caking up. Notwithstanding the fact that the Company made the payment of Rs.1.03 crore to the suppliers towards demurrage in January 1999, the handling agent was responsible for the same and the Company had not been able to recover the balance of dues of Rs.45.19 lakh from him so far (June 2001).

The Fertiliser Manual of the Company stipulated that dealers were to be appointed after due selection. However, it was observed in Audit that the antecedents of the parties were not verified before entering into agreements with them. In several cases, stock was handed over to the parties without obtaining adequate security to safeguard the interest of the Company. This resulted in several court cases. Twenty-three court cases involving dues/claims of Rs.8.06 crore were pending (March 2001).

3.1.5.2.1    A review of some of the cases revealed the following:

3.1.5.2.1.1    The Company entered into an agreement with M/s. Vridhishree Marketing and Services Limited (VMSL), Patna for handling and storing its fertilisers in Patna Division. As per the agreement, the party was required to give a bank guarantee for Rs. 5 lakh as security deposit and blank cheques with a covering letter as security for stored goods. Subsequently, in November 1997, the bank guarantee amount of Rs.5 lakh was raised to Rs. 15 lakh.

On receipt of a complaint regarding misappropriation of stock by the party, an enquiry was conducted which revealed (December 1997) that (i) the Managing Director of VMSL had earlier defrauded Hindustan Fertiliser Corporation Limited, a public sector undertaking, to the tune of Rs. 20 lakh and (ii) several other irregularities viz. stock worth Rs.5 crore being held by M/s. VMSL against the bank guarantee of Rs. 5 lakh, shortage in the number of bags, return of 700 MT of old stock by VMSL, etc. The enquiry officer suggested that all fertiliser stock lying in private godowns should be transferred to Central Warehousing Corporation (CWC)/State Warehousing Corporation (SWC) godowns immediately. However, the Management neither shifted the material nor liquidated it. A task force formed (September 1998) for disposal of fertilisers noticed (February 1999) a shortfall of over 4000 MT with VMSL and served a notice on them for shifting the material from their warehouses. On 5 February 1999, VMSL accepted that they sold 4434 MT of urea valuing Rs.1.49 crore on credit basis from various godowns. This sale was done without the concurrence of the Company. On shifting of material in March 1999, it was found that there was a shortage of 5327.92 MT of fertilisers including the credit sales effected by VMSL.

Thus, lack of control over the stock lying with the handling agent, resulted in the misappropriation of 4434 MT of urea valuing Rs.1.49 crore and a shortage of 893.92 MT of urea valuing Rs.30.07 lakh. Such a situation could have been avoided by (i) verification of the antecedents of the party before entering into the agreement, (ii) obtaining adequate security against stock and (iii) taking custody of the material immediately on conclusion of the enquiry.

The Management stated (September 1999) that the case was being investigated by the Vigilance Division and legal action for recovery of the Company’s dues had also been initiated.

3.1.5.2.1.2    M/s. Lucky Trading Corporation (LTC), Bhopal, a pharmaceutical stockist and distributor, was appointed (April 1995) dealer and liaisoning agent of the Company at Bhopal for sale of fertilisers. While awarding the work, the specific description of duties to be performed by M/s. LTC, the quantum of orders to be obtained and the time frame for realisation of proceeds against the material sold were not decided. The arrangement with the agent was finalised on the basis of discussions held with them and no tenders/offers were invited from any party before their appointment. However, a formal work order was issued to them on 28 August 1995 appointing them marketing-cum-liaisoning agent for the year 1995-96. The agreement was renewed for 1996-97 in October 1996. Though the party was required to furnish a security deposit of Rs.5 lakh, the same was not obtained by the Company.

