Industry on the verge of Closure: A Case study of KSDL

by Contributed Papers | November 6, 2010 8:35 pm

TABLE OF CASES/STATUTES

TABLE OF CASES
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Balco Employees Union (Regd.) v. Union of India (2002) 2 SCC 333. Churk Cement Mazdoor Sangh, Churk v. State of U.P. AIR 1992 All l88. Excel Wear v. Union of India AIR 1979 SC 25. Fertilizer Corporation Kamgar Union v. Union of India [1981]I LLJ 193. Karnataka ITDC Hotels Officers Association v. Indian Tourism Development Corporation Ltd. [2002] II LLJ 193. Maharashtra General Kamgar Union v. State of Maharashtra 1986 Lab IC 921 S.V. Vasaikar v. Union of India MANU/MH/0058/2003. Southern Structurals Staff Union v. Management Of Southern Structurals Ltd. [1994] II LLJ 1243. Stump Schedule and Somappa Ltd. v. Union of India (1988) 2 Lab W 400. Vazir Glass Works Ltd. v. Maharashtra General Kamgar Union 1992 Lab IC 1337

TABLE OF STATUTES
1. Industrial Disputes Act, 1947. 2. Sick Industrial Companies Act, 1985.

CONSTITUTIONS
1. Constitution of India

Introduction The Karnataka Soaps and Detergents Limited, Bangalore was established in 1980[1]. KSDL is a wholly owned Public Sector Enterprise of the Government of Karnataka. It was initially set up with the objective of generating employment, utilising the natural resources and to increase economic growth. KSDL, mainly engaged in the manufacture of soaps, sandal oil, agarbatis and detergents became a success and its brands Mysore Sandal Soap and Sandal Oil have become a household name. In fact the current value of the brand name Mysore Sandal Soap is estimated to be in the region of Rs 500 crores[2]. Mysore Sandal Soap has a market share of about 17% in south India and about 8% on an all India basis. Some of the other products

manufactured by KSDL are Mysore Sandal Gold Soap, Mysore Sandal Baby Powder, Mysore Sandal Talcum Powder, Mysore Dish Bar and Baby Soap. KSDL has the largest single plant under one roof for manufacture of soaps and detergents and the machinery for the finishing lines have been imported from Italy. KSDL also has two sandalwood extraction units at Mysore and Shimoga which have a capacity of 144 MT of oil extraction capacity[3]. Unfortunately the KSDL plant at Shimoga has shut down owing to shortages in availability of sandalwood and is now mainly used as a godown[4]. The Company was incurring losses continuously since its inception till 1993-94 when the accumulated losses stood at Rs 99 crores. However, from 1994-95 onwards as a result of a rehabilitation package approved by the Board of Industrial and Financial Reconstruction (BIFR) which had extended substantial relief and concessions viz. supply of sandalwood at concessional rates, deferment of sales tax payable by the company etc. the carried forward losses were wiped out. KSDL had become sick under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 and came before BIFR[5]. Recently the company submitted before BIFR that it has been continuously earning profits for the last nine years and its net worth has become positive since 1998-99 with all its external commitments having been fully met. As there is no provision for deregistration of a company after it has turned its net worth positive there may be no need for the BIFR to de-register the company and declare it out of its purview[6]. Thus for all practical purposes KSDL today is out of the purview of BIFR and in fact it has been making profits consistently for the last few years and in the year 2002-2003 it reported a profit of Rs 1.5 crores[7]. In fact according to Mr.P Ravi, Deputy Manager (Costing) KSDL has cash deposits of Rs 13 crores in banks all over the country. Though the above mentioned facts may paint a very rosy picture and portray KSDL as a company which has turned its fortunes around and is on the way to bigger things all is not well. The Government of Karnataka on the basis of the recommendations of the Padmanabha Committee on Public Sector Restructuring has decided to privatise KSDL and retain only 26% stake in the company. The basic rational for privatising KSDL is that the government feels that soap making is not a priority sector for the government and the government should not waste its time and money in running a unit that can be better and more profitably run by private enterprise. The workmen of KSDL have however taken a very pessimistic view of the Governments decision to privatise the company. They feel that the company is on the verge of closure as the Government is disinterested in the future of the company. They also fear that privatisation will lead to massive job losses and reduction in salaries and thus strongly oppose the move towards privatisation. Some people within the company feel that the profits in recent years do not present a very accurate picture of the financial position of the company as these profits have been earned owing to BIFR concessions and as these concessions are no longer available and with the company suffering from shortage of sandalwood supply the company is all set to plunge into the red again which may prove to be fatal to the life of the company[8]. The question that arises now is whether KSDL is actually on the verge of closure or will disinvestment and privatisation actually take place successfully and give KSDL a new lease of life. The project seeks to answer this question and also explores the options available to the workers of KSDL currently and as to what their future course of action should be. Apart from this the project also deals with disinvestment and exit policy issues in relation to KSDL and analyses the financial viability of the company. The crux of the project however is to explore the rights and interests of the workers in the current scenario at KSDL and to determine the best options that should be exercised by them in order to ensure protection of their interests and a secure future.

Research Methodology The Group chose the topic industry on the verge of closure: a case study of ksdl Course. In this research assignment, we faced many challenges: 1. They were both in nature of conceptual questions and basic understandings of the socio-legal and socio-economic issues involved. 2. It also involved doing quite a bit of fieldwork mainly interviewing senior officials and union leaders of the company. 3. The entire focus of the project from the very beginning has been to try and see the issues from the labour (as against management) point of view. This is because it is the workmen who usually bear the brunt of changes in status of enterprises from public to private, and also because of the nature of our course. 4. The issues attached to lay-offs and retrenchment become especially important in times like these, especially because workmen do not have a social or moral safety-net in India as they do in most industrialised nations of the West. 5. Furthermore, disinvestment and privatisation are hot and controversial issues at the best of times and these are more than ordinary times as there is tremendous upheaval in the public sector and the central and state governments are keen to carry out some big-ticket disinvestment involving major (and mostly profitable) concerns. Our effort has been not to generalize the issues involved in the research assignment, but rather to give specific instances and a contextual understanding of the issues. 1. We have been careful as not to make broad assumptions that come from a general idea of social issues. There is a certain tendency in certain sections of global society today to see disinvestment as government abdicating its socio-economic responsibilities at the cost of unjust enrichment of the capitalists. This view is at times borne out by events in many of the erstwhile Soviet states and Eastern Europe, which are other so-called transitional economies. However, before undertaking this project, we tried not to begin with such a presumption. This is because we were aware that our general understanding might fall short when we undertook actual research. 2. It is for this reason that we decided to approach the project through a case study method and in this approach we were guided by Prof. Babu Mathew who had an intimate understanding of the whole case. We have concentrated almost entirely on the specific facts and circumstances surrounding the KSDL disinvestment and have not delved too deeply in other contentious cases. 3. Furthermore, we have decided not to go too deeply into case law and judicial precedent due to primarily two reasons. Firstly, there have been very few cases like the present one that have actually seen a final resolution. Secondly, we felt that the present situation was unique because of all the PSEs listed by the Karnataka Government, KSDL was the only one making a profit. A valid question then arises is whether the government was justified in hurrying through the disinvestment and what were its reasons. 4. One limitation of this project assignment was that our fieldwork was concentrated on people and officials directly related to KSDL and did not encompass others. We felt that we had gleaned sufficient amounts of information through the very forthcoming aid of Mr. Mohan (Deputy Manager HR), Mr. P. Ravi (Deputy Manager Costing), and Mr. Prathapan (General-Secretary). 5. One significant aspect of the project was the shift that we had to undergo in our focus and orientation when we discovered that the company, which had been in a limbo for a long period, had finally been listed for privatisation and not for closure.

Field Work
1. Our location for fieldwork was the KSDL Bangalore Factory located on Bangalore-Pune Highway, Rajajinagar. 2. Our group undertook a total of four visits, together and separately. 3. First trip was undertaken on /08/03 accompanied with an introductory letter from Prof. Babu Mathew to Mr. Mohan. Mr. Mohan, once he had ascertained our bonafides was most gracious in receiving us and answering our numerous questions. Not only did he personally answer our questions, but he also facilitated our meeting with Mr. P. Ravi, who he said would be able to better guide us on the costs and accounts issues. 4. Mr. P. Ravi also welcomed us and started to regale us not only with facts and figures but informative and entertaining anecdotes about the company and its products. Then he was called away for an urgent meeting with the General Manager Finance, and asked to be excused. So we also took our leave. 5. We visited the factory two days later and asked him for copies of the balance sheets and other account books but he seemed quite reluctant do so. However, he did give us permission to peruse the books at the factory itself. Due to lack of time, we were unable to take this opportunity. 6. On 11/08/03, we visited the factory for the third time hoping to have a detailed look at the books of accounts. In spite of having called earlier and fixing up an appointment, we were unable to meet with Mr. Ravi or look at the books of accounts. We decided to see if Mr. Prathapan was available at such short notice. Fortunately, he was within the main office building itself and we took the opportunity to question him about the labour perspective of the whole KSDL case. On that day, he promised to give us the books of accounts and certain other documents available from the AITUC office, the next time we visited. 7. Two of our number visited the factory the next day to collect the promised documents and took the opportunity to ask him some more questions about the sandalwood controversy. Our sources of data were both primary and secondary. The primary sources included interviews with the above-mentioned officials, the books of accounts of KSDL, cases and legislation. The secondary sources included the Internet, books and articles from the NLSIU library, and certain studies conducted by the labour unions. The Disinvestment Option Historically, public sector undertakings (PSUs) have played an important part in the development of the Indian industry. At the time of independence, it was felt that political independence without economic selfreliance would be detrimental to the countrys sovereignty and autonomy in policy-making. However, the public sector had overgrown itself and shortcomings started manifesting themselves, such as low capacity utilization and low efficiency due to over manning and low work ethics, over capitalization due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large political and bureaucratic interference in decision making process etc.[9] The concept of privatization evolved as a response to these shortcomings of PSUs. The trend towards privatization has a two fold aim: first, to shrink the size of the public sector, and second, to shift the production of public goods and services from the public to the private sector.[10]

Primary Objectives of Privatization

As per the Department of Disinvestment[11], the primary objectives for privatizing the PSUs are as follows:

Releasing large amount of public resources locked up in non-strategic PSUs, for redeployment in areas that are much higher on the social priority, such as, basic health, family welfare, primary education and social and essential infrastructure. Stemming further outflow of scarce public resources for sustaining the unviable non-strategic PSUs. Reducing the public debt that is threatening to assume unmanageable proportions. Transferring the commercial risk, to which the taxpayers money locked up in the public sector is exposed, to the private sector wherever the private sector is willing and able to step in. Releasing other tangible and intangible resources, such as, large manpower currently locked up in managing the PSUs, and their time and energy, for redeployment in high priority social sectors that are short of such resources. Disinvestment should result in wider distribution of wealth through offering of shares of privatized companies to small investors and employees. Opening up the public sector to appropriate private investment would increase economic activity and have an overall beneficial effect on the economy, employment and tax revenues in the medium to long term.

