Shipping Corporation of India Ltd (SCI) does not have enough “surplus cash” to transfer Rs1,000 crores to a non-core company being formed per a demerger scheme that is key to the privatisation of the national carrier, India’s largest by capacity, and will borrow from the market to fulfil the obligation, highlighting the flaws in a split that is being rammed through without rationale.
Documents, including notes and minutes of board meetings, accessed by ET Infra, reveals the dark underbelly of the demerger scheme, which many reckon will put the State-owned carrier with a ‘Navratna’ tag on course to an uncertain future as a commercial entity regardless of whether it stays under government control or is privatised.
The board of SCI, during a meeting on 4 November 2022, discussed a plan to borrow some Rs350 crores as working capital to part fund the Rs1,000 crore transfer to Shipping Corporation of India Land and Assets Ltd or SCILAL, the non-core company, for the upkeep and maintenance of ‘Shipping House’ in South Mumbai and the Maritime Training Institute at Powai, which over the last ten years have been carried out annually with not more than Rs25 crores. ‘Shipping House’ is the headquarters of SCI.
On 6 May 2022, the company’s board approved a revised demerger scheme that involved, among other significant changes, transferring Rs1,000 crores from its surplus cash to SCILAL, from the Rs450 crores envisaged in the original plan, cleared by the board on 1 November 2021, to separate its core and non-core assets.
“The Board was informed that the members of the Audit Committee had initially expressed different views on the legal status of the assets where after the matter reached a consensus for revision in the Scheme and accordingly recommended the revised scheme of demerger for the approval of the Board,” the minutes of the 6 May board meeting showed.
While deliberating and approving the changes to the demerger scheme on 6 May, the board took note of a “letter” from the government and “considering the good results (for FY22) and a PAT (consolidated) of Rs865 crores as also the low dividend being recommended on account of the constraints while there has been a cash profit of Rs1,474 crores, increased the transfer of surplus cash from Rs450 crores to Rs1,000 crores in the revised scheme of demerger,” according to the minutes of the 6 May board meeting seen by ET Infra.
The “constraints” refers to the revaluation done in FY16 of the 44-acre (1,78,871.1 square metres) land from which it runs the maritime training institute at Powai, to some Rs2,376.29 crore, which sits in the balance sheet under the heading of ‘General Reserve’.
SCI adopted the Indian Accounting Standard 27 (Ind AS 27) in FY 16 which necessitated calculating the carrying value of assets (ships), and while doing this, if the ships were making losses, the value of the ships would be restated based on the income derived from ships. This translated into a loss of some Rs2,537 crore in the profit and loss account of SCI as the charter rates dipped sharply.
To counterbalance this, SCI revalued upwards the MTI land (freehold land given as grant by the Maharashtra government for the specific purpose of running a maritime training institute). This helped in adjusting the cash loss of SCI against the gain in value of MTI land.
Under the Companies Act, a firm cannot declare a special dividend unless it is able to show that its retained earnings are higher than the General Reserve. It still can do it, provided it met three conditions, one of them being that the rate of dividend cannot exceed the average of the last three years.
On May 6, the board of SCI declared a dividend of Rs0.33 a share for FY22. The rate of dividend was Rs0.25 a share in FY21 and Rs0.75 a share in FY20.
Typically, the government sucks out the surplus cash from a State-owned company ahead of sale by directing it to pay a special dividend to the shareholders.
But, due to the embargo or restriction on declaring special dividends per the Companies Act as explained earlier, the surplus cash will be trapped in SCI and the government cannot take it out.
By the time the next board meeting took place on 8 August, the implications of the higher fund transfer from SCI to SCILAL, started to unravel, with concerns mounting within SCI itself on how it would be implemented, putting a question mark on the way in which the Rs1,000 crores transfer was “determined by the board” and whether it was “prudent” or not.
The amount, according to a person briefed on the matter, is said to have been “determined” without seeking concurrence from the company’s Treasury Department.
During the 8 August meeting, the board noted that “the amount (Rs1,000 crores) was determined and informed to the board in the meeting held on 6 May. However, prior to the meeting, the additional amount of Rs550 crores was not earmarked and not kept in an escrow type arrangement” for ultimate transfer to the resulting company (SCILAL).
At the 8 August meeting, the company management presented before the board the projected cash balance position on 31 March 2023 (FY23) based on the cash, mutual fund and fixed deposit balances on 30 June 2022 and expected net inflows for the remaining 9 months of the financial year. The projected cash balance was adjusted for earmarked funds, employee liabilities and expected dry dock (including ballast water treatment systems) expenditure. This exercise concluded that the projected surplus amount is expected to be less than Rs1,000 crores.
“If SCI has to proceed with the transfer of Rs1,000 crores to the resulting company (SCILAL), consequent to the receipt of approvals from competent authorities (MCA etc), SCI will be compelled to borrow further funds to make the said transfer, which will be at a cost which is expected to be higher than the current rate of borrowing (since the asset base will be reduced and liquid cash will be almost nil). There may also be strain in meeting the liabilities in time unless there is an increased cash flow than projected, which might happen if the trade situation changes favourably. As the demerger scheme states surplus cash as a non core asset, it is felt that the intention of the scheme is not to borrow for the purpose of the transfer to resultant company. The Board noted the position,” according to the minutes of the 8 August board meeting.