M/s. LTC proposed to purchase the stock of DAP, MOP and SSP at the prevailing rate in order to liquidate the old stock and the Company sold material worth Rs.42.63 lakh to them on credit basis against a bank guarantee of only Rs.25 lakh. As the Company did not reconcile their accounts periodically after allowing unsecured credit, the outstandings against M/s. LTC went upto Rs.85.97 lakh in September/October 1997, when M/s. LTC indicated that they were no longer interested in working as the liaison agent of the Company. After partial recovery and invoking of bank guarantee of the party in October 1997, an amount of Rs.44.74 lakh was still outstanding against the party as on 31 March 2001.

The Management stated (September 1999) that the matter was under vigilance scrutiny.

3.1.5.2.1.3    M/s. S.R. International, Karnal were appointed as stockist-cum-distributor by the Company for sale of fertilisers in some districts of Haryana including Karnal. The party misappropriated about 1500 MT of urea valued Rs.40 lakh stored in the godown during October 1995. A total amount of Rs.1.11 crore (including interest) was outstanding against the party as on 31st March 2001. Further, it was observed that the party had been appointed as buffer stockist-cum-distributor with a dealer margin of Rs.250 PMT even though another party had offered to accept a dealer margin of Rs.210 PMT.

The Management stated (September 1999) that the case was under vigilance investigation.

3.1.5.2.1.4    The Company appointed (October 1995) M/s. Gold Star Enterprises, Ludhiana as stockist/distributor for sale of fertilisers in some districts of Punjab. The party was stated to have sold about 12,000 MT of fertilisers in and around Ludhiana on credit basis for which payments to the tune of Rs.20 lakh were pending on account of disputes about the quality of the material. An amount of Rs.23.73 lakh had been outstanding against the party since February 1998.

The Management stated (September 1999) that the case was under vigilance investigation.

3.1.5.3.1    The Company hired private as well as institutional godowns for keeping its fertiliser stocks. It was observed that (i) agreements with private godown owners were signed after storing the materials in their godowns, (ii) work orders had been issued before signing the final agreements and (iii) availability of space at the godowns of CWC/SWCs was not ascertained before hiring private godowns.

The Management stated (September 1999) that the godowns were hired from private parties as well as institutions for storing their goods in various districts at predetermined terms and conditions and rates duly accepted by the parties. In some cases, rakes arrived at destinations before formal agreements could be executed and in such cases, the work was allotted to the agents due to urgency. The agreements were entered into and got signed at a later stage in all such cases.

The Management’s reply is not convincing as handling of fertilisers was a regular business of the Company and as such, action for inviting tenders/quotations and signing agreements should have been completed well in time i.e. before placement of letters of indent for purchase of fertilisers.

The Ministry, while endorsing the reply of the Management added (June 2001) that while all efforts were made to store the material at CWC/SWC godowns, there was no option but to store the material in private godowns in a few cases where availability of CWC/SWC godowns was not there. The contention of the Ministry is not tenable, as non-availability of capacity with CWC/ SWC godowns was not ascertained prior to hiring of private godowns.

3.1.5.3.2    The RO Kolkata appointed (April 1996) M/s. Narayanpur Agri and Agricultural Development Project (NAADP) as handling agents in a number of cases. They also hired their godowns. In terms of the agreement signed in June 1996 and valid till 9 January 1997, M/s. NAADP were required to furnish to the Company an interest free security deposit of Rs. 10 lakh, a bank guarantee of Rs.5 lakh and a fidelity bond of Rs.50 lakh to cover any probable loss/damage etc. NAADP executed two bank guarantees for Rs. 8 lakh and Rs.2 lakh only but did not furnish the cash security and fidelity bonds. The agreement was extended upto 9 January 1998. The Company issued a delivery order in favour of the agent in the last week of November 1996 for lifting the Company’s DAP, MOP and urea from the SWC godown and their own godown. Cheques for Rs.50.19 lakh given by NAADP in this regard bounced (March 1997). In June 1997, NAADP approached the Company and issued fresh cheques in lieu of dishonoured ones for Rs.43.03 lakh being the final price but asked the Company to present them in July/August 1997. However, these cheques were also not cleared by the bank. In October 1997, the party again requested for extension of the time for payment. However, as NAADP had also misappropriated 284.85 MT of DAP and 1178.65 MT of urea valuing Rs.68.70 lakh, the Company invoked the bank guarantees of Rs.10 lakh in November 1997 and served a notice (November 1997) on the party to make the payment of Rs.1.09 crore towards the material lifted (Rs.40.43 lakh) alongwith the value of the fertilisers misappropriated (Rs.68.70 lakh) by them. Further, a civil suit as well as a criminal suit was filed against NAADP for the recovery of dues.