The Process of Disinvestment

In order to carry out the disinvestment of a PSU, the following process has to be followed by the government: [12] Proposals for disinvestments in any PSU, based on the recommendations of the Disinvestment Commission, are placed for consideration of the Cabinet Committee on Disinvestment. After it clears the disinvestment proposal, selection of the Advisor is done through a competitive bidding process. Then the draft share purchase agreement and the shareholder agreement are prepared by the Advisor with the help of the legal Advisors, and the final draft is prepared after detailed consultation with the bidders, in consultation with an Inter-Ministerial Group. The prospective bidders hold discussions with the Advisor, the Government and the representatives of the PSU for any clarifications. Concurrently, the task of valuation of the PSU is undertaken in accordance with the standard national and international practices. The Share Purchase Agreement and Shareholders Agreement are sent to the prospective bidders for inviting their final binding financial bids. The bids are sealed after receipt, in presence of bidders. The upset price determination exercise is thereafter completed by IMG. The sealed bids are then opened by IMG, in presence of bidders and compared with the Upset Price. After examination, analysis and evaluation, the recommendations of the Inter Ministerial Group are placed before the Cabinet Committee on Disinvestment for a final decision regarding selection of the strategic partner, signing of the Share Purchase Agreement and Shareholders Agreement, and other related issues. In case the disinvested PSUs shares are listed on the Stock Exchange, an open offer would be required to be made by the bidder before closing the transaction, as per SEBI guidelines. After the transaction is completed, all papers and documents relating to it are turned over to the CAG of India; the CAG prepares an evaluation for sending to Parliament and releasing to the public. The money, which is raised through disinvestments, goes into the Consolidated Fund of India, and is used for future public purposes. The money may also be used for the development of those PSUs, which have a possibility of being turned around. A part of it is utilized to settle retrenched labour of closed PSUs.[13]

Labour and Disinvestment Some Judicial Pronouncements

In this whole process of disinvestment, it is also necessary to consider the viewpoint of the employees who hold the opinion that disinvestment leads to a breach of agreement between the employees and the Government.[14] They also argue that it takes away the protection that they enjoyed under Article 14 and creates uncertainty because of the lack of security of tenure. On the other hand the Disinvestment ministry asserts that employee participation and protection of employee interests is a key concern of the disinvestment process and the practice of reserving a portion of the equity to be disinvested for allocation to employees, at concessional prices, has been adopted in a number of cases.[15] The most important case related to the topic has been the case of Balco Employees Union (Regd.) v. Union of India[16]. In this case, 51% of the shares of Bharat Aluminum Company were to be sold to Sterlite Industries. The sale agreement comprised of some safeguards for the employees of the company. These included provisions such as no retrenchment for a period of one year following the sale; the voluntary retirement scheme was not to be less favourable than the current one in place, etc. However, the employees of BALCO resisted the sale on the grounds that they were not consulted when crucial decisions were taken such as choice of buyer, terms of sale agreement, quantum of shares to be sold, etc. This was a violation of the rules of natural justice. Their second main contention was that if the company passed into private hands, the employees would lose the protection accorded under articles 14, 16 and 21, as well as the right to approach the High Court and Supreme Court directly without having to go through the adjudication mechanism laid down by the Industrial Disputes Act. However, the Supreme Court rejected both the contentions of the employees and held that going into the merits of the economic policy of the government is beyond the scope of the judiciary, and as such, the disinvestment policy cannot be challenged. The Court stated that it was not within the powers of the judiciary to comment upon the policy issues decided by the government. It also stated that the employees are not guaranteed the continued protection of articles 21, 14 and 16 once they enter government service. Such protection is not granted to them in perpetuity. They cannot therefore challenge the deprivation of such protection. The court gave the example of the abolition of a post to qualify the above statement. Finally, the Supreme Court ruled that non-consultation of the employees on crucial decisions regarding disinvestment is not a violation of the principles of natural justice. The employees are not entitled to be consulted in this matter, and there is no principle of natural justice that requires that the government do so. There are some other cases that deal with the issue of rights of PSU employees and disinvestment as well. In the case of Southern Structurals Staff Union v. Management Of Southern Structurals Ltd.[17], the issue raised was whether the State can be compelled not to disinvest from a Government company at the instance of the employees of the company either on the ground that the industrial unit though presently sick is capable of being made viable with the aid of further substantial investments by the State, or on the ground that such disinvestment would deprive the employees of the rights conferred by Articles 14 and 16 or of the right to approach this court under Article 226 or the Supreme Court under Article 32. The company had been making losses continuously since 1971 and in 1991, the company was referred to the BIFR. In this background the Madras High Court held the Government decision to disinvest from the company and thereby shed this burden on the State exchequer was eminently reasonable and certainly not malafide or arbitrary. It said that employment under the State is not a precondition for approaching the High Court or the Supreme

Court. All industrial workers have a right to approach the Labour Court or Industrial Tribunals. The decisions rendered by the Civil, Labour and Industrial Courts or Tribunals are open to challenge before the High Court and the Supreme Court in appropriate proceedings. The Court went on to emphasize that the employees have no vested right in the employer company continuing to be a Government company or other authority for the purpose of Article 12 of the Constitution of India. They cannot claim any right to decide as to who should own the shares of the company. The State, which invested of its own volition, can of its own volition also disinvest. The status so conferred on the employees by being employed by a Government company or other authority under Article 12 of the Constitution does not prevent the Government from disinvesting. It was also argued by the workers that they are likely to suffer diminished emoluments or loss of employment altogether in the event of disinvestment and, therefore, the proposed disinvestment is violative of Article 19(1) (g) of the Constitution. The Court relied upon the case Fertilizer Corporation Kamgar Union v. Union of India[18] and said that the right to pursue a calling or to carry on an occupation is not the same thing as the right to work in a particular post under a contract of employment. If the workers are retrenched consequent upon and on account of the sale, it will be open to them to pursue their rights and remedies under the industrial laws. The rights of the petitioner to work as industrial workers in any other industry is not in any way affected even if the company or the industry is closed. So Article 19 (1) (g) is not violated. In the case of Churk Cement Mazdoor Sangh, Churk v. State of U.P.[19], a two judge bench of the Allahabad High Court was called upon to decide upon the validity and legality of the sale by Government of U. P. of 51% shares in a wholly Government owned public sector Corporation, U. P. State Cement Corporation Ltd. (UPSCCL) in favour of Dalmia Industries. The actual production of UPSCCL had been far below national average of cement factories. Around 7,000 workers were employed by UPSCCL. Dalmia Industries agreed to take over the labour on an as is where is basis and after taking over the management was to decide on the future course of action. But further recruitment for the next 4-5 years would be stopped to take care of the problem of surplus labour. The petitioners assailed the process of disinvestment as arbitrary and unfair and violative of Article 14. The Court rejected this contention. Further the Court held that the employees of the Corporation were not Government employees and did not have the protection of Article 311 of the Constitution. They had no right to challenge the policy decision of the Government to privatize the Corporation or to enter into a joint sector agreement. The rights and privileges of the workers of the Corporation were not affected in any manner by the agreement entered into between the Government and Dalmia Industries. No basis existed for any apprehension in the minds of the workers and employees of the Corporation regarding their service conditions. It was contended by the employees that privatization of public sector concerns, whether total or partial, should be contrary to the Directive principles contained in Part IV in particular, Clauses (b) and (c) of Article 39. However the court rejected the argument on the ground that it was in public interest to disinvest the company considering its poor performance and losses. The Court said that public interest was the paramount consideration. If the Government decided to disinvest in public interest, that decision should be respected. The Court observed that the Government was only privatizing those public sector Corporations which had been consistently incurring losses and where substantial fresh investment was required, which the Government was not in a position to spare. In the case of Karnataka ITDC Hotels Officers Association v. Indian Tourism Development Corporation Ltd.[20], the Karnataka High Court was moved to strike down the privatization agreement, wherein it was agreed that no employee would be retrenched for a period of one year only. The petitioners assailed the decision to disinvest the Corporation as being arbitrary in terms of Articles 14, 16(i), 21 and 39(a) of the Constitution. Facts revealed that the Government took a policy decision on disinvestment of the

Corporation in the light of its dismal performance. The petitioners did not challenge the policy decision as such, but the Court still went in to the question of what would happen if they had indeed challenged the policy decision as laid down that the appropriate forum for testing the correctness of a policy is the Parliament and not the Courts. The workmen complained of no consent and no hearing in the matters relating to disinvestment. On this issue, the Court quoted the BALCO case Merely because the workmen may have protection of Articles 14 and 16 of the Constitution, by regarding BALCO as a State, it does not mean that the erstwhile sole shareholder viz., Government had to give the workers prior notice of hearing before deciding to disinvest. There is no principle of natural justice which requires prior notice and hearing to persons who are generally affected as a class by an economic policy decision of the Government. Further the Court laid down that the policy of disinvestment cannot be faulted if as a result of it the employees lose their rights or protection under Articles 14 and 16 of the Constitution. So the existence of rights or protection under Articles 14 and 16 of the Constitution cannot affect the Governments right to disinvest. The Court went on to say that the employees have no vested right in the employer company continuing to be a Government company or other authority for the purposes of Article 12 of the Constitution of India. In the case of S.V. Vasaikar v. Union of India[21], a the Bombay High Court decided that even a government servant, having the protection of not only Articles 14 and 16 of the Constitution but also of Article 311, had no absolute right to remain in service. Thus non-government employees of the public sector cannot claim a superior or a better right than a government servant and impugn the change of status of their company. From the above decisions, it is clear that the judiciary is firmly of the opinion that disinvestment is in favour of public interest and that there is no right that the employees have in determining the fate of the company by which they are employed. One case of disinvestment that seems to be similar to that of the KSDL scenario seems to be that of the National Aluminum Company (NALCO). NALCO is a highly profitable PSE situated in Orissa, which the Department of Disinvestment has scheduled for privatization through both strategic sale and sale of equity through ADRs and on the stock markets. It has no debt and has paid a dividend to the government for the last eight years.[22] Despite opposition from the every quarter over its sale, the Department proposes to go ahead with the sale, claiming that profitability of the company does not reflect its efficiency, and that within five years time, the company will face rising costs, as it will face a shortage of low cost bauxite, the chief raw material. The second proposition is somewhat faulty, especially since the mines run by NALCO are said to have enough bauxite to run the factory for 75-100 years at present consumption levels.[23] Thus, there is widespread concern and suspicion about the motives of the disinvestment ministry in pushing through the NALCO privatization.

Disinvestment Policy in Karnataka

Karnataka has 76 State Level Public Enterprises and Statutory Corporations. The total investment on the Public Sector Enterprises in the state, existing as on 31st March 2000 was to the tune of Rs. 19,295 Crores. Of the 76 SLPEs, 37 are reportedly loss making, whereas 13 are termed non-working (12 under liquidation and 1 in the process of merger). Of these, 19 PSUs, with accumulated losses of Rs. 811 Crores have been identified for disinvestment.[24] The total government investment in the 57 working PSEs was Rs.16,323.04 Crores, an increase of over Rs. 6000 Crores over the previous year. As on 31 March 2001, the total investment in 13 non-working Government companies was Rs.77.9 Crores.[25]

Annexure 1 to the government order no DPAR (BPE) 23 ARU 1996 VOL II, Dated 06.02.2001, identifies the aim and purposes behind Karnatakas initiative to disinvestment in the public sector. The order states that the rapid expansion in the number of variety of Public Sector Enterprise in the state, sometimes without sufficient socio- economic justification or adequate financial, technical and managerial resources to back them up, has led to a situation where many became sick in short span of time. Since then there has been a major change in the economic scenario, the circumstances and the considerations which provided the initial justification for the setting up of the public sector units have been distorted or have disappeared. According to the Karnataka Government order, the new policy of liberalization which envisages an increasingly larger role for the private sector and limits the role of state only in essential matters of state concern, has led to the need to such a need to evaluate the PSEs in terms of productivity and parameters, and so as to evaluate the performance of the PSEs to determine their utility or need for retention as Public Sector Enterprises. According to one of the officers interviewed at KSDL, the government position was described saying that in the soap and detergents industry, there already exist a large no of private players, who provide good quality of products at a reasonable price. In such an industry, he felt, there was no need for the state government to exists, as this was not consistent with the role of the state and neither was the soap industry relevant to the traditional role of the state. In August 1998, a committee was set up under the Chairmanship of the then Chief Secretary to review the functioning of the state pubic enterprises. In its report, the committee recommended that 5 of the states PSEs be privatized, 15 be liquidated, four merged with other similar companies and management in the remaining be rationalized. In September 1990, the state government constituted a Cabinet Sub-Committee to review the recommendations of the Committee on Public Enterprises. The sub-committee came to the conclusion that those public enterprises, which were not serving any useful purpose and were suffering losses should be wound up. The Government of Karnataka also came up with a Policy on Public Enterprises Reform and Privatization. The main elements of the policy are as follows: The PSEs whose activities are commercial in nature or which produce consumer goods and in which there is a strong private sector presence would be restructured through privatization or closure. No further infusion of funds from state budgetary resources would be made in such PSEs for the purposes of modernization, expansion or taking up new activities. The PSEs not involved in commercial activities would be restructured by induction of strategic partners or other appropriate systems of management, including mergers and reorganization, so as to eliminate the dependences on the budgetary support of the Government. In cases where joint partners are inducted the management role of the state would be minimal and restrict to specific crucial areas to safeguard the interest of the state and to prevent speculative activities. Minimisation of duplication of activities between PSEs, Government Agencies and co-operatives by a suitable process of rationalization. The improvement of the efficiency of the PSEs providing utilities to be achieved by means of necessary regulatory authorities, with the object of providing quality services to the customers at economic and reasonable prices. No New PSEs to be established with the rare exception of appropriate institutional mechanisms for the expeditious execution of specific major projects relating to development of infrastructure. Rationalisation of employment is PSEs to be ensured through implementation of schemes relating to

voluntary retirement and possible redeployment among PSEs, with adequate measures to safe guard the interest of workers, with the development of suitable mechanism of social safety net. Suitable measures to be taken to mitigate environmental aspects, particularly in cases of PSEs identified for privatization or closure so that the process are environmentally sound. Guidelines to be developed for environment liability assessment and remediation. The net proceeds realised form privatization or closure to be used on infrastructural development, rural development and welfare development. March 2005 was set as the deadline for the implementation of the policy. The first phase of the policy, which required the privatisation or closure of up to ten PSEs, was to be implemented by March 2002. For this purposes 15 PSEs were identified with Karnataka Soap and Detergent Limited being one of them. By the end of March 2003 the government had planned to privatise or close ten additional PSEs, while the remaining PSEs were to be covered in a period ending March 2005. For the first phase of privatisation and closure, which included KSDL, those PSEs had been identified which no longer serve any public purpose or were a big drain on the exchequer.