Given this backdrop, the company management moved a proposal for the board’s consideration on 4 November, which pointed out that SCI previously benefited from converting a big chunk of its short-term borrowings into medium/long term loans that helped improve its “current ratio” and “liquidity position”.
“In view of the same, it is considered that it would be beneficial for SCI to convert its balance short term loan into long term loan”, the board proposal said.
Justifying the proposal to convert the short-term loan of USD 31 million (some Rs260 crores), taken from Bank of India, into medium or long-term loan, the note said: “The loan is on a 3-month rollover basis and by the end of the third month, the Bank limit is to be rolled over. However, the Bank can do only up to 3 rollovers because of credit risk policy and regulatory restrictions on “ever greening” of loans. Hence, there is a requirement to convert the existing short-term loan to a medium/long term loan of 3-5 years based on the Bank’s sanction possibilities”.
The board note also proposed that the estimated shortfall of about Rs350 crores for funding the Rs1,000 crores transfer to SCILAL will be borrowed from the “existing working capital lenders and the said borrowing (would) be converted to a medium/long term loan in due course”.
“This proves that SCI never held any surplus cash of Rs1,000 crores,” the person mentioned earlier said. “In fact, due to the weak cash flow position of SCI, payments to vendors and suppliers are getting delayed and, in a few cases, the company is forced to pay interest on delayed payments, hitting the ship operations and bottom line”, he stated.
“SCI is operating in a capital-intensive sector and pushing the company to make large cash transfers to SCILAL will hurt the day-to-day working capital availability and raise the cost of debt. Did the audit committee and the SCI board carry out detailed deliberations to ensure protection of minority shareholders’ interest and assess the impact of the decision on operations, expansion and profitability of SCI and its existence as a going concern,” the person asked.
Bankers say that the ‘Shipping House’ and the land and buildings of MTI always acted as a “comfort factor” while sanctioning loans to SCI for buying ships. “The company’s credit worthiness will likely be impacted by its absence and generate concern among lenders,” a banker said.
By 31 March 2023, SCI’s total debt is projected at Rs2,593 crores comprising a short term loan of Rs252.81 crore, long-term working capital loan of Rs1,545.16 crores and long-term project (vessel) loan of Rs795.03 crores.
The original demerger scheme envisaged that the non-core assets such as ‘Shipping House’ and the land and buildings of Maritime Training Institute will be transferred to SCILAL only after the core shipping company is sold to a private strategic buyer.
Documents seen by ET Infra reveals that the Ministry of Ports, Shipping and Waterways directed the SCI board in a 22 April 2022 letter to complete the demerger process and transfer the non-core assets to SCILAL “on immediate basis prior to the completion of Share Purchase Agreement” with the private buyer. This was approved by the SCI board at the 6 May meeting.
The land on which ‘Shipping House’ is located and the maritime training institute is run were given on long lease by the Maharashtra government. Hence, the transfer of these assets to a new entity owned by the Centre, would be subject to approval from the State government, per the original demerger scheme. This condition was removed from the revised demerger scheme.
The decision to complete the demerger of core and non-core assets before the privatisation of SCI is seen as a “risky” move.
“If the privatisation doesn’t go through for any reason, SCI will be forced to pay rent at market rates to the government or its nominated agency to operate from its own building putting further strain on its financials already depleted by the proposed carve out of ‘Shipping House’ and MTI,” the person quoted earlier said.
Besides, the revised demerger scheme also deleted the clause pertaining to securing a crucial no objection certificate (NOC) from the Iranian government for the transfer of the 49 percent stake held by SCI in Irano Hind Shipping Company – a joint venture with Iran’s state-run Islamic Republic of Iran Shipping Lines (IRISIL) – to the noncore company.
The Ministry of Ports, Shipping and Waterways, per the documents seen by ET Infra, pushed the SCI board before the 6 May meeting “to remove any legal conditions/prior approvals” written into the original demerger scheme as it could “impact” securing “approval” from the Ministry of Corporate Affairs and any other authorities and hence, “were detrimental to a smooth demerger”.
The agenda for the 6 May board meeting including the revised demerger scheme is itself shrouded in secrecy as it is said to have been prepared on the midnight of 5 May and not circulated to the board members in advance. As a result, the ‘Secretarial Standards on Meetings of the Board of Directors’ (SS-1) of the Institute of Company Secretaries of India (ICSI), were not seemingly complied with, according to the person quoted earlier.
The agenda setting out the business to be transacted at the meeting and notes on the agenda should be given to the directors at least 7 days before the date of meeting unless the Articles prescribe a longer period, according to SS-1.
An alleged negligence of this magnitude by a listed company gains further significance as five persons who were newly inducted as independent directors on the board of SCI were attending their first ever board meeting of the national carrier on 6 May, a second source privy to the development said.
The newly appointed Board members are put through the process of induction training which the company’s executive management is understood to have given a go by, he said.
“The propriety of transferring Rs1,000 crores and other issues contained in the demerger scheme was therefore given a rough shod. These new independent directors possibly didn’t get sufficient time and opportunity to study the original demerger scheme and the changes proposed before giving their consent to the revised demerger scheme on 6 May,” he added.
SCI did not respond to a detailed questionnaire at the time of going to press.
The revised demerger scheme is coming up for a final hearing before the Ministry of Corporate Affairs on 29 December.