Thus, due to non-implementation of the terms of agreement, recovery of substantial dues of Rs.1.09 crore was involved in a legal tangle. The Management confirmed (September 1999) that criminal suits had already been filed against the party for recovery of the Company’s dues.

3.1.5.4.1    Annexure-V indicates the position of closing stocks of finished fertilisers for the last six years ending March 2000.

3.1.5.4.1.1    Annexure-V and Annexure -II read with paragraph 3.1.3.3 on ‘Performance Analysis’ reveal that excessive procurement of fertilisers by the Company during 1994-95 in the absence of an efficient mechanism for assessment of the requirements and to dispose of the stocks created a position wherein closing stock of MOP in terms of months’ sale was as high as 141 during 1994-95 and 16.6 during 1995-96. In quantitative terms, the Company had to carry-over 140620 MT and 147650 MT of MOP at the end of 1994-95 and 1995-96 respectively. The closing stocks at the end of these years were more than the sales effected in the corresponding next year.

Inventory of SSP at the end of 1994-95 was equivalent to 86.85 months’ sales and ranged between 3.82 and 17.21 during 1995-96 to 1999-2000. The closing stock of urea in terms of months’ sales was 66.52 at the end of 1994-95 and ranged between 4.88 to 9.64 at the end of next five years ending 31 March 2000. Similarly, closing stock of DAP at the end of 1994-95 was equivalent to 15 months’ sales

The Management/ Ministry offered no comments.

3.1.5.4.1.2    The Company constituted (September 1998) a task force for the liquidation of stock lying at various regions. At that time, the CMD of the Company directed the task force to liquidate the entire stocks of urea lying at all the places except Orissa by 31 January 1999. Despite this, as on 25 July 2001, the Company had 9604 MT of old urea the value of which had declined from Rs.2.88 crore (At a normal average price of Rs.3000 per MT) to Rs.1.81 crore resulting in loss of almost one crore of rupees.

The Ministry stated (June 2001) that despite efforts made by the task force for liquidation, the entire quantity could not be liquidated as the material being very old.

3.1.5.4.1.3    Age-wise analysis of the stock revealed that the movement of fertilisers was slow. In September 1998, the Company had more than 3 years old stock of fertilisers at a depleted value of Rs.4.52 crore. Similarly, the depleted value of the stock lying for (i) more than three years and (ii) the stock lying for more than two years was Rs.2.29 crore and Rs.1.35 crore respectively (March 2001).

The Management, while accepting the facts, stated (September 1999) that the slow movement of stocks was caused by the age of the stock and even after giving discount, the stock could not be liquidated. Reply of the Management confirms the fact the initial failure in disposal of the stock rendered it old which resulted in further slow movement and depletion in the value thereof with the passage of time.

3.1.5.4.2    In addition to the allowable shortage of 0.5 per cent in the handling/distribution of fertilisers, there was a shortage of 16558 MT of fertilisers valuing Rs.9 crore during the years 1995-96 to 1999-2000 (Annexure-VI).

The Management accepted the Audit observation and stated (September 1999) that the above shortages were due to misappropriation by certain parties for which claims had been lodged with the defaulters.