Disinvestment of KSDL
Till date, no steps have been taken towards disinvestment in KSDL, apart from the offer of VRS to workers, and the appointment of a consultant to aid and oversee the restructuring of the company.[26] However, KSDL had been referred to the Public Sector Restructuring Commission for its recommendations. The initial set of recommendations made by Commission was taken without having consultation with the employees. Such consultations are desired by the policy paper prepared by the Karnataka Government. Therefore a High Powered Committee, to whom the commissions views were referred, requested the commission, to also take into accounts the views of the employees. At that time, the main demands and concerns of the labour representatives, according to Mr. Pratapan, were that the Government should retain the overall management control of the company and that the workers be offered certain percentage of shares at a concessional and reasonable price under Employees Stock Purchase Scheme. They also wanted the government to assure the protection and safeguarding of assets of the company and its brand name, while keeping the workers interest in mind. The officers association, whose interests seemed to have coincided with those of the workers, took the stand that as the company was making profits, the government should retain the control of the company. Moreover, the government should make arrangements for adequate supply of sandalwood at a subsidized rate. The association pointed out that all the loans from the financial institutions having been repaid and that the previous losses almost completely wiped out, the company was now financially sound, and that if adequate supply of sandalwood at a subsidized cost can be ensured to the company, the company would continue to ensure good returns. The Commission pointed out that the profits of the company were based on the fact that the Government supplied sandalwood to the company at concessional rates, making the profit an artificial one. Without going into reasons, the Commission stated that it would be unreasonable for such a supply to continue. The commission further stated that due to the nature of the industry, huge investments for advertising would have to be made and such investments by the government were not feasible. The Commission further argued that with the company working at best to fifty percent of its capacity it would be better if privatization occurs while the company still earns profit. It also saw no reason how employee interests would be affected under a new management. The Commission took the view that a strong, professional strategic partner, could only be found, if such a partner had the control over the company and

therefore it recommended that the Government of Karnataka retain only 26% of share, the strategic partner 72% and the employees 2%. To protect the interest of the workers, the commission recommended that the MOU entered into between the Government and the strategic partner stipulate that for a period of one year no employee would be retrenched. During such period services of professional manpower experts be utilized to determine the excess of employees. It seems clear that the commission saw it necessary for the Government to privatize KSDL. This seems to be in line with the stated position of the Karnataka Government with respect to its intention from withdrawing from consumer areas, under the new economic situation. At the same time VRS has seem to have emerged as an attractive option for the government to protect both the workers interest and streamline the issues relating to excess employees. In the course of fieldwork, the officers of KSDL, primarily Mr. P. Ravi (Deputy Manager, Costing) expressed the view that KSDL could be operated as a viable going concern, simply by increasing the research input and publicity expenditure for the company. It was his feeling that better publicity of the companys products would lead to an increase of turnover, thus securing its future. Mr. Pratapan, the President of the AITUC at KSDL, stated that the workers were now resigned to the fact that the government would privatize the company and that the workers were waiting for a better VRS package to avail of. However, he also expressed concerns that the government may be planning to shut down the company, as was done to Mysore Lamps. The demands of the workers currently, as outlined by Mr. Pratapan, are that they want job security and salary protection, in case the company is privatized. He said that the working conditions were very good and the relationship between the management and labourers was cordial, with no strikes resorted in some time. On the question of workers participation in the management of the company, or formation of a cooperative society to hold the company, he said that it might be a viable solution and beneficial for the company, but the workers were not interested. It was his stand that they would rather take a good VRS package and leave the company. EXIT POLICY- A WIN-WIN SITUATION ? The recommendations of the Second Labour Commission have also been made public, which say among other things that steps should be taken to check the multiplicity of trade unions, number of holidays be reduced and employers be empowered to lay off and retrench the employees without prior permission. It appears that the consensus in the Government is also coming round to amend the labour laws so as to pave the way for hire and fire policy and introduction of contractual system of employment[27]. What is, however, most important for the Government is to take the general public of the country into confidence that in the wake of globalization and new labour laws the employment opportunities will not be reduced. The Second Labour Commission has suggested that the employers or factories employing more than 100 workers should have the freedom to downsize or restructure their activities as per their requirement[28]. An e-mail was sent to Mr Sajja Narayanan, Member, Labour Law Commission who was the sole dissenting member soliciting his comments regarding the status of the exit policy in India. A phone call was then made regarding the same and he promised to reply a soon as possible.

Rajendra Verma Commission

The Commission also says changes in labour laws must be accompanied by a well-defined social security package that would benefit workers, whether in organised or unorganised sectors[29]. It has talked of an umbrella-type of law for unorganised sector, with State laws for different sub-sectors, all incorporating core rights and ILO standards. What has proved highly controversial so far and unacceptable to the trade union movement has been the privatisation drive and the proposed changes in the industrial relations law to provide

for easy retrenchment and lay-offs, no doubt with fair compensation. It is here that the Commission, rather surprisingly, has gone almost the whole length with the reformers, though it says it has tried to strike a fine balance between proponents of an unfettered exit policy and opponents of any change in the present system of industrial relations and disputes settlement[30]. Predictably, the Left-led trade union organisations have dubbed the report anti-labour. Recognising that all economic activities have been subjected to market pressures, compelling employers to make a different type of adjustment, including the size of the labour force, it straightaway recommends that prior permission is not necessary in the case of layoffs and retrenchment in an establishment of any size. Workers will be entitled to two months notice or notice pay in lieu of notice in case of retrenchment. In case of establishments employing 300 or more workers, where layoffs exceed one month, they would be required to obtain post-facto approval of the appropriate government[31]. For closures, of course, prior permission as at present is retained. The compensation suggested is 30 days pay for every completed year of service in the case of closure of a sick industry with losses for three consecutive years and 45 days for retrenchment by a sick industry or body where retrenchment is done with a view to become viable[32]. It will be higher at the rate of 60 days wages or every completed year of service for retrenchment and 45 days for closure in profit-making organisations. All dues of the workers should be settled first as a pre-condition under retrenchment. These provisions would not bar an industrial dispute being raised against lay-offs, retrenchment or closure. The Commission feels its scheme is an improvement on Governments intended proposal to exempt establishments employing less than 1,000 persons from seeking prior approval for layoffs, retrenchment or closure. It has increased the rate of compensation and provided for consultations with representatives of workers without giving the latter a right to veto, judicial review by labour relations commission in case of dispute, and obligatory purchase by employers of insurance cover for employees. The role of the public sector, which is diminishing, remains a major issue of contention. The Commission is not opposed to disinvestments but says it is at present related to financial targets without emphasis on promoting efficiency, dispersal of ownership and extending quality and benefit to the consumer. It has cited the resource generation of Rs 2,40,000 crore by public enterprises during the l990s which, it said, was more than double the government investment at the end of 2000[33]. Yet, one hardly finds the Commission providing a roadmap for the public sector or employment generation, even if these are strictly outside the terms of reference. A report taking a holistic view of Indias labour scene would be lopsided if it appeared at the end of it all to be pointing the way for relatively less painful ways of retrenchment and closure in the midst of massive unemployment. The fear and insecurity of losing a job is understandable but at the same time it is also necessary to know that the existing legislation has proved to be thoroughly inadequate either to generate more employment or more productivity[34]. However, it is the duty of any responsible government or society to take care of all those who are contributing their might in strengthening the economy of the country. It will be unwise and unadvisable to keep the working force in lurch or high and dry, when the entrepreneurs find it difficult to pull on with the existing strength of workers. Enough precaution has to be taken so as to curb and control the misuse of the proposed changes in the labour laws.

Laissez Faire Theory

Complete laissez faire means the absolute non-interference of the Government between employers and employees[35]. The logic behind this theory is that the employment is a contract between two parties and if one party is renegading from the contract, then the doors of Courts should be left open to either party but no

extraneous precondition should be imposed on any party. This theory appears to be innocuous and appealing to all those who are unaware of the socio-economic conditions prevailing in India. The problem is that any such demand in a country like India, accustomed to the socialistic pattern of society having heavy dependence on the State, is looked at with considerable doubt or suspicion. This is perhaps one of the reasons that, in spite of the current liberalization and globalization sweeping across the country[36], the labour laws could not be changed or amended in the last more than two decades. Even the idea of changing the labour laws is met with loud noise and vehement opposition. This must be seen in the light of prevailing uncertainty and next-to-nil preparation in changing the mental wake-up of the people with the sound and convincing logic, the main reason being the established populist nature of the polity in India. Any kind of economic logic is sacrificed at the altar of possible success in the elections. The people need to be convinced that amendments are urgently needed to generate more employment and psychological confidence among the employer to open-up new industries. At present the restrictions of labour laws are so harsh and so many that even a die-hard and famed industrialist is balked from starting new ventures. On the other hand, the other section says that the fear and insecurity of losing a job is understandable. However, its remedy is not job protectionist legislation that effectively underwrites lifetime employment. One possible solution is a social security system with unemployment benefits for the jobless. This is where the exit policy can play a decisive role in keeping both sides happy[37].

Problem with the present laws

The Industrial Disputes Act is against the removal of employees irrespective of the circumstances, including the confirmed unviability of units.[38] As a result of it, industrial units accumulate losses if they are not permitted to retrench or lay-off employees, it only ensures a mirage of job security till all assets get exhausted. Thereafter, neither wages nor terminal benefits can be paid. This results in national economic waste and only defers un-employment. China has the closest proximity with India not only in the geographical sense but because of many similarities, but even there the employers are free to dismiss their labour if the employing unit comes to the brink of bankruptcy or runs into difficulties in production and management, and if reduction of its personnel becomes really necessary, the unit may make such reduction after it has explained the situation to the trade union or all of its staff and workers 30 days in advance. In India organised labour is not very large. Of the about 317 million workers, only 26 million (about 8 per cent) are organised[39]. Furthermore, of these, about 16 million (70 per cent) constitute Government employees at central, state and municipal levels. The remaining 10 million are employed in the private sector. Due to laws like the Industrial Disputes Act, India has paid a high price for the job security of only 3 per cent of the total workforce, simply because they are a defending minority in a short-sighted, votedependent political system. The current provisions of Chapter V -B of the Industrial Disputes Act were introduced in 1976 during the heyday of socialism. Till then there were no such restrictions on retrenchment as long as the employer followed the last in, first out principle for retrenchment, paid half a months notice, paid half a months wages per year of service and informed the Government.

North and South Korea- A Comparizon between Protected and Hire & Fire economy
North Korea has complete job security, while South Korea has none. Starting from an identical base in the Fifties, South Koreas per capita income had shot up to $5,500 by 1991 compared to only $987 for North

Korea[40]. The annual growth rates in South Korea averaged 9.4 per cent in 1980-90 compared to only 2.4 per cent in North Korea. South Koreas foreign trade amounted to $135 billion in 1991, compared to a mere $4.8 billion for North Korea[41]. By 1998, South Koreas per capita income had reached $7,970 while North Korea had a per capita income of barely $1,200. The result has been that any employer who applies for permission to downsize either by retrenching or by laying off workers, is almost never given permission by the State Government. On the rare occasion when such a permission has been given, the decision of the Government has been challenged and stalled in the Courts for years.

