PERIYAR FIBRES LIMITED

16th August, 1998. 10 A.M. The fifth -floor office of Mr Hemant Desai, Executive Director
of Periyar Fibre Industries Limited (PFL) located at Periyar Towers, M.G. Road, Cochin,
Kerala. Mr Desai was pacing up and down his modern posh and well-furnished office. His
countenance showed that he was lost in thought and that some uncomfortable thoughts were
on his mind. Mr Desai wondered as to what went wrong with the company. PFL which could
pay a dividend of 50% in 1994-1995 and 40% in 1995-1996 couldn’t pay any dividend for
1996-1997 and 1997-1998. There were no demand constraints. He also reflected on the
circumstances under which he was elevated as Executive Director from the position of
President (Operations) with effect from 12-05-1997 consequent to the Managing Director Dr.
Sathya Moorthy’s resignation from the company after a long and illustrious career. Dr.
Sathya Moorthy had to leave under highly controversial circumstances and at a time when the
company was going through the worst ever crisis since its incorporation on 22 nd August,
1957. The company had been engaging in a bloody battle with the Kerala State Pollution
Control Board, Central Pollution Control Board and the local people who were organised
under the banner of Periyar River Protection Joint Council (PRPJC), in the Kerala High Court
and the Supreme Court, on environment issues. It was also caught up with the demands of its
employees- represented by eight trade unions- for pay, perquisites and protection. Many
questions came to his mind. Was the company’s expansion strategy in tune with the
regulatory requirements? What should the company’s future growth strategy be in the face of
the crises that have engulfed the company?

BACKGROUND

Periyar Fibre Industries Limited was incorporated in August 1957 when a consortium of
textile mills in and around Palghat and Coimbatore decided to build a modern plant for
producing Viscose Staple Fibre (VSF), Viscose Filament Yarn (VFY) and Rayon Grade
Wood Pulp (RGWP) in South India to reduce the need for import of these materials. The
plant was built at Alwaye on the banks of river Periyar. Technical assistance and equity
participation were provide by M/s. Italviscosa Eastern trading SPA, an associate of M/s. Snia
Viscosa SPA, Milano, world leaders in man made fibre. The name of the company was
changed to “Periyar Fibres Limited” (PFL) in 1992.

In 1981, S.P. &Co.Ltd (a reputed construction company) and its associates acquired a
substantial stake in PFL and took over control of the management in 1983. Parvez Mistry, the
Chairman of S.P. & Co. Ltd. became the Chairman of PFL and still continues in the post.
Periyar Magcobar Lignins Limited, Periyar farm Chemicals Limited, Periyar Seeds and Agro
Products Limited, PAEC Boilers Limited, Borg-E=Sally Investments Limited, Heaven Valley
Finance Company Limited, Best Wishes Finance Company Limited, and Angel Finance
Company Limited are the subsidiary companies of PFL. The Modern Oils Division of the
PFL Group has set up an ultra-modern composite oil mill to produce oil from oil seeds of the
local agriculturists. The entire operation of crushing and refining is fully automated. PFL has
also set up an Agro Forestry and Biotechnology Division for developing alternate sources of

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wood for its viscose plants. PFL has also set up a 5 MW wind farm at Parassala, Kerala and
the power generated is utilised at its plants through the state grid.

INDUSTRY REVIEW

Viscose Staple Fibre: PFL and Grasim are the only two producers of VSF in India with
market shares of 17% and 83% respectively. The entry barriers to this industry are pretty high
compared to other industries. The entry barriers include very stringent environmental laws,
sophisticated technology, high capital costs, raw material constraints and economies of scale.
The prices are subjected to fluctuations on line with international prices.

Viscose Filament yarn: Out of the dominant seven players in the industry, three companies
Century Textiles, Indian Rayon and Kesoram Industries alone account for 60% of the total
capacity. Viscose Filament Yarn popularly known as ‘art silk’ is primarily used as a
substitute for silk. Demand and supply match in this segment.

Rayon Grade Wood Pulp: There are only four producers of RGWP in India. except A.P
Rayons all other players use their output for captive consumption. PFL alone has planned
additional capacity for its increased consumption. Though export of RGWP is restricted
import is allowed and as a result domestic prices move in line with international prices.