3.1.5.4.3    The major shortages occurred in RO, Delhi valuing Rs.2.71 crore (1614 MT of DAP and 3458 MT of urea) during the years 1995-96 to 1997-98 followed by RO, Mumbai with shortage of 1234 MT of DAP valuing Rs.1.15 crore during the year 1995-96, RO, Visakhapatnam valuing Rs.94 lakh (1825 MT of MOP) during the period 1995-96 to 1997-98 and RO, Calcutta valuing Rs.67 lakh (690 MT of DAP) during 1995-96 and 1996-97. It was observed that the RO Delhi was absorbing the shortages as a normal trading loss without carrying out detailed analysis and fixing responsibility.

3.1.5.4.4    Major shortages in private godowns were as follows:

The Management stated (September 1999) that criminal suits in respect of 2 parties, mentioned at sl. no. 1 and 4 in the above table had already been filed. In respect of the others, appropriate action for recovery was being considered.

In its subsequent reply (June 2000), the Management/Ministry did not report the progress in regard to (i) two criminal cases that had been filed and (ii) action taken for recovery from rest of the parties.

3.1.6    Import of canalised urea on behalf of GOI

3.1.6.1    Until 1993-94, the Company was the sole canalising agency for the import of urea. In 1994-95, National Fertilisers Limited (NFL) and Pyrites Phosphate and Chemicals Limited (PPCL) were also authorised to import urea on behalf of the GOI. Due to failure of these companies to import urea as per the Government allocations during 1994-95, the Government authorised (April 1995) the State Trading Corporation of India Limited, (STC) also as the fourth canalising agency for the import of urea. Subsequently, Indian Potash Limited (IPL) was also nominated as a canalising agency during the year 1995-96. The Government also laid down (April 1995) a uniform procedure for procurement of urea to be followed by the canalising agencies which stipulated, inter-alia, that the contracts should be on free on board (FOB) basis and where the companies considered cost and freight (C&F) basis to be more profitable, they should obtain permission from Transchart, a department under the Ministry of Surface Transport.

3.1.6.2    To meet the requirements of DOF, the Company had been floating limited/global tenders from time to time with minimum 10 to 14 days’ time for suppliers to furnish their bids. The tender notices were published in all leading newspapers. The bids were invited for supply on FOB basis and any supplier could participate in the tender. Bid bonds at the rate of US $ 1 PMT were, however, required to be furnished by all the bidders. In the absence of bid bonds, the offers were not considered to be valid.

3.1.6.3.1    Annexure-VII indicates the gross profit earned by the Company in import and distribution of urea as a canalising agency on behalf of GOI during 1993-94 to 1999-2000. During this period, there was a nominal gross profit was Rs. 19.06 crore against the turnover of Rs.5904.03 crore. It would be seen from the Annexure that the percentage of profit to the turnover was very negligible throughout these seven years. The Company worked out the profit by taking into account the service charges received from DOF at the rate of Rs.17 PMT for these imports. No effect was given to the expenses incurred by the Company in meeting other overheads relating to these imports.

The Management stated (December 1999) that DOF did not take any decision to increase their service charges from time to time despite repeated requests made by them.

3.1.6.3.2 A review of the records by Audit revealed that the calculation of the gross profit did not take the following facts into account:

1. Demurrage of Rs.1.41 crore paid to various suppliers in respect of various vessels for the period prior to the year 1994-95, which could not be recovered from the then Ministry of Agriculture, mainly due to non-reconciliation of lay time. The amount was adjusted by the Company from the dues payable to the GOI without obtaining consent of the GOI in this regard.

2. Despatch charges of Rs.45 lakh paid to various suppliers in respect of various vessels for the period prior to the year 1994-95, which could not be recovered from the DOF, mainly due to non-reconciliation of lay time. This amount was also adjusted against the dues payable to the GOI without obtaining any consent.

3. Despatch charges of Rs.6 lakh deducted by the Ministry of Agriculture in respect of various vessels for the period prior to 1994-95, which could not be recovered from various suppliers, mainly, due to non-reconciliation of lay time.

4. Despatch charges of Rs.3.46 crore deducted by the DOF in respect of various vessels for the period from 1994-95 to 1997-98, which could not be recovered from various suppliers mainly due to non reconciliation of lay time.