Position in India
There has been an alarming rise in the level of sickness in Indian industries. In 1991, the number of sick units was about 221,000[42]. By 1998, this had gone up to about 224,000. By 1999, there were about 307,000 sick units, an increase of about 80,000 units in one year. Of these, about 272,000 are not viable[43]. It just doesnt make any sense to lock up resources in units that are not viable. We should allow redeployment of scarce resources when there are still resources to deploy, rather than wait till they get exhausted. Why not allow such factories complete freedom to downsize and to retrench. This restructuring would most likely save the jobs of the workers who continue to be employed, if it is undertaken in a timely manner. No one can deny that India has been facing a situation of jobless growth. The South Asia Multidisciplinary Advisory Team of the International Labour Organisation, in a report on economic reforms and labour laws in India 1996, concluded: There is little doubt that the employment security regulations gave rise to a number of problems whose harmful effects were absorbed principally by industries and industrial workers. In the first place, they had a negative effect on growth of employment in organised industries and thus hampered the process of improvement of employment conditions in the economy as a whole.[44]

Present law regarding Exit policy

Chapter V-B of the Industrial Disputes Act, 1947 (hereinafter referred to as the Act) introduced in 1976 under the, emergency regime, has introduced a rigid exit policy in the country. By making it obligatory for the employers employing 300 or more than 300, workers, to seek the permission of the appropriate Government before they can lay off, retrench, or close their industrial establishment. The 1982 Amendment to the ct has made this exit policy more rigid by making this chapter now applicable to employers employing 100 or more than 100 workman in their industrial establishment, Section 25-O of the, Act deals with the provision with regard to closure of undertaking of an industrial establishment under chapter V-B[45]. This section was amended in e year 1982, because of the Supreme Court Judgment in the famous case of Excel Wear v. Union of India[46], in which it was held that the section is unconstitutional for violating Article 19(1)(g) of the Indian Constitution. The amended Section 25-0 has since incorporated many suggestions given by the Supreme Court in the Excel Wear case. The amendment made to the section, now provides that the Government has to give reasons far its order on objective considerations the Government has to strive to strike a balance between the various interests involved, the Government itself may review its; order or refer the matter for decision by Tribunal for adjudication. In addition, the absence of deemed permission clause; which was one of the grounds far the Supreme Court to strike down the Section as unconstitutional in the Excel Wear case, is P present in new Section 25-0.

Important points in the Excel Wear case

The procedural infirmities were rectified in the new Section 25-0, because of the Supreme Court

observations in the Excel Wear case at Para 25 that though .the employer furnishes elaborate details pertaining to the performance of the enterprise for the last few years and also pertaining to the current assets, financial stocks, market, etc., the authority under the Industrial Disputes Act passes a cryptic order which often reproduces routine terminology such as the reasons for the intended closure are prejudicial to public interest. The Supreme Court expressed its annoyance about such orders in no uncertain terms and observed that the section did not have the provision for such orders being scrutinized by higher authorities or Tribunals either in appeal, revision or review. Apart from the procedural infirmities jointed out above the Supreme Court in Excel Wear case also considered some other very crucial issues in the light of the existing socioeconomic realities. These crucial issues pertain to the concept of socialism, the concept of public interest, and the effect of refusing permission to close.

Socialism and Pragmatic Socialism

With regard to the concept of socialism. the Supreme Court observed at para 24 as follows :But so long as the private ownership of an industry is recognised and governs an overwhelmingly large proportion of economic structure, is it possible to say that princip1es of socialism and social justice, can be pushed to such an extreme so as to ignore completely or to a very large extent the interests of another section of the public namely the private owners of the undertakings.[47] The concept of public interest was discussed at para 25 of its Judgment, and the related concept of balance of interest at para .29. After considering the different interests involved in the closure of an industry, the Supreme Court comes to the conclusion, that if protection against unemployment is the sole criterion, then no closure would ever be possible. The Court in the above context posed one more question. Whether the employers can be compelled to go on incurring losses year after year just for the sake of protecting employment. The effect of refusing permission was discussed at para 26 by the Supreme Court where it observes that Chapter V-B never states anywhere that the object of carrying on production can be achieved by refusing permission and further observes that I would be highly unreasonable to achieve such an object by compulsion to produce. The question was again posed at posed at para 30 where the Court observed to tell an employer to pay (minimum wages) and not retire even if he cannot pay is pushing the matter to an extreme. Thus considering all the above-mentioned issues the Supreme Court held All the attendant circumstances must be taken into consideration and one cannot dissociate the actual content of the restrictions from the manner of their imposition or the mode of putting them into practice. It is equally pertinent to note that the Supreme Court of Excel Wear case did not hold the old Section 25-O as unconstitutional, because the permission there is made to depend upon on an authority like Government. But the single Judge of the Karnataka High Court in Stump Schedule and Somappa Ltd. v. Union of India[48], (sic) while applying the ratio of the Excel Wear case to the facts before him observed that the real ground for striking down Section 25-O was that the exercise of the Right was made dependent on the permission of the Government, which could be refused, even if reason for closure were good. The Division Bench of the Karnataka High Court reversed this view in a batch of writ appeals involving the same parties. At para 15 of the Judgment, it held that Necessity of permission from an independent authority like the Government was not held as destroying the fundamental right of the employer any where in Excel Wear case. At this juncture, it can be observed that the role of the Government is all pervasive throughout the Act. However, it should be noted that the 1976 amendment to the Act is a radical departure from the previous

one, which has got as its objective prevention and control of job losses. The pre-independence goal of the Act. which is mainly regulation and control of strikes and lock-outs has changed substantially in the postindependent India to that of regulation and control of job losses. Even then it can be said with certainty that the Government which exercises Quasi Judicial powers under Section 25-0 the remedies of review or reference available against its order and the remedy of Judicial review under Article 226 are adequate safeguards to prevent any misuse of its discretion and would go a long way in preserving and promoting industrial harmony. However a note of caution is that doctrinaire concepts should be avoided and it is high time to be pragmatic. Doctrinaire concepts have to be accommodated and viewed in the light of the existing socio-economic realities. It is thus by so doing we can aspire for a stable and strong economy.

Consequences of the Excel Wear Case

As a result of the Supreme Court Judgement in the famous case of Excel Wear v. Union of India.[49]. Section 25-0 of the Industrial Disputes Act (hereinafter referred to as the Act) was amended in the year 1982, incorporating many suggestions made by the highest Court of the land. The new Section 25-0 now provides that when the employer makes an application for closure the Government has to conduct an enquiry complying with the principles of natural Justice pass a speaking order. the order of the Government granting or refusing permission to close subject to review or reference, either on its own motion or on the application made by the aggrieved party is final and binding on all the parties and shall remain in force for one year from the date of order. These changes are reflected in sub-sections (2) (4) and (5) of new Section 25-0. The deemed permission clause, which is one of the grounds for the Supreme Court in Excel Wear case to strike down the section as unconstitutional is present in the new Section 25-0 at its subsection (3). This sub-section provides that if the Government does not communicate its order, of granting or refusing permission within 60 days from the date of application by employer, the permission applied for shall be deemed to have been granted. These changes introduced in the new Section 250, it was thought, would go a long way towards making the section constitutional.

Technical Aspects of Exit Policy- s 25O Review Period

With regard to review or reference provided in the new Section 25-0. the Kerala High Court in Laxmi Starch Ltd. v. Kunciara Fact ory Workers Union[50], at J 345 observed at para 17 of their Judgment that the power of review given to the Government is not limited to the power of review as contemplated by Order XLVII Rule 1 of Civil Procedure Code, but an elaborate review to reconsider the entire matter including the facts and law omitted in its order granting or refusing permission to close down. The Court in this case further observed that the Government while reviewing its order can also take into consideration new developments that took place, after the order granting or refusing permission was passed. The object of this power of review, the Court explained was to do Justice between parties by considering whether the original decision is legal or correct. With regard to reference, the Court observed in this case, that such reference by the Government shall be treated as an industrial dispute,

Waiting Period of One year

In Vazir Glass Works Ltd. v. Maharashtra General Kamgar Union[51]the Supreme Court held that not only the review application should be made by the aggrieved party from the order of the Government. Granting or refusing permission. within the period of one year, which is the period of its validity. But also that it should be disposed of within the said period of one year. Since in this case, the Government disposed of the review application made by the employer, after the said period of one year by making reference to the Tribunal, the Supreme Court held that the Government after one year becomes functions officio, and hence it cannot refer the matter to the Tribunal. The reasoning of the Court is that, since after one year, the order of

the Government itself comes to an end, there is nothing left for review. The Supreme Court also pointed out that the employer will not be put to any serious hardship, because he can move a fresh application before the Government at the expiry of one year, seeking its permission to close, in which he can plead not only new grounds, but also, the old grounds on which review was not done. This Judgment of the Supreme Court is open to objection, because in Section 25-0, it is no where provided as to within what time the Government shall dispose of the review application made by the aggrieved party[52]. The relevant sub-Sections (4) and (5) of Section 25-0 provide that the order of the Government granting or refusing permission, subject to review or reference is final, and shall remain in force for one year from the date of such order. These provisions in their proper interpretation should mean that though the order of the Government shall remain in force for one year only, the one-year period may get extended, subject to review or reference by the Government. To this, it may also be added, that though the order of the Government granting or refusing permission to close, comes to an end after one year, the effect of the order continues after one year also, until the employer makes a fresh application to close and obtains permission. Further the importance of review as explained by Kerala High Court in Laxmi Starch case, mentioned supra, will become futile.

Laying off

The observations of the Bombay High Court in the case of Maharashtra General Kamgar Union v. State of Maharashtra[53], at pp. 924-925 in the context of lay-off under Section 25N, whose provisions are in pari-materia with Section 25-0 that the enquiry contemplated at the initial stage of granting or refusing permission by the Government is a limited enquiry, makes the review by the Government all the more important, because of its exhaustiveness. If this decision of the Supreme Court is viewed from the workers perspective, then it can be observed that review of an order of the Government granting permission to close to the employer, acquires more significance, as if after one year, the Government becomes functus

officio, the workers would be left with no other effective remedy. The Supreme Courts observations, that after one year, the employer can move a fresh application, has not viewed the problem, from the workers view point. Of course, the workers can raise an industrial dispute
Since in the Section 25-0, it is not mentioned as to within what period, the aggrieved party, should move an application for review before the Government, it is enough, if the said application is moved within one year, from the date of granting or refusing to grant permission by the Government Moreover, the deemed permission clause, which is present in sub-section (3) of Section 25-0, is not present at the review stage. This also makes it clear that the Legislature did not fix any time limit for the review application to be disposed of. The making of a fresh application to close, after one year is true only for the employers, but not for workers.

Adjudication on what grounds

The next question to be answered is when the Government makes a reference under Section 25-0 (5) for adjudication, does the words mean an adjudication, on merits of application, or whether it means only an adjudication on merits of the order granting or refusing to grant permission? This question was answered in Indian Humepipe Co. Ltd. v. Its Workmen[54],) in the context of retrenchment under Section 25-N (6), whose provisions are in Pari-materia with S. 25-0 (5) that such reference is not a regular reference, but a special reference. and that the Tribunal has only a restricted Jurisdiction to take a Judicial review of the order, either granting or refusing to grant permission. The proviso to Section 25-0 (5) provides that when a reference has been made to a Tribunal, it shall pass an award within a period of thirty days from the date of such reference. lnspite of the mandatory direction, that the Tribunal shall pass an award within a period of 30 days, the Courts have construed it only to be directory., which is entrusted with a public duty. It can be mentioned here that in Vazir Glass Works case[55] also, mentioned supra, it was because of the negligence of the Government, that the review application was not disposed of within one year. and hence an inference can be drawn that the parties should not be made to suffer, and be deprived of their valuable rights, because of negligence or callousness on the part of the authorities. Finally, it can be observed, that though time is the essence of Section 25-0, and the application for closure should be decided expeditiously, because of its impact on employment, economy, production etc. but at the same time, it should be realised that a fair opportunity should also be given to remedies of review or reference, which it should be remembered have been introduced in the new Section 25-0, as very important safe guards, to prevent it from becoming unconstitutional.