Products

The three principal products of the company are Viscose Staple Fibre (VSF), Viscose
Filament Yarn (VFY) and Rayon Grade Wood Pulp (RGWP). Sulphuric Acid, Carbon Di-
Sulphide and Anhydrous Sodium Sulphate are the other products. PFL also extracts vegetable
oil from sunflower seeds. The Group’s products range includes Chrome Lignosulphonates,
Calcium Lignosulphopnates, Sodium Lignosulphonates, Ammonium Lignosulphonates,
Ferrochrome Lignosulphonates Magnesium Lignosulphonates (from PMLL), Cereals, Pulses,
Fibre crops, Vegetables, Fruits, Flowers, Edible Oils and Plantation Crops (from PS & APL),
Benzene Hexachloride, Dimethoate raw material, Dimethoate formulation, Quinolphos
formulation, Monochrotophos formulation, Fenvalerate formulation and Endosulphan
formulation (fromPFCL), Packaged Fuel Tube Boilers, Waste heat Boilers, Hot Air
Generators, Pressure Wessels & Storage Tanks, Heavy Structurals & Sections, Air Receivers,
Autoclave Vessels, tubular Air Pre-Heaters, heat Exchangers and Incinerators (from
PAECL).

Performance highlights

The present capacities of the plant are 38,950 TPA, 7500 TPA, and 60000 TPA for VSF,
VFY and RGWP respectively. The installed capacity and actual production figures are given
in Exhibit 1.

The Company’s sales grew from Rs. 10,304 lakhs in 1988-89 to Rs. 42,134 lakhs in 1995-96
and then nose-dived to Rs. 29,780 lakhs in 1996-97 and Rs.29,780 lakhs in 1997-98. PFL’s

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net worth at Rs.3221 lakhs in 1988-89 rose to Rs.31691 lakhs in 1995-96, dipped to Rs.
28,527 lakhs in 1996-97 and slumped to Rs. 19,667 lakhs in 1997-98. The crippling effect of
the pollution control issue has started showing up on the company’s balance sheet. A highly
placed source in the company commented, “For the first time under the present guard the
company will be posting a net loss.” In the first half of 1996-97 the company’s gross sales
slipped from Rs. 38 crore to Rs. 1.46 crore. In 95-96 the company made a profit of Rs. 63
crore on sales of Rs.421 crore. Dr.Sathya Moorthy in an informal chat with a reporter from
the business publication, ‘Kerala Times’ said, “The failure of the northeast monsoon dried up
the water level of the Periyar river so much so that the government compelled the company to
cut its production to 50% of its capacity for four months of the financial year. At the same
time, input costs of wood, caustic soda and sulphur registered a rise of about 20-25%. All this
has affected the company’s bottom line severely.” Exhibits 2 and 3 Present a summary of the
operations and financial position over a ten-year period.

Environmental issues

Located on the banks of the Periyar in Alwaye, Kerala the company has traditionally been
emptying its coloured effluents in the river ever since it started production. In the past few
years, the weak monsoon and the consequent depletion of the river’s water level has focused
public attention on the aggravating pollution, evoking the ire of locals who use the river water
for drinking and daily ablutions.

Kerala State Pollution Control Bard (KSPCB) had never been happy with PFL. In 1995
KSPCB ordered the closure of PFL’s pulp plant vide closure order dated 09-05-1995 for non
compliance with pollution control norms issued by KSPCB. PFL questioned the closure order
before Kearala High Court by Writ Petition No. 7142 1n 1995. On 28-09 1995, Honourable
Mr. Justice Madhavan Nambiar quashed KSPCB’s closure order by stating that the order was
passed without application of mind. The judge observed that the company which had set up
an Effluent Treatment Plant (ETP) in 1983 should be given more time to modernise the ETP.
The KSPCB did not prefer an appeal against this order of the High Court. A source in the
KSPCB pointed out, “Since 1993 we have been asking the company to shut down the pulp
plant, to no avail. In response the management kept making promises but did not keep its
word. Finally we had to issue a closure notice. Instead of complying with our directives and
negotiating for acceptable operation procedures, the company has countered with legal
action.” However an organisation known as Periyar River Protection Joint Council (PRPJC),
representing local agriculturists, filed a writ appeal against the High court’s judgment.

Official sources attribute the genesis of the current impasse between the state government and
the company to PFL’s poor public relations. Forgetting the support enjoyed by the company
from locals, the company rather than employing the locals for desalting the surrounding
lagoons deployed mechanical assistance. The failure of the monsoon added fuel to the fire.

Many employees of the company believe that the roots of the crisis lie in the management’s
hasty cashing in on the market boom. An insider pointed out, “The company dramatically
increased production from 50 tonnes per day to 220 tonnes without much thought to the
environmental impact it would have. It did not bother to adequately upgrade its obsolete
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effluent treatment plant so that it could handle the increased effluent discharge.” The high
profile former managing director Dr. Moorthy didn’t give much importance to the green
lobby. In addition, one of the active members of the green lobby, Mr. Muthuswamy, became
the Environment Minister.