5. Non-recovery of the award amount of Rs.2.53 crore in respect of demurrage awarded and decreed (January 1997) against M/s. Quodros International, as the party’s whereabouts remained untraceable.

If the above facts were accounted for in the working results, the gross profit of Rs.19.06 crore would be reduced to Rs.11.14 crore.

3.1.6.4.1    The year-wise quantities of urea imported by the Company vis-a-vis the requirements intimated by the GOI during the last 7 years ending 31 March 2000 was as follows:

The monthly requirements intimated by the GOI to the Company vis-à-vis actual arrivals thereagainst are available in Annexure-VIII.

The above table shows that the Company imported 142000 MT and 83000 MT of urea during 1995-96 and 1999-00 respectively in excess of the requirement indicated by the GOI. As regards, actual imports against monthly requirement, there were variations between the two, especially during October 1993 to March 1994, the whole of 1994-95 and 1995-96.

The Management attributed (December 1999) these variations to delayed procurement of vessels by Transchart and delayed arrivals of vessels at the discharge ports. The Ministry stated (June 2001) that in import of bulk quantity it was always not possible to import quantity accurately to the last tonnage as vessels were nominated on “plus minus” basis. Contention of the Ministry though valid for 1993-94 and 1994-95 is not applicable in respect of subsequent years when significant variations to the extent of (-) 26.57 per cent to (+) 55.33 per cent occurred between quantities imported by the Company and the quantity indented by the GOI.

3.1.6.4.2    A detailed analysis of the year-wise import of urea by the Company revealed the following:

3.1.6.4.2.1    To meet the requirement of the 1994-95 Kharif season, the Company floated (22 February 1994) a tender for import of 1 lakh MT of urea on FOB basis for shipment during 15 March to 30 April 1994. The Company received a total of 18 offers. The 10 lowest offers out of the above 18 had quoted derived landed price in the range of US$ 130.5 to US$ 144.35 PMT. It was noticed that one of the bidders had quoted for the full tendered quantity of one lakh MT at an FOB cost of US$ 98.50 PMT. However, the SPC decided (15 March 1994) that since the rates quoted by the suppliers were on the high side, attempts should be made to get cheaper rates. It is interesting to note that even at that time, the SPC had felt that the prices may increase further. In this connection, it was also noticed that the SPC had earlier approved (from October 1993 to March 1994) purchases of urea at landed costs ranging from US$ 128 PMT to US$ 131 PMT.

The Company again issued (24 March 1994) a limited tender enquiry, inviting offers for import of urea on FOB basis for shipment during April/May 1994. As per the quotations received, the landed cost was in the range of US$ 135 to US$ 148 PMT. The SPC, considering these rates to be high, instructed to call for revised competitive offers. Accordingly, global tender was issued on 22 April 1994. As per the revised offers, the lowest landed cost was US$ 143 PMT. Once again, the SPC did not approve the imports, considering the prices to be still on the higher side and decided (4 May 1994) to give counter offer to all the bidders working backwards on landed cost of US$ 137.50 PMT. As the offers were on higher side, SPC on 5 May 1994 authorised CMD, Director (Finance) and CGM to negotiate the best possible prices for purchase of urea for prompt shipments along with finalisation of terms and conditions on long term basis. Following this, the SPC authorised the Company on 17 May 1994 to enter into a contract for import of 2.30 lakh MT urea at the rate ranging from US$ 121 PMT FOB to US$ 123 PMT FOB.

Thus, the decision of the SPC in February 1994 not to import urea at the FOB cost of US$ 98.50 resulted in avoidable extra expenditure of US$ 2.30 million (equivalent to Rs.7.14 crore) for one lakh MT.

The Management stated (December 1999) that Gulf producers had quoted prices, which were not in line with the prevailing market prices. The Management also stated that since the inventory of urea was comfortable, the Ministry told them to offer resistance to the suppliers and check the rising prices. They also stated that had they not shown resistance, the subsequent prices would have been much higher.