Voluntary Retirement Scheme An Analysis In 1997 the Karnataka State Bureau of Public Enterprises issued guidelines on Voluntary Retirement Schemes for the employees of Public Sector Enterprises. The Government of Karnataka after studying and revising the afore mentioned guidelines approved them and issued Guidelines for Voluntary Retirement Schemes in Public Sector Enterprises in Karnataka on 10th August, 2001 which were made applicable with prospective effect. The following are the salient features of the guidelines which must be taken into account while formulating and implementing Voluntary Retirement Schemes in pubic sector enterprises in Karnataka: Applicability[56] The focus of the VRS should essentially be on such Public Sector Enterprises which are in the process of restructuring, privatisation or closure. However the VRS can also be introduced by other PSEs even if they are not in the process of restructuring, privatisation or closure. Thus even profit making enterprises can make use of the VRS to rationalise their staff strength. Objectives[57] To improve the performance of the PSEs. To achieve the optimum level of manpower with the desirable age mix so as to cope with the changing needs of the public sector. To provide for necessary adjustment in the man power through redeployment so that over all levels of skills and productivity are improved. To compensate such manpower as may be rendered redundant by any restructuring, privatisation, closure or any other exercise taken up by the organisation. Eligibility[58] All employees on regular payscales who have been identified by management to be brought under the VRS can opt for the scheme. The scheme is purely voluntary and the option to apply for its benefits rests with the employee. In case of excess of applications in any category the principle of first come first served will be applied. Non Applicability[59] The scheme shall not be applicable to: Deputationists from Government and other organisations. Casual employees and employees on consolidated wages. Employees taken on contract basis. Employees in whose case proceedings for termination of employment on disciplinary grounds of unsatisfactory performance while in service are in progress or under contemplation or under litigation. Benefits[60] Terminal Benefits should include the provident fund, gratuity and any other statutory dues as per the existing rules of PSE. It should also include cash equivalent of accumulated earned leave as per the existing rules of the enterprise. It is to be noted that no encashment of half pay leave is permitted.

Ex-gratia benefits[61] An employee whose request for VRS is accepted would be entitled to an ex-gratia payment equivalent to an amount consisting of salary of 35 days for every completed year of service and 25 days for every year of service left before superannuation. However, it shall be subject to a minimum amount of salary calculated at the rate of 45 days for every completed year of service only. It shall also be subject to a maximum amount not exceeding any of the following:[62] a) Amount of salary calculated at the rate of 60 days for each completed year of service.

b) Monthly salary at the time of voluntary retirement multiplied by the balance months of service left before normal date retirement. c) Rupees five lakhs.

Implementation Procedures and Conditions of VRS[63] Only those posts and personnel should be covered by the VRS which have been identified as surplus by the organisation in the process of restructuring or privatisation. The VRS option should only be availed of by employees who have been identified as surplus and who are under regular pay scales. In case of PSEs due for closure VRS is to be offered to all the employees in the regular pay scales treating all of them as surplus. The identified surplus employees should exercise the VRS option within a time limit prescribed by the PSE which should not exceed thirty days. Employees must exercise the VRS option in writing and their signature must be included. The management reserves the right to accept or reject an application for voluntary retirement in accordance with the conditions stipulated in the scheme and thus the VRS should specify the grounds on which and the circumstances under which an application for voluntary retirement can be rejected. The decision as to whether an application for VRS has been accepted or rejected must be communicated to the applicants within a period not exceeding 30 days from the last date specified for exercising the option. FN: The Managing Director has the power to accept applications for voluntary retirement of employees up to the level of Managers. Above the level of Manager the decision to accept or reject an application is to made by the Board of Directors only. As far as possible the funds for the implementation of the VRS should be generated from within the Public Sector Enterprise itself. Financial support from the Government should have adequate justification. Moreover the management must have the full funds available for implementing the VRS before notifying employees of the scheme. Once the options for VRS are accepted, the related posts vacated by those opting for the VRS should be simultaneously abolished and not even held in abeyance. Employees retired under VRS shall not be eligible for re-employment in the same Public Sector Enterprise. A formal undertaking will be obtained by the management in this regard from the employee availing of the VRS. Once the management has accepted an employees application for VRS and communicated the acceptance to him in writing the employee cannot withdraw the option. All outstanding amounts and dues payable to the organisation by the employee such as loans and advances, money payable under any court decree etc. shall be adjusted and the net benefit amount arrived at after all such adjustments will be paid to the employee availing of VRS. All the amounts payable under VRS should be settled on a one-time basis within a period not exceeding 30 days from the last date specified for communicating acceptance of the option under VRS[64]. Payments should be made by account payee cheques only and the cheques must not be

post dated. Residential accommodation, if any, provided by the PSE to an employee whose application for VRS has been accepted, shall have to be vacated before payment of ex-gratia benefit. All Public Sector Enterprises must send their send their VRS to the concerned administrative department for approval. Approval will be granted by the concerned administrative department under intimation to the Karnataka State Bureau of Public Enterprises and the Finance Department if the VRS is in accordance with these guidelines and is funded entirely by internal resources of the PSE. In all other cases the concerned administrative department will through KSBPE refer the scheme to the High Power Committee on Public Sector Enterprises for making suitable recommendations to the cabinet for approval. The surplus employees who do not fall within the VRS net will be dealt with as per relevant legal provisions and administrative procedures of the organisation and not under VRS. In cases of PSEs due for closure- employees who are eligible for VRS but do not apply within the specified time limit shall be retrenched by following due procedure in accordance with the Industrial Disputes Act, 1947. It will be the personal responsibility of the Managing Director to ensure that the funds meant for implementation of VRS are utilized for that purpose alone. The management shall also arrange for continuous internal audit for the VRS account. The PSE implementing VRS should arrange for counselling and retraining arrangements for employees accepting VRS. The PSE should also have a feed back system of information from counselled and retrained personnel. In cases of closure or privatization the KSBPE will make arrangements for collecting feed back information. On the whole these guidelines are fairly comprehensive and are a commendable effort on the part of the Government to ensure that PSEs implement VRS which is fair and just to workers and suitably rewards them. The guidelines provide for adequate checks and balances on the Managements power with respect to implementation of VRS by making the MD personally responsible for misutilisation of funds allocated for VRS and by ensuring that the VRS goes through severe audit by the appropriate state machinery before being approved. By setting strict deadlines relating to implementation of VRS the guidelines ensure that a speedy settlement takes place. The guidelines definitely make a valiant attempt to safe guard the interests of workers and the company in VRS. However it must be remembered that these guidelines are just a means to an end and not an end by themselves. If these guidelines are followed verbatim the VRS may not be successful and in all probability will cause resentment and injustice amongst workers. This is because the circumstances and conditions prevailing in every PSE are different and unique and the hopes, aspirations and wants of workers will also differ from one PSE to the other. Thus in order for as fair and effective VRS the guidelines should be adapted to suit the specific economic and other conditions prevalent in the PSE and the VRS must satisfy the needs and aspirations of the workers. The scheme should make the workers feel rewarded for their contribution and should ensure that they have a secure financial future ahead of them. After Karnataka announced its Disinvestment Policy in 2001 Karnataka Soaps and Detergents Limited -the makers of the prestigious Mysore Sandal Soap -became the eighth PSE to be identified for privatisation[65]. The Government of Karnataka constituted the P. Padmanabha Commission on Public Sector Restructuring which came out with operational recommendations. Each recommendation was reviewed by a high-powered committee headed by the Chief Secretary followed by clearance from the cabinet[66]. The Padmanabha Committee recommended that disinvestment in KSDL be made through a strategic partner with the Government of Karnataka retaining only 26%, the strategic partner 72% and the employees 2%. The High Power Committee reviewed the recommendation and it met with cabinet approval. The Government Order dated 2.1.2003 accepting the abovementioned recommendation regarding privatisation of KSDL inter alia gave permission to KSDL to extend VRS to its surplus employees and decided to release Rs. 10.85 crores

as loan towards VRS from the State Renewal Fund[67]. The present Employee Structure of Karnataka Soaps ands Detergents Limited is as follows:[68] Bangalore Complex Executive 85 Non-Executive 767 Employee Type Marketing 60 59 Mysore 19 69 Shimoga 4 11 Total 168 906

Thus the total employee strength at KSDL is 1074.Out of these 1074 employees 188 have opted for VRS. Out of the 188 employees that have opted for VRS 141 are workmen and 47 belong to the managerial cadre[69]. Mr P. Ravi, Deputy Manager (Costing), KSDL informed the researchers that KSDL spends about 16% of its total cost on labour and out of this total expenditure on labour about 11% is devoted to the workmen. He was of the opinion that in comparison KSDLs labour costs were extremely high as other Public Sector Enterprises in Karnataka spent only about 6-7% of their total cost on labour. He attributed this high labour cost to surplus of labour. In Mr Ravis opinion the present surplus of workmen in KSDL amounts to about 200 and the surplus of clerical staff is about 30. He estimated that for voluntarily retiring the 200 surplus workmen the company would have to spend about Rs 5 crores but such a VRS would allow the company to save Rs. 2.4 crores on wage cost thereby reducing the companys total costs on labour in the long run. FN: It is to be noted that estimate is based on the present VRS scheme and does not reflect the workers views as to what the VRS should constitute. The researchers also met with Mr. Pratapan, the General Secretary of the AITUC, the largest union of workmen in KSDL who provided interesting in sights about the workmens perspective relating to the VRS. According to Mr. Pratapan, ever since the Government took the decision to privatise KSDL, the workers have opposed the decision as they feel that the Government is not interested in privatising KSDL that in spite of the profits the company will close down. Mr. Pratapan cited the example of Mysore Lamps which was also listed for disinvestment and privatisation by the government but the disinvestment never took place and the company shut down. According to Mr. Pratapan the workers feel that KSDL might go the Mysore Lamps way and thus are extremely insecure about their jobs and financial future. The unions primary demands are: Job Security Protection of Salary As the workers are pessimistic about the future of the company many of them want to avail of VRS. They fear that if they do not take VRS they might lose their jobs and be left with nothing because in their opinion the company is likely to shut down. However the workers are not happy with the present Voluntary Retirement Scheme which provides for only 45 days wages for every completed year of service amongst its ex gratia benefits. The workers want a VRS which provides for 90 days of wages for every completed year of service as well as for every year of service left. If such a favourable scheme is not forthcoming the workers demand a lumpsum payment of Rs 10 lakh to each worker in exchange for his voluntary retirement from the company. None of the managerial personnel the researchers interacted with mentioned these demands of the workers related to the VRS[70]. Thus it clear that the workmen of KSDL are of the opinion that KSDL is on the verge of closure and their jobs are in jeopardy. They are willing to opt for VRS but want a scheme which is more suited to their financial needs and economically favourable to them so as to provide them with a certain amount of financial

security for the future. It is hoped that the appropriate authorities in KSDL will take cognizance of these views of the workmen and these views will be acted upon soon in the interests of the future of the workers as well as the company.

THE BIFR PERIOD The Rehabilitation Package

When the BIFR under Section 15 of the Sick Industrial Companies Act, 1985 comes to know about the financial status of the company it forms an operating agency to inquire and submit a report it also prepares guidelines for revival of this industry. The operating agency may carry out the following:[71] Revival- Means rehabilitation, it would also cover the selling off of assets and starting a fresh industrial undertaking at a different place. Amalgamation- Its when two companies join to form a single company Compromise and Arrangement- It basically includes rearrangement of the share capital Reconstruction- It applies to the formation of a new company to take over the business of the old company. Its aim is to reconcile with creditors alter share capital and improve viability of the organization. Thus when a reference was made to BIFR regarding KSDL for determination of measures to be adopted for its rehabilitation BIFR nominated IDBI as the operating agency for the formulation of a rehabilitation package covering reliefs and concessions to be extended by the Government of Karnataka, financial institutions and a consortium of commercial banks to KSDL. The reliefs and concessions to be extended to KSDL by the Government of Karnataka for its rehabilitation as suggested by the operating agency viz. IDBI were considered by the Government and met with cabinet approval. The BIFR approved the rehabilitation package on 6.9.1996 and the Government announced the rehabilitation package via an order dated 25.11.1996. The following are the various reliefs and concessions specified under clause 4.3(a) to (j) of the rehabilitation package:[72] Waiver of interest of Rs 2045 lakhs on the unsecured loans advanced by the Government of Karnataka to KSDL. Conversion of Government of Karnataka loan of Rs 1419 lakhs into equity. Rescheduling payment of sales tax dues of Rs 81 lakhs and repayment of a loan of Rs 250 lakhs given by the Government of Karnataka. Fresh loan of Rs 100 lakhs to be released in five equal annual instalments commencing from the financial year 2000-2001 on interest free basis. Deferment of collection of sales tax and all other commercial taxes such as entry tax, turnover tax etc. on interest free basis for a period of five years from the year 1995-96.The amount so deferred shall be paid in subsequent five years in equal annual instalments. Payment by KSDL of the deferred sales tax dues of Rs 149 lakhs for the period 1992-93 in two equal annual instalments in the financial years 1998-99 and 1999-2000. Approval for handing over the Mysore Unit excluding vacant lands to the Karnataka Forest Department against the dues payable by KSDL to the Forest Department. Approval for sale of surplus land at Mysore to another Government outfit and arrange for completion of all the formalities in this regard in the financial years 1995-96 and 1996-97 so that the proceeds of

sale are available to the company on time as envisaged for the purpose of ammortising the dues to institutions and meeting capital expenditure. Continuance of 100% default guarantee for regular and periodic payment of interest on and instalments of various term loans and funded interest loans to institutions and banks under the rehabilitation scheme. Grant of necessary guarantee to commercial banks for incremental working capital limits/facilities (fund based and non-fund based) sanctioned to the company under the earlier 1991 rehabilitation scheme and revised rehabilitation scheme. Continuance of supply of sandalwood at the existing administered price during the entire period of rehabilitation.