PFL had sought legal recourse to sort out the dispute with KSPCB when the government
stopped supply of power to the unit in 1996. The company got this order stayed by the High
Court after promising to install an advanced ETP. The management spent Rs 70 crore and
finally installed a Lindox reactor in 1996 for effluent treatment hoping that this would
persuade KSPCB to back down. As the company expressed displeasure over the way KSPCB
treated it, the Kerala High Court directed the Chennai-based King’s Institute to inspect the
company’s effluent treatment system.

The newly installed ETP from Linde of Germany using the ‘Lindon’ Oxygen Activated
Sludge Process (OASP) dramatically brought down effluent levels. The ETP brought down
Bio-chemical Oxygen Demand (BOD) from 110 milligram per litre to below 30mg per litre.
Similarly Chemical Oxygen Demand (COD) came down to 450 mg per litre from 630 mg per
litre. Though BOD and COD could be brought down, the colour alpha couldn’t be diluted
from the 1500 mark. This meant that the new ETP failed to conform to the stipulations laid
down by the Central Pollution Control Board (CPCB) and KSPCB. The judiciary’s patience
ran out and the company was given 16th January 1997 as a deadline for stopping all its
effluent discharge into the Periyar River. The company was asked to discharge the effluents
into the agricultural land instead. The deadline was extended by ten more days on the
management’s request. When this period elapsed the company was forced to shut down the
pulp plant. The ruling was a big set back for the company when it was gearing up for a Rs
1000 crore expansion project. PFL has so far not been able to find a satisfactory total effluent
solution for all its plants. A senior executive remarked, “We would have to go in for reverse
osmosis to get a complete approach to the problem. But our size cannot sustain such an
investment, which is more suited to the kinds of Cochin Refineries Limited.

On 16th April, 1997, the company chairman Mr. Mistry met and held talks with Environment
Minister and KSPCB officials in Trivandrum to find a solution to the problem. The company
then got an effluent evaluation done by the Natural Resources and Waste Recycling
Department of Madurai Kamaraj University. The evaluation report showed BOD level was
below 25mg per litre, COD level 200 mg per litre and no colour presence at all. The total
dissolved solids were reduced to an acceptable 1800 mg per litre. However the effluents still
contained sulphur and zinc above KSPCB norms. KSPCB didn’t relent, though the company
claimed that the norms set by KSPCB were very stringent. The company then promised to
install another Lindox treatment plant at a cost of Rs. 25 crore. The KSPCB then permitted
the company to resume operations of its VSF and VFY plants on a trial basis for four weeks
based on a Supreme Court order. The Supreme Court directed KSPCB to submit status report
on the test samples of the treated effluents by 25 th April 1997. The KSPCB complied with the
Court’s directive and submitted its report on 25th April 1997 wherein it stated that the
company had not fully adhered to the norms set by KSPCB.

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On 28th April, 1997 the Supreme Court directed KSPCB to give its views on an alternative
proposal submitted by PFL by 9th May 1997 before PFL’s Special Leave Petition came up for
hearing. The Court directed the company to comply with its action plan mentioned in the
alternative proposal. The action plan envisaged lowering of the three parameters (dissolved
solids, sulphate and zinc) in the treated effluent to acceptable levels as prescribed by the
authorities. A three member Technical Team was constituted to study the proposal made by
the company and give its views. Dr. Rajasekharan from Anna University, Chennai, Dr.
Sundaram and Dr Kalyanaraman from IIT, Chennai constituted the Technical Team.

The Technical Team analysed the proposal at length and suggested that the company might
be given permission to run its VSF and VFY plants subject to the implementation of the
action plan. However, on 9th May 1997, the Supreme Court refused to give PFL any
additional extension of temporary operation.

As a result the pulp plant remained closed throughout the year. VSF and VFY plants could
not be run till the end of July 1997. The loss due to the closure of the three plants works out
to be Rs 1.2 crore per day estimated But the Company succeeded in restarting both the plants
in the first week of August 1997 pursuant to Supreme Court’s directive, for a period of four
months with the concurrence of KSPCB. PFL was again permitted to run the two plants
except the pulp plant for a further period of four months from 24 th November, 1997 Finally at
the hearing held on 30th March, 1998 the Supreme Court disposed of the Special Leave
Petition in PFL’s favour allowing the company to run its VSF and VFY plants continuously.

Personnel and industrial relations

The company had strength of 3253 employees out of which 2800 are workers and 430 staff
and officers. There were eight unions in PFL. In 1994-95 the company signed a three year
agreement with the Unions for payment of a 49% bonus. The workmen resorted to an illegal
sit-in strike demanding bonus for 1996-97 and the company declared a lock-out on 27 th
October 1997. The lock-out was lifted on 12 th December, 1997 following conciliation by the
Government Labour Department. An agreement was signed with the unions for payment of
49.75% bonus in a phased manner. The Company’s request for laying-off workmen in the
wake of ongoing crisis related to environmental issues was rejected by the Join
Commissioner of Labour.