The reply of the Management is not tenable since the prices quoted by various suppliers were within the prevailing market rates as indicated in a chart prepared by them. No record was shown to indicate that the urea position was comfortable in the country. Due to less procurement of urea by the Company, the GOI had to nominate more agencies to import urea as stated in para 3.1.6.1 above. Even after showing ‘resistance’, the Company could not to keep the prices of urea at low levels and had to incur an extra expenditure of Rs.7.14 crore.

The Ministry stated (June 2001) that MMTC tried to negotiate with Gulf producers to get the price further reduced but they did not reduce the price by more than one dollar. The reduction in price was not upto the expectations of MMTC. Therefore, the Management in their meeting held on 15 March 1994 decided not to make any purchase and tried to source the material even outside the tender at a lower price. However, no contract could be concluded.

Thus, the fact remains that the Company incurred extra expenditure of US$ 2.30 million (equivalent to Rs.7.14 crore).

3.1.6.5    DOF asked (February 1995) the Company to make necessary arrangement for importing 9 lakh MT of urea in the first quarter of 1995-96 at the rate of 3 lakh MT per month. Subsequently, DOF authorised (April and June 1995) the Company to import an additional quantity of 5.5 lakh MT urea for arrival between July to September 1995.

3.1.6.5.1    Against the target of 9 lakh MT for the quarter ending June 1995 as directed by the DOF, the Company actually imported 10.66 lakh MT. Further, in order to procure additional quantity of 5.5 lakh MT for the second quarter ending September 1995, the Company held negotiations with various parties without inviting tenders and could not finalise any contract as the offered rates of US$ 181 to 182 PMT FOB were considered high. Besides, the Company even did not consider two offers of US$ 185 and 190 PMT C&F.

3.1.6.5.2    The Company imported 1.53 lakh MT of urea at the rate of US$ 192 PMT C&F from other suppliers (without inviting tenders) for the second quarter which resulted in net shortage in procurement of urea by 2.31 lakh MT. This also deprived the Company the benefit of economic offers during earlier negotiations. In order to procure urea on urgent basis, the Company negotiated contracts in September 1995 for purchase of 5.1 lakh MT at the rate of US$ 210 PMT FOB.

The Management stated (December 1999) that there was no pending allocation from DOF in the month of July 1995. They also stated that they had only tested the market in that month. The reply of the Management is not tenable as DOF had allocated 14.5 lakh MT to be imported by the Company upto September 1995 against which, the Company could import only 12.19 lakh MT resulting in a shortfall of 2.31 lakh MT. Thus, by not purchasing the short quantity of 2.31 lakh MT required to be purchased in July 1995 at the prevalent rate of US$ 182 PMT FOB, the Company incurred an avoidable extra expenditure of US$ 6.47 million (equivalent to Rs.20.05 crore) on the procurement of this quantity, subsequently.

The Ministry stated (June 2001) that the Company had to make up the shortfall by entering into long-term contracts with Gulf suppliers @ US$ 210 PMT FOB. MMTC procured 6.55 MT of urea for shipment upto March 1996 when three foreign suppliers failed to supply 1.5 lakh MT of urea at US$ 199 C&F PMT. The reply of the Ministry overlooked the fact that the Company did not place order when two suppliers offered to sell urea at the rate of US$ 185 and US$ 190 PMT C&F as stated above.

3.1.6.5.3    The Company placed (15 July 1993) an order on M/s. Quadros International, Hong Kong (supplier) for supply of 25000 MT + 5 per cent of urea at a price of US$ 78 PMT FOB. In accordance with the contract, the vessel Jag Shakti was nominated by the Company/Transchart, which was accepted by the supplier. The said vessel arrived at Yuzhny port on 29 September 1993 and waited for the loading of cargo. The vessel had to incur demurrage of US$ 286640 for 44 days 10 hours and 18 minutes before cancelling of the fixture. The following amount was recoverable from the supplier due to non-performance of the contract.