Non-Compliance with BIFR approved Rehabilitation Scheme

The Karnataka Soaps and Detergent Joint Action Committee consisting of representatives from all the KSDL worker unions made an application before the BIFR stating that as per the Rehabilitation Scheme the Government of Karnataka was bound to supply to KSDL sandalwood at the administered price. However the Government was in direct non compliance with the BIFR directive as it was not supplying the sandalwood to KSDL and justified non supply of sandalwood by saying that the Government does not have enough sandalwood. The Joint Action Committee submitted that they had reliable information to establish that that the Government of Karnataka had sandalwood and was auctioning the same without offering it to KSDL at the administered price. The Committee therefore prayed to the BIFR to direct the Government of Karnataka to submit an affidavit indicating the various quantities of sandalwood and the stumps that are available in different depots and different forest locations.[73] In 1.3.2000 the BIFR held a review hearing of KSDL in order to enquire as to why the company should not be delisted from the purview of the BIFR as its net worth had become positive. KSDL then requested for continuation under the purview of BIFR as otherwise the non supply of required quantity of sandalwood at an administered price by the Government of Karnataka would adversely affect the profit margin of the company. BIFR, however, after studying the status report of the Implementation of the Rehabilitation Scheme of KSDL came to the conclusion that all the clauses of the Scheme were substantially implemented and the company had ceased to be a sick company within the meaning of Section 3(1)(o) of the SICA and therefore the company no longer requires to be dealt with by the BIFR. BIFR therefore by an order dated 22.5.2003 discharged KSDL from its purview and recognized the fact that the Government of Karnataka was not in a position to supply sandalwood at an administered price[74]. The order magnified KSDLs problems relating to acquisition of sandalwood as discharge of KSDL from BIFRs purview meant that the Government of Karnataka was no longer bound to sell sandalwood to KSDL at the administered price. Thus KSDL which used to get sandalwood from the Government of Karnataka at Rs 1.4 lakhs per ton is forced to buy sandalwood at Rs 14-16 lakhs per ton from the public auctions conducted by the Tamil Nadu Government. This is adversely affecting the profit margins of KSDL.

Financial Performance
KSDL had already started making profits even before the operation of the rehabilitation scheme. The companys performance steadily improved during the period of the scheme, from 1996-7 to 1999-00, and even exceeded the profitability projections of the rehabilitation scheme during the period. A summary of the working results of the company is show in Annexure-C, Table 1. It is evident from the information below that the financial performance of KSDL improved dramatically with the implementation of the rehabilitation scheme. The sales turnover nearly doubled from 1995-6 (pre-

rehabilitation) to 1999-00. Profit before tax increased 10-fold in the first year of the rehabilitation period itself. The financial ratios give a more clear analysis of the specific areas in which efficiencies were achieved. [75] The most significant was in the reduction of specific material cost by over 25% from its pre-rehabilitation levels. Power and fuel costs also decreased significantly as a percentage of sales. Another significant reduction was in the interest cost, which reduced four-fold from 10% of sales to 2.5% of sales in the five year period. The emphasis on an aggressive marketing strategy is evident in the nearly three-fold increase in the specific advertisement and sales cost. Overall, there was a significant improvement in the operating margin. A significant feature is the significantly lower material cost for KSDL as compared to the industry at large specifically due to the BIFR package. However, that is predicated on KSDL continuing to get subsidized supplies of sandalwood from the Karnataka government. This shall be examined later in detail in the chapter on Viability. The specific interest cost is still substantially higher than for the industry, despite a four-fold decrease during the rehabilitation period. The specific employee cost is quite high though, and this may continue to weigh down the enterprise. Since 1998-9, the expenditure on advertisement and sales is on par with industry norms. The profitability ratios compare well with the industry.

Utilisation of funds
KSDL made substantial profits during the period 1996-2000 of the rehabilitation phase. According to a senior AITUC official working in the factory, the success brought its own problems. The Karnataka Industries minister is reputed to have asked as to why the company was making such profits. Such a question is not far out of the realm of possibility because it has been seen that the government has to walk over coals in the case of disinvestments from a profit-making company and that too a high profit making company such as KSDL.[76] Returning to the issue at hand, much of the profits could not be utilised in operations or asset building because of having to wipe out its substantial accumulated losses[77] and repay huge outstandings. Below is the generation and utilisation of funds during the period.[78] There was an internal generation of funds during the period 1996-00 of Rs. 67.48 crores transferred from the Profit and Loss Acouunt, plus Rs. 2.45 crores of accumulated depreciation for the period. Thus, the total internal generation of funds was Rs. 69.93 crores. The increase in borrowings, in the form of unsecured loans, was Rs. 22.27 cores. These funds were used mainly to repay secured loans of Rs. 35.89 crores and to finance increases in working capital of Rs. 40.29 crores. There was a deferred miscellaneous expenditure on advertising and sales promotions of Rs. 14.55 crores. There are three issues of significance that arise from the above. Firstly, the company had to substantially diversify its product mix to maintain its share in the market and level of turnover. An inevitable consequence of this was the necessity of a much higher expenditure on advertisement and sales promotion. In the two years 1998-00, in addition to an already high outlay under this head accounted in the Profit and Loss Account, the company had to capitalize as deferred expenditure a sum of Rs. 14.55 crores. Secondly, the low level of investment in fixed assets was of marked concern. The Rehabilitation Scheme approved by the BIFR had earmarked capital expenditure during the period of Rs. 6 crores. The actual capital expenditure has been less than 25% of this. This is particularly significant as the Rehabilitation Scheme identified the inability of the promoters (Karnataka Government) to infuse funds for modernizing the plant and for market promotion as the two major reasons for the poor performance of the company. Thirdly, two of the major sources of funds envisaged by the Scheme were Rs. 6 crores from sale of vacant land at Mysore,

and Rs. 1 crore budgetary support from the Government of Karnataka. Unfortunately, both did not materialise. Therefore, it is not really surprising that despite a high internal generation of funds, the company found itself cash strapped to invest in modernising its plant. The fact that the government of Karnataka was not willing to make such an infusion of funds in a profit-making company is quite strange and may lend credence to the belief of a majority of workers that the government was never really serious about turning around KSDL and was more interested in disposing it off one way or the other.

VIABILITY OF THE COMPANY

Availability of Sandalwood
Until 2001, according to the Karnataka Forest Act 1963, the sandal tree used to be the property of the government, any trees grown in the State automatically became a Government property and trade in it was the monopoly of the State which barred individuals from growing sandalwood trees. Though the laws have been amended to curb sandalwood theft and allow individual ownership yet the Government still enjoys monopoly over sandalwood. Sandalwood was being made available to the KSDL from sandalwood forests in Karnataka from the Karnataka Forest Department. In this regard it is important to note that since the Karnataka Government owns all the shares in the company, sandalwood was provided to the company at highly concessional prices. From the data available to the researchers, through documentary research as well as various interviews carried out during fieldwork, it seems to the researchers that the biggest problems to the economic viability of KSDL stem from the non-availability of sandalwood. However, it does not seem to be an insurmountable problem. According to an official of the company, the situation would have been much better if the government had taken a farsighted view of sandalwood growing keeping in mind sustainable development. The researchers have found data to show that in recent years the company itself has taken some steps towards sustained economic viability but with mixed results and not without possible compromises on quality. There is nothing wrong or deficient in the fundamentals of the company. In fact, even today, taking into account the data the researchers have collected, there is nothing to show that this is not a company with great potential for earnings. However, the biggest constraint that the company faces is the lack of supply of sandalwood: the companys USP ingredient. The Government of Karnataka in pursuance of orders from the BIFR directed the Forest Department to make available the sandalwood at the price reckoned in the rehabilitation package by the company according to the existing rates at which the sandalwood was supplied to the company by the Government, which amounted to Rs 1.44 lakhs per MT. Further, the government in its order dated 25th November 1996[79] took a decision that the Forest Department would continue to supply Sandalwood at the existing administered price during the entire period of rehabilitation. During interviews with the Deputy Manager (Costing) Mr. P. Ravi and Mr.Pratapan, the AITUC generalsecretary at the factory it was revealed that the Forest Department has not been providing the sandalwood at the prices settled according to the BIFR order. Moreover, there has also been a fall in the amount of

sandalwood offered for sale and as a result of the inadequate supply of Sandalwood by the Forest Department the KSDL has had to procure it from Tamil Nadu and outside the country from South Africa, Australia, Indonesia at much higher prices, which are also not as good as the Indian sandalwood and only serve as partial replacements. While sandalwood is a critical element in the production process for KSDL, the requirement of sandalwood in the production process is very low. Over the years, the company has been reducing its dependence on sandalwood as the following information made available to the researchers would show.

Table 1: Sandalwood Oil in soap[80]

*SW = sandalwood SW oil Consumed (MT) Soap Produced (MT) % sandalwood oil/soap 1995-6 13.39 9504 0.14 1996-7 12.32 8635 0.14 1997-8 9.02 7688 0.12 1998-9 5.44 8530 0.06 2000-01 4.47 5838 0.08

It can be seen clearly that the quantity of sandalwood has been reduced by almost 50% in a period of five years in order to reduce costs. Even then, a major hit to profitability has been caused by the refusal of the Government of Karnataka (through the Forest Dept.) to continue to supply KSDL with sandalwood at the concessional rate set by the BIFR Scheme. Officials of KSDL, when asked by the researchers as to the reasons why the Forest Department had stopped supplying KSDL sandalwood at these concessional prices, said that this was a policy decision of the government which had decided in 2001 that as KSDL had started making profits there was no further requirement to provide sandalwood to KSDL at such subsidized prices and therefore, KSDL has been made to participate in the auction sale conducted by the Forest Department in the open market. Furthermore, there had been no direction from BIFR granting subsidy to sandalwood purchased by KSDL and as the Company was no longer a sick company. In the opinion of the researchers this implies that KSDL has to participate in open auctions and procure sandalwood just as any other purchaser. In addition to this, the officials also stated that the Forest Department felt that the prices of sandalwood were too low, causing a loss to the Exchequer, and that KSDL should pay open market prices. The officials of KSDL have time and again brought to the attention of the government the revenue it gains through KSDLs operations. Even at a low price of sandalwood of Rs. 1.44 lakhs/MT with sales of 40 MT of premium Mysore Sandal soap, the government would collect revenues of 19.31 lakhs/MT after levying all applicable duties and taxes. At the above cost of sandalwood, 500 tons of soap would be produced thereby netting the government an annual revenue of Rs. 29 crores. If the price were increased over 3 times to Rs. 5 lakhs/MT with reduced sales of 200 tons of soap, the government would still net revenues of Rs. 14 crores per annum.[81] When asked as to why the subsidy was no longer possible, forest officials had told the company that under the Transparency Laws even the government is not obligated to supply preferential services to anybody. Rule 97 of the Karnataka Forest Act, 1963 deals with the supply of sandalwood oil but nowhere does it state that the government shall supply at subsidized prices. The researchers asked Mr. Ravi as to the high price of sandalwood on the open market. He said that this was due to deforestation and excessive felling of sandalwood trees.