Modernisation Project

The pollution problems forced the company to scale down the allocation for its ambitious
expansion plans; the current outlay stands at Rs. 398 crore. A New VSF plant with 50 TPD
capacity has started operations. The thrust of the modernisation project is the containment of
pollution as per acceptable pollution control norms of the government. After litigation
spanning over a reasonable period of time the company has finally realized the importance of
setting up advanced effluent treatment plants to contain environmental pollution, rather than
wasting time and money on prolonged litigation endangering the profitability and future of

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the company, which could also facilitate PFL’s entry into the BIFR net and started work in all
earnestness to resolve the issue in the interest of all stake holders. The workers have agreed to
co-operate with the Management for technology up gradation and expansion. A proposal to
sell two estates of the company, Ambily and Rayon in Munnar, has been put up. Ambily
which covers 100 acres is under eucalyptus cultivation. Rayon has 70 acres under coffee and
eucalyptus cultivation. PFL’s intention behind the proposal is to avoid duplication of its agro-
forestry operations in Munnar and Alwaye. The company has also started a dialogue with
farmers in and around the plants for acquiring 2000 acres of land owned by farmers, which
the company requires, to discharge effluents as per the Supreme Court’s direction.

Exhibit 1

Installed Capacity, Actual Production, and Capacity Utilization

for 1994-95 to 1997-98

Installed Capacity (tones) As on 31-03-98 31-03-97 31-03-96 31-03-95

VSF 38950 38950 38950 38950
VFY 7500 7500 7500 6500
RGWP 60000 60000 60000 60000
Actual Production Tonnes Tonnes Tonnes Tonnes
VSF 14115 23364 31839 29764
VFY 3108 5013 6509 5790
RGWP 0 37632 50583 53623
Capacity Utilization % % % %
VSF 41.44 66.84 86.79 89.80
VFY 36.24 59.98 81.72 76.42
RGWP 0 62.72 84.31 89.37

Source: Annual Reports of 1994-95 to 1997-98

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 Exhibit 2

Financial Highlights: Summary of Operations (Rs. In Lakhs as on 31st March)

Summary 1997- 1996- 1995- 1994- 1993- 1992- 1992- 1991- 1989- 1988-
of 1998 1997 1996 1995 1994 1993 1991 1990 1990 1989
Operations
Sales 15645 29780 42134 40366 34257 29147 22147 13450 13266 10304
P/(L)BI&D -2152 2574 10942 8055 5623 4675 3656 2615 3574 2234
Interest 4576 3762 2526 2330 2292 1872 1631 718 321 164
P/(L)BD -6728 -1188 8416 5725 3331 2803 2025 1898 3253 2070
Depreciation 2132 1976 1336 1008 776 905 803 595 326 254
P/(L)BT -8860 -3164 7080 4717 2555 1898 1222 1302 2927 1816
Taxation - - 700 700 320 600 360 450 700 620
Pat/(L) -8860 -3164 6380 4017 2235 1298 862 852 2227 1196
Dividends - - 1382 1121 687 521 386 386 496 386
Retained - - 4998 2896 1548 777 476 466 1731
Earnings
DPES (Rs) - - 4.00 3.50 .00 4.00 3.50 3.50 4.50 3.50
EPS (Rs) - - 18.46 11.62 16.26 9.44 7.80 7.70 20.20 10.80

Source: Annual Reports of 1988-89 to 1997-98

Exhibit 3

Financial highlights: Financial details (Rs. In Lakhs as on 31st March)

Year end 1997- 1996- 1995- 1994- 1993- 1992- 1992- 1991- 1989- 1988-
Financial 1998 1997 1996 1995 1994 1993 1991 1990 1990 1989
Position
Gross Fixed 59773 57512 43811 29806 23910 19506 14994 13622 10447 7722
Assets
Net fixed Assets 44840 44691 32884 20202 15302 11624 7978 7404 4824 2417
Net Current and 13542 20771 25769 22254 11034 8768 9048 4227 2345 1530
Other Assets
Share Capital 3456 3456 3456 3456 1375 1375 1103 1103 1103 1103
Reserves and 16211 25071 28235 23301 8884 7337 4791 4316 3850 2118
Surplus
Net Worth 19667 28527 31691 26757 10259 8714 5894 5419 4953 3221
Loan Funds 38715 36935 26962 15699 16077 11680 11132 6212 2216 726
Capital 58382 65462 58653 42456 26336 20932 17026 11631 7169 3947
Employed

Source: Annual Reports of 1988-89 to 1997-98

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