The Company could not recover the above amount and went into arbitration. The arbitration award was given in favour of the Company on 10 October 1995 ex-parte and the same was made a ruling of the Court.

It was observed in Audit that the party was not in existence since beginning of the arbitration. Further, while entering into the contract, the Company did not verify the antecedents of the party. The case was also referred to the vigilance division in July 1997 when the alleged employees had either retired voluntarily or superannuated.

The Management stated (December 1999) that efforts had been made to locate the whereabouts of the supplier without any success.

The Ministry stated (June 2001) that the party had performed successfully four contracts earlier and this time only they could not perform and added that efforts were being made to locate whereabouts of the supplier. However, the fact remains that the party with whom the Company contracted was not an established one, which led to a loss of Rs.2.53 crore.

3.1.7.1    Loss due to failure to insure cargo

In 1995-96, the Company took a number of marine insurance policies for import of DAP/MOP cargos from different parts of the world to anywhere in India. As per the terms of the insurance policies, validity of the policies expired 60 days from the completion of discharge. During a test check of insurance claims, it was observed that the inland despatches were continued after expiry of 60 days. There were inland shortages and the Company lodged claims on the insurance company. The insurance company, however, repudiated the claims on the ground that the policies had expired before despatch to inland destinations. The Company neither despatched cargo within 60 days of completion of discharge nor extended the policies to cover despatches to inland destinations. Due to failure to extend the insurance cover for the cargos, the Company could not recover legitimate claims and lost Rs.2.36 crore.

The Management stated (September 1999) that all the claims with the insurance companies were being pursued. The reply of the Management is not to the point as it failed to state the reasons for not insuring the cargo after expiry of the period of despatch.

The Ministry stated (June 2001) that the claims for shortages were being pursued with the concerned insurance companies and some of the claims have already been settled. Simultaneously, they have initiated arbitration proceedings against the handling agent holding them responsible for all these shortages. Arbitration awards were awaited. Contention of the Ministry that some of the claims had already been settled is not tenable, as the Audit scrutiny revealed that evidence to prove receipt of any amount out of Rs.2.36 crore, in respect of which insurance cover was available could not be produced. The details of the parties held responsible for these shortages and claims under arbitration had not been supplied.

The Company entered (January 1995) into a contract with a processor viz. M/s. Trimurti Fertilisers Limited (TFL) for production of 49000 MT of SSP and 21000 MT of GSSP against supply of raw material (Rock Phosphate and Sulphur) by the Company. The total cost of the venture was more than Rs.20 crore.

Accordingly, the Company supplied raw material worth Rs.2.89 crore which was sufficient to manufacture 13275 MT of SSP and GSSP. At the time of entering into the contract, the processing company was a sick unit registered with BIFR. Against the above quantities, the processor could process only 6217 MT of finished product, which was substandard and there were various complaints from consumers as well as the Ministry of Agriculture. The Company disposed off 5623.5 MT in the domestic market by incurring a loss of Rs.1.10 crore. Further, the processor also did not return the remaining material (including bags) worth Rs.1.58 crore. It is interesting to note that no SPC approval was obtained even though the transaction was above Rs.5.00 crore. Thus, despite knowing the fact that the party was a sick Company, the Company entered into an agreement without the approval/concurrence of the SPC/Finance Division and also did not take any insurance cover to safeguard its interest and suffered a huge loss. Its funds were blocked to the turn of Rs.1.58 crore and it had to enter into litigation.

The Management stated (September 1999), inter-alia, that most of the companies had gone sick due to withdrawal of subsidy immediately after decontrol of phosphatic fertilisers in 1992. Further, they stated that supply of raw material against which finished products were available for export was found to be a commercially prudent venture, and that their claim was pending with BIFR/arbitration. The reply is not tenable, as the Audit observation was regarding the selection and entering into the arrangement with a sick Company.