Financial Projections
The following is an attempt to recast the financial workings for the company using the financial parameters for the year 2001-02 as the basis. The projections are based on the production figures achieved for the year 1999-00 without the constraint of the availability of sandalwood. The projections take into account the possibility of increased efficiency due to increased productivity caused by a reduction in the number of days worked per week (by one: Saturday); and due to closure of the Mysore division and transferring the entire process of oil extraction to the Bangalore factory (refer Annexure ). Also taken into account are the savings in labour costs due to a Voluntary Retirement Scheme (VRS) that has already been implemented. (Refer Chapter on VRS) The most important question that arises in the present context of disinvestments and privatisation is what is the present sales position of the products of the company. As the information given below would show, the products of KSDL have a market. As can be seen from the information arrayed below, the primary products of the company (soaps and agarbatti) still maintain demand even if there are increases in price. As for the other two products (detergent and talc) there was negligible fall in price which might be taken to mean that the demand fell slightly. As regards the sandalwood mix of local and foreign varieties[82], at production levels that are a little below the levels for 1999-00 and at the prices for 2000-01, the company would have achieved a turnover of around Rs. 150 crores. At those cost levels, the projected profit-before-tax (PBT) is around 10 crores (Scenario 1). This decreases to just under Rs. 8 crores with the local sandalwood cost assumed at Rs. 3 lakhs per MT (scenario 2), and to around 7.75 crores with local sandalwood at Rs. 3 lakhs per MT and Australian sandalwood at Rs. 1.6 lakhs per MT (Scenario 3).[83]

Financial Performance till end of year 2002-03

For the financial year 2002-3, the turnover of the company was Rs. 108 crores and the profit on that was Rs. 1.5 crores.[84] The operating cost of the company were 96% and they were as follows: labour 16%; raw materials 32%; marketing cost 23%, excise duty 13%, administration costs 12%. A comparison of KSDLs financials along with its industry competitors is quite unfavourable to the company and shows some grim indicators.[85] The drastic drop in turnover in the financial year 2000-01 was not recovered from. The drop from year-to-year was of approximately Rs. 40 crores and the drop in profit was even worse, from Rs. 17 crores to Rs. 1.92 crores. The drop was primarily due to the inability of the company to invest in new products and plant. Two reasons were essentially responsible for that.[86] Firstly, marketing efforts in the years previous had focused on broadening the market, by developing new products (having less requirement of sandal oil) and new markets. The major drive was in the period 1998-00, when the company introduced 16 new products with major all India launches. An aggressive marketing strategy was resorted to with large sales promotions. As a result, the turnover and book profits increase tremendously for 1998-99 and 199900. However, this had lead to a high increase in working capital requirements and at the end of the latter year the company was servicing book debts of Rs. 32 crores.[87] Furthermore, the market was down due to an economic recession and the premium soap category was the worst affected. The decline in the category had been at the rate of 10% annually for the years 1998-99 and 1999-00 and according to Mr. Ravi had not been successfully arrested by the industry in general. Therefore, the company was faced with two choices: it could either continue with its aggressive marketing strategy, or withdraw and try to conserve its niche markets. It opted for the second strategy.[88] It reduced

its marketing budget and ct down its contract sales staff, and slowed down efforts to gain new markets. A stringent financial policy was followed with lower trade margins and credit. As a result, book debts were reduced to Rs. 19 crores by the end of financial year 2000-01 and there were zero external borrowings. Due to the above, however, both turnover and profits were adversely affected. Furthermore, the fact that at the time it was still under BIFR limited its options as regards expenditure. Therefore, the company lost out on an opportunity to capitalise on aggressive investments in marketing development thereby negatively impacting the longterm effect on market share and brand equity. In spite of the precarious situation of KSDL, there are certain strengths that would make the company attractive to any potential buyer.[89] The primary strength of the company is the brandname Mysore. Its flagship product, the Mysore Sandal soap has a reputation, especially in the southern states, of a high quality product. The soap has had a presence in the markets of the southern states for nearly 90 years. It has a niche market in these states. A number of sandalwood soaps introduced in the market by other large players have virtually left the market for this particular brand untouched. However, an exact valuation of the brand is not possible because valuation is still an ongoing process. The company has reasonably strong financial fundamentals. It has a much lower specific raw material cost than its major competitors. It has cleaned its Balance Sheet over the last five years, and has no long term liabilities. In fact, we were told by the Dy. Mgr. (Costing) Mr. Ravi that the company has cash reserves totalling approximately 13 crores which are lying unutilised because of the uncertainties and are drawing meagre interest from banks. The company has huge manufacturing capacities for both toilet soaps and detergents, and operates at a very low breakeven level. It has never achieved a capacity utilisation of more than 35% for soaps and 40% for detergents. For the year 2000-1 it made a profit at a capacity utilisation of 22.3% for soaps and 15.8% for detergents. Its huge surplus capacities allow the possibility of increasing production at low marginal costs. The company has surplus assets which were earmarked even at the time of the Rehabilitation Scheme being drawn, for use in its rehabilitation. These include land in Mysore, valued at 6 crores. Its works in Bangalore are also located on very valuable real estate. However, the valuation for the land is also unknown at present. The partnership with the Karnataka Government (owner of 100% shares) has strong synergies. It allows the company access to the vast sandalwood reserves in the state. The company benefits from being one of the oldest industrial undertakings in the state with a strong public image. It is this image that helped the company to obtain such strong support from the Karnataka Government before the BIFR. Finally, the fact that KSDL was under strict expenditure controls under BIFR and couldnt undertake much expansion in products or capacity has meant that it has huge cash reserves of over Rs. 13 crores. Inspite of the above-listed strengths, KSDL has numerous weaknesses as well which may yet push it towards unviability in any hands[90]: The major weakness of the company is the uncertainty regarding its ownership in the future. The government announcement to privatise state-owned public sector undertakings was made more than a year ago. However, no action has been taken in this regard. There is every possibility of this limbo continuing for a significant period of time. The effects of are already apparent: there has been a decline in the morale of the employees since they are unsure about their future; instability in the market both with suppliers and stockists; inability of the company to take longterm decisions, as well as the lack of product launches since a burst of them in 1998-00.

The company had, in the five financial years previous to 2000-1 made substantial profits. However, as these profits had to be utilised to wipe off past losses, they did not result in the company generating comfortable reserves which could be utilized for expansion and modernisation. KSDL essentially remains a single product company, with most of its revenue and profits earned from its flagship sandal soap. This product has a limited geographical market, with about 80% of the sales being in the southern states. Thus, the company is highly susceptible to changes in market conditions. In fact, Mr. Ravi told us that these days the demand for Mysore sandal soap also has become quite price sensitive with the plethora of competing premium soaps available in the market. Furthermore, as has already been mentioned, the viability of the company is heavily dependent on the availability of sandalwood. The availability of sandalwood in Karnataka is severely restricted due to large-scale smuggling. According to Mr. Ravi, at times the company has had to buy from Tamil Nadu public auctions at even Rs. 17 lakh/MT. The labour cost at KSDL is quite high, compared with the industry average. Labour cost as a percentage of sales was 14.3% for KSDL in 1999-00, as compared to 5.8% at HindLever and 3.2% at Godrej. With declining sales, this parameter would be further affected. Unfortunately, this is a critical parameter due to two reasons. Firstly, it is the parameter that makes KSDL an unattractive proposition in the immediate term for a strategic partner. Secondly, this also the parameter which causes most prejudice to the interests of the workers. Of course, it is a possibility that in the long-term, the private buyer may require more numbers of workers to completely utilize capacity in case it succeeds in spurring growth in turnover and profitability for the company. However, in the opinion of the researchers, the prevailing winds of change in consumption patterns in India and the increasing eagerness of the middle class to embrace privatisation and disinvestments (with the view that government enterprises are generally inefficient and only privatisation can save the day) may have changed the situation somewhat. Furthermore, the synergies of the partnership with the government will only come into play if the Government continues to support the company after privatisation with various incentives such as tax holiday, sandalwood at concessional rates, etc. At this time, the Government seems singularly against doling out any sops to the company (just a few sops would allow the company to become profitable under present circumstances in fact, it is enough that sandalwood is supplied at even double the present rate). If it were to dole out sops to a private party, then it would have conducted the present disinvestments process malafide and that would create a huge hue and cry. It would be difficult for the government to explain its actions even with the present policy refrain that it is not the business of the government to be in business. CONCLUSION The issue of privatisation of KSDL seems to be a foregone conclusion, as even the workers seem to have accepted that the government will ensure its disinvestment. Though there may be doubts about the final result, owing to the concerns that it may be forced into liquidation, the disinvestment process seems to be on track. However, the idea that KSDL needs to be privatized needs to be examined, as it seems to be based on certain faulty assumptions. The objectives of disinvestment are to stem outflow of scarce public resources to unviable non-strategic PSUs and reduce the public debt. KSDL however is not a debt-laden company, being completely debt free, moreover having cash reserves of Rs. 13 crores in addition to large land holdings and a well known brand name, to both of which a value is yet to be assigned. It is a valuable asset, more than a liability. A strategic sale may not be able to fetch the best value for the company, since the strengths of the company dont lie in readily-ascernible tangible assets like machinery or accumulated profits. As such, liquidation and a sale of assets following that might be a better option in this case. However, at this time, exact data about the brand

equity and land assets is not available as the process of valuation is still continuing. Another question that may be asked at this point ties up to the question of viability. The chief difficulty that the government faces is this: how to justify giving sandalwood at concessional rates to KSDL considering it is a policy prescription that government should foster competition in virtually all sectors of the economy and should limit its own activities to the so-called strategic sectors (and public services) which the private sector cannot provide. Furthermore, the Rehabilitation Package had many other conditions such as loan guarantees and interest free loans which were dependent upon the governments largesse. If there can be merit in the contention that KSDL is still a viable company, which requires only a certain further investment in R&D and publicity, then it would be hard to justify the privatisation of the company. As such, the recent decisions of the government to stop supplying subsidized sandalwood to the company, which has hurt the profitability of the company in a very big way, may have some somewhat uncomfortable implications. Apart from the high cost of sandalwood, which would hurt a private player as well, there does not seem to be much going against the continued existence of the company. Even the labour burden of the company may not be a major issue, as the vast majority of workers (upto 80%) seem to be advocating taking the VRS option, if a more beneficial package is offered by the company. A clear problem for KSDL has been the fact that though the premium soaps segment of the FMCG sector has been declining for the past few years, there has been little KSDL has done in order to weather the storm. One clear limitation that KSDL has faced, vis--vis its competitors in the segment, has been its inability to retrench workers. Furthermore, the competitors are well-established in virtually all the soap segments, unlike KSDL which has a weak presence, and therefore may have been able to cover up shortfalls in the premium soaps segment by increasing sales in other segments. Whether there is an exit policy or not, it is not always possible to avert exits, they can only be delayed. Efforts should be made to minimize job losses and other adverse employment effects. In any event, human resources should not be treated as disposable commodities. This idea is recognised by the provisions of Section 25FFF of the Industrial Disputes Act, 1947 which provides for compensation to workmen in case of closing down of undertakings. However the question is whether this provision will alleviate the fears of the workmen of KSDL regarding job security who feel that their company is on the verge of closure and whether the compensation provided by this provision will be adequate. In light of the morale of the workers and their demands the question would have to be answered in the negative. In fact the levels of pessimism amongst the workers is so high that they want a attractive VRS package and leave the company as they see no future in the company. However whether this attractive VRS package is forthcoming or not is unclear. The government has more than a sundry responsibility towards these non-priority sectors of which KSDL is a part. Its prerogative right now should be to make earnest efforts to resolve the quandary that has been plaguing both academicians and bureaucrats alike job security on one hand and on the other, running an industry down into the ground in the guise of safeguarding jobs and then when the place crashes not have enough to pay even the basic salary to the workers leaving them in a worse off position than before. Also labour reforms has provided an avenue to unscrupulous employers to pass off unjust firing and lopsided exit policies as necessary for greater efficiency and productivity. As such, some bold decisions on the part of the government may still be able to make the company a very profitable concern. However, this seems unlikely, as the Government of Karnataka seems to be determined to rid itself of KSDL, and as a matter of policy, seem to have decided not to support any more PSEs.