The Ministry stated (June 2001) that though the total quantity required to manufacture the yearly quantity of 70000 MT was above Rs. 20 crore, stockpiling of such huge quantities of raw material/ finished goods was never the intention of the Company. The intention was to restrict the exposure by supplying minimum quantities required to meet MMTC’s export obligations. The value of raw material supplied had never exceeded Rs.2.88 crore, which was within the powers of the Director. No insurance of the stocks of raw material/finished goods was considered in view of the provisions in the agreement binding M/s. TFL responsible for the quality and quantity of the goods supplied. They were to give quantities of finished goods proportionate to the quantity of raw material supplied as per the norms fixed in the agreement. Arbitration award in this case had since been pronounced but a copy of the same was awaited. Further necessary action would be taken on receipt of the same. Reply of the Ministry overlooked the fact that being an unsecured creditor, it would not be able to recover the outstanding amount from a party that had reported itself to be a sick unit.

3.1.7.3    Credit sales and dishonoured cheques

The credit policy of the Company envisaged that it could offer secure credit at the prevailing interest rate with the approval of the competent authority. Security could be in the form of LCs (Letters of credit) or bank guarantees or banker’s certified cheques. Acceptance of post-dated cheques had also been banned by the Company from August 1992. In gross violation of these instructions, various ROs of the Company allowed fertiliser sales on credit basis by accepting post-dated cheques from various stockists/dealers. The Company received post-dated cheques amounting to Rs. 1.40 crore as part payment in liquidation of outstanding dues, which were dishonoured. Thereafter, the Company initiated criminal cases against the concerned parties. The Company could not recover its legitimate dues to the tune of Rs.1.40 crore besides loss of interest of approximately Rs.83.05 lakh thereon upto 31 March 2000 and also had to enter into avoidable litigation.

The Ministry stated (June 2001) that MMTC had to allow fertilisers sale on credit as per the practice prevailing in this trade. In most of the cases, the sales were made against payment of LCs, in few cases the sales were effected against post-dated cheques. Wherever such post-dated cheques were dishonoured suitable action has already been initiated against the party for recovery of amount. Contention of the Ministry is not tenable as approval of the competent authority viz. Board of Directors had not been obtained to extend unsecured credit sale to the private party. Further, receiving of postdated cheques had been prohibited by the Company in August 1992.

During the period November 1993 to June 1994, the Company entered into 3 contracts with M/s. G. Premji for purchase of 117000 MT of urea valuing US $ 15million. The Company obtained 3 performance guarantee bonds (PGBs) aggregating US$ 0.45 million. The Company was to recover/adjust US$ 0.32 million from the supplier on account of claims relating to quality deviation already deducted by the Ministry, load port demurrage, share of despatch earned in respect of these contracts. The Company decided (December 1994) to invoke PGBs to adjust their dues. However, on the request of the supplier, the Company extended the validity period of the PGBs instead of invoking the same and allowed the same to expire resulting in non-recovery of claims amounting to US$ 0.32 million (Rs.1.29 crore ).

The Management/Ministry did not offer any comments.

The Company imported 131865 MT of DAP during 1995-96 to 1997-98. Out of this, 122983.10 MT of DAP was despatched by rail/road using 2975423 HDPE bags against the requirement of 2582643 bags (As per norm of 21 bags per MT) for packing. This resulted in the excess consumption of 392780 bags costing Rs.44.23 lakh.

The Management stated (September 1999) that the HDPE bags were with the handling agents and arbitration proceedings were going on.

During the period from 1993-94 to 1998-99, 9 cases (Annexure-IX) relating to fertiliser transactions were referred to the vigilance division for investigation. Out of these, 3 cases were under various stages of investigation as on August 2001. Two cases were settled after imposing penalties on the employees as mentioned against each case in the Annexure. No action could be taken in respect of 2 cases as the alleged officials had retired by the time any action could be taken against them. Two cases were closed by the CBI.