Bibiliography
Articles
1. C. S. Venkata Ratnam, Exit Policy: An Overview of Some Issues, IJIR, Vol 27, No: 4 (1992). 2. H.L. Kumar, No Exit- No Entry -Labour Amendments must focus on More Employment, LLJ, Vol 111,(2002). 3. H.L. Kumar, No Exit- No Entry -Labour Amendments must focus on More Employment, LLJ, Vol 111, (2002). 4. www.frontlineonnet.com/fl2001/stories/20030117005301000.htm[1], as on 9 August, 2003. 5. R. Krishna Murali , Section 25-0 A Critical Analysis, Journal Section Lab IC, (2002), pp 57. 6. R. Krishna Murali , The Importance of Review or Reference under Section 25-0of IDA, Journal Section Lab IC, (2002), pp 23. 7. Sivaji Patnaik, NALCO Privatisation Move Faces Stiff Resistance, Peoples Democracy, Vol. XXVI, No. 46, 2002, pd.cpim.org/2002/nov24/11242002_orissa.htm[2], as on 9 August, 2003. 1. V. Sridhar, NALCO A Story of Resistance, Frontline, Vol. 20 Issue 01, January 2003,

Books
1. Pahwa and Puliani, Sick Industries and BIFR (New Delhi: Bharat Law House, 2000).

Miscellaneous
1. Overview of the Privatization Process, divest.nic.in/disprocedure.htm[3], as on 7 August, 2003. 2. Chapter 1 Overview of Government Companies and Statutory Corporations from the CAG Audit Reports of Karnataka, www.cag.nic.in/reports/karnataka/rep_2001/comm_ch1.pdf[4], as on 9 August, 2003. 3. Disinvestment in States Karnataka, www.divest.nic.in/dis_instate/karnatka.htm[5], as on 7 August, 2003. 4. Disinvestment of Government Telecom sector, apro.techno.net.au/apt451.htm[6], as on 4 August, 2003. 1. Genesis of Disinvestment in India, divest.nic.in/manual/chap4.htm[7], as on 4 August, 2003. 1. Guidelines For Management-Employee Bids In Strategic Sale, divest.nic.in/guidestsale.htm[8], as on 7 August, 2003. 2. Board for Industrial and Financial Reconstruction Order, Bench II- Case No. 629/92: M/S Karnataka Soaps and Detergents Limited, New Delhi (22.05.2003). 3. Government Order No. CI 48 CHI 96, Bangalore, Dated 25th November 1996. 4. Proceedings of the Government of Karnataka, Government Order No. DDPER 61 ARU 2002 (Subject: Privatisation of Karnataka Soaps and Detergents Limited), Bangalore (02.01.2003). 5. Proceedings of the Government of Karnataka, Government Order No. DPAR (BPE) 13 ARU 2001 (Subject: Guidelines on Voluntary Retirement Scheme in Public Sector Enterprises in Karnataka), Bangalore (10.08.2001). 6. Proceedings of the Government of Karnataka, Government Order No. CI 48 CHI 96 (Subject: Rehabilitation of Karnataka Soaps and Detergents Limited- Investment and other Reliefs and Concessions to be granted by State Government Sanction), Bangalore (25.11.1996).

7. Samuel Paul, Privatization and the Public Sector, EPW, February 23, 1985, 8. The Times of India, PSE: Public Sector Exit, Pg. 4 Bangalore Edition, 5th July, 2002. [1] Proceedings of the Government of Karnataka, Government Order No. DDPER 61 ARU 2002 (Subject: Privatisation of Karnataka Soaps and Detergents Limited), Bangalore (02.01.2003). [2] Opinion of Mr. Pratapan, AITUC General Secretary, KSDL. [3] Supra note 1. [4] It is to be noted that KSDL got ISO 9002 certification for its quality products on 12.4.1999 and ISO 14001 certification on 18.3.2001. [5] Supra note 1. [6] Id. [7] As per records maintained by Mr. P. Ravi, Deputy Manager-Costing, KSDL. [8] Shortage of supply of sandalwood is the main problem plaguing KSDL today. The company used to get sandalwood from the Government of Karnataka at Rs. 1.5 lakhs per ton. However as the government is no longer interested in the company, KSDL is forced to buy sandalwood from the public auctions conducted by the Tamil Nadu government at rates of Rs 14-16 lakhs per ton. [9] Genesis of Disinvestment in India, divest.nic.in/manual/chap4.htm[7], as on 4 August, 2003. [10] Samuel Paul, Privatization and the Public Sector, EPW, February 23, 1985, at page M4. [11] Supra note 9 [12] Overview of the Privatization Process, divest.nic.in/disprocedure.htm[3], as on 7 August, 2003. [13] Id. [14] Disinvestment of Government Telecom sector, apro.techno.net.au/apt451.htm[6], as on 4 August, 2003. [15] Guidelines For Management-Employee Bids In Strategic Sale, divest.nic.in/guidestsale.htm[8], as on 7 August, 2003. [16] (2002) 2 SCC 333. [17] [1994] II LLJ 1243. [18] [1981]I LLJ 193. [19] AIR 1992 Al l88. [20] [2002] II LLJ 193. [21] MANU/MH/0058/2003.

[22] V. Sridhar, NALCO A Story of Resistance, Frontline, Vol. 20 Issue 01, January 2003, www.frontlineonnet.com/fl2001/stories/20030117005301000.htm[1], as on 9 August, 2003. [23] Sivaji Patnaik, NALCO Privatisation Move Faces Stiff Resistance, Peoples Democracy, Vol. XXVI, No. 46, 2002, pd.cpim.org/2002/nov24/11242002_orissa.htm[2], as on 9 August, 2003. [24] Disinvestment in States Karnataka, www.divest.nic.in/dis_instate/karnatka.htm[5], as on 7 August, 2003. [25] Chapter 1 Overview of Government Companies and Statutory Corporations from the CAG Audit Reports of Karnataka, www.cag.nic.in/reports/karnataka/rep_2001/comm_ch1.pdf[4], as on 9 August, 2003. [26] Mr. V. N. Bhattacharya, being the consultant, who has given two sets of recommendations of which neither have been accepted or finalised and they have not been made available to us. [27] H.L. Kumar, No Exit- No Entry -Labour Amendments must focus on More Employment, LLJ, Vol 111, (2002). [28] Since the focus is on KSIDL, which has approximately 1000 workers, this point has not been looked at in detail. [29] www.blonnet.com/2002/09/27/stories/2002092702070900.htm[9] [30] Id. [31] Id. [32] Id. [33] Id. [34] Id. [35] C. S. Venkata Ratnam, Exit Policy: An Overview of Some Issues, IJIR, Vol 27, No: 4 (1992). [36] Id. [37] According to Mr. Prathaban, gen secy. AITUC, KSIDL the workers are not averse to a hefty pay packet in the unfortunate event of them being fired, simply because they are now practically resigned to their fate and have option but to look at this as their best alternative. [38] R. Krishna Murali , The Importance of Review and Referenceunder Section 25-0of IDA, Journal Section Lab IC, (2002), pp 23. [39] R. Krishna Murali , The Importance of Review and Reference under Section 25-0of IDA, Journal Section Lab IC, (2002), pp 23. [40] R. Krishna Murali , Section 25-0 A Critical Analysis, Journal Section Lab IC, (2002), pp 57. [41] Id

[42] Id [43] Id [44] C. S. Venkata Ratnam, Exit Policy: An Overview of Some Issues, IJIR, Vol 27, No: 4 (1992). [45] Id [46] AIR 1979 SC 25. [47] Id. [48] (1988) 2 Lab W 400. [49]AIR 1979 SC 25. [50] 1992 Lab IC 1337. [51] AIR 1996 SC 1282. [52] H.L. Kumar, No Exit- No Entry -Labour Amendments must focus on More Employment, LLJ, Vol 111,(2002). [53] 1986 Lab IC 921. [54] 1986 Lab IC 749. [55] AIR 1996 SC 1282. [56] Proceedings of the Government of Karnataka, Government Order No. DPAR (BPE) 13 ARU 2001 (Subject: Guidelines on Voluntary Retirement Scheme in Public Sector Enterprises in Karnataka), Bangalore (10.08.2001). [57] Id. [58] Id. [59] Id. [60] Id. [61] Id. [62] (a) Salary for the purpose of calculating ex gratia benefit means basic pay plus dearness allowance. (b) While computing completed years of service, the remainder of six months or more shall be treated as one full year. In case of computing full years of service left too the remainder of more than six months shall be treated as a full year. Illustrative examples of computation of ex-gratia benefit are appended as Annexure-B. [63] Supra note 56.

[64] Thus the whole process of implementation of VRS in a PSE- from the stage of notification of VRS and calling for options to the stage of full and final settlement- should be completed in all respects within a period not exceeding 90 days. [65] The Times of India, PSE: Public Sector Exit, Pg. 4 Bangalore Edition, 5th July, 2002. [66] Id. [67] Proceedings of the Government of Karnataka, Government Order No. DDPER 61 ARU 2002 (Subject: Privatisation of Karnataka Soaps and Detergents Limited), Bangalore (02.01.2003). [68] Office records of Mr. Mohan, Deputy Manager- Human Resources, KSDL. [69] Id. [70] At present the company is willing to give to each worker a lump sum amount of Rs. 4-6 lakhs based on seniority in exchange of voluntary retirement. However the workers want a lump sum payment of Rs 10 lakhs for each worker. [71] Pahwa and Puliani, Sick Industries and BIFR (New Delhi: Bharat Law House, 2000) at 67. [72] Proceedings of the Government of Karnataka, Government Order No. CI 48 CHI 96 (Subject: Rehabilitation of Karnataka Soaps and Detergents Limited- Investment and other Reliefs and Concessions to be granted by State Government Sanction), Bangalore (25.11.1996). [73] See Annexure-A. [74] Board for Industrial and Financial Reconstruction Order, Bench II- Case No. 629/92: M/S Karnataka Soaps and Detergents Limited, New Delhi (22.05.2003). [75] See Annexure-C, Table 1. [76] BALCO, NALCO, Energy PSUs. [77] About 100 crores by 1992. [78] KSDL Annual Reports 1995-6 to 2001-2. [79] Government Order No. CI 48 CHI 96, Bangalore, Dated 25th November 1996. [80] From the Report titled KSDL Potential for Profits. Received from Mr. Prathapan. [81] Presentation by KSDL to the government. See Annexures K-N. [82] Australian variety which gives about half the yield as well as less frangrance. [83] See Annexures-F&G, Table 4. [84] All figures are from Trial Balances given to us by Mr. Ravi. [85] See Annexure-C, Table 2 (Comparison with Industry). [86] From the Report titled KSDL A Financial Report. Received from Mr. Prathapan.

[87] Id. [88] Id. [89] Id. [90] Id. Endnotes: 1. www.frontlineonnet.com/fl2001/stories/20030117005301000.htm: http://www.frontlineonnet.com/fl2001/stories/20030117005301000.htm 2. pd.cpim.org/2002/nov24/11242002_orissa.htm: http://pd.cpim.org/2002/nov24/11242002_orissa.htm 3. divest.nic.in/disprocedure.htm: http://divest.nic.in/disprocedure.htm 4. www.cag.nic.in/reports/karnataka/rep_2001/comm_ch1.pdf: http://www.cag.nic.in/reports/karnataka/rep_2001/comm_ch1.pdf 5. www.divest.nic.in/dis_instate/karnatka.htm: http://www.divest.nic.in/dis_instate/karnatka.htm 6. apro.techno.net.au/apt451.htm: http://apro.techno.net.au/apt451.htm 7. divest.nic.in/manual/chap4.htm: http://divest.nic.in/manual/chap4.htm 8. divest.nic.in/guidestsale.htm: http://divest.nic.in/guidestsale.htm 9. www.blonnet.com/2002/09/27/stories/2002092702070900.htm: http://www.blonnet.com/2002/09/27/stories/2002092702070900.htm Related posts: 1. Labour Law Silk Industry- The Problem of Child Labour 2. Employee Stock Option Plans: A Study Source URL: http://legalsutra.org/761/industry-on-the-verge-of-closure-a-case-study-of-ksdl/ Copyright 2011 Legalsutra | Law Students' Knowledge-Base Law School Projects, moot court memorials, class and case notes and more! unless otherwise noted.