1
Rayalaseema Biscuits Company, Kurnool
S Raghunath
Sickness in industry, more so sickness in
small scale industries, has become a national
concern. Is sickness primarily due to
ineptitude and dishonesty of management? Is
it because of the destructive attitude of
labour unions? Is it due to non-disbursement
of funds by banks? These are some of the
questions that are confronting academics,
industrialists, and policy-makers. This case
would enable the readers to get a glimpse of
the causes that lead to sickness and what
might be done to prevent sickness.
S Raghunath is presently Assistant Professor of
Management at Lai Bahadur Shastri National
Academy of Administration, Mussoorie.
'Preparation of this case in its present form was inspired by a
senior bank executive. Materials and documents for the
substantive contents of this case were provided by the same
bank executive who wishes to remain anonymous. The author
and the Editorial Board gratefully acknowledge his
contributions at various stages of preparation of the case.
This case was prepared during S Raghunath's tenure as
Research Associate at the Indian Institute of Management, Ah-
medabad.
Vol.14,No.4, October-December 1989
In mid 1988, Surya Narayan, who had recently assumed
charge as the branch manager of Telugu Bank Ltd., Kur-
nool, was contemplating what legal action he should
take against Rayalaseema Biscuits Company (RBC). As
of June 30, 1988, RBC owed Rs 41.5 lakh to the bank
whereas its accumulated losses totalled around Rs 59
lakh against its share capital of Rs 11 lakh. The chances
of recovering the dues from liquidation of stocks ap-
peared bleak. Though the advances were partly secured
by personal guarantees of the directors, the bank could
hardly recover 70 to 80 per cent of the dues. Surya
Narayan was convinced that RBC could be turned
around with a change in management. Nonetheless, he
was contemplating enforcement of the personal
guarantees given by the directors.
The Company
RBC was established in 1980 as a private company to
manufacture biscuits in the small scale sector. It was
promoted by two directors Pratap Reddy and Kan-
tha Rao. Pratap Reddy, a man of substantial means, was
the Correspondent of a college and a non-practising
lawyer. Kantha Rao was an agriculturist turned success-
ful civil contractor who had executed a number of
projects for the Indian Railways, the Public Works
Department, and other large companies. They entered
into a technical and marketing tie-up with Benzer and
Company Limited, Bangalore, which was to act as the
clearing and forwarding agent for the biscuits manufac-
tured by RBC. In addition, Benzer was to provide tech-
nical guidance for manufacturing quality biscuits and
train some of the employees.
Finance
The total cost of the project was estimated at Rs 31 lakh.
In September 1980, the promoters approached Telugu
Bank for a term loan of Rs 19 lakh and working capital
finance of Rs 2.7 lakh. At that time, they did not sub-
mit a detailed project report to the bank, but gave an
outline of the project, details of machinery and
equip-
43
ment, and working capital requirements. On 14 Oc-
tober 1980, the Branch Manager recommended RBCs
proposal to the Regional Manager. On 30 October 1980,
the Regional Manager wrote to the Head Office that
RBC's proposal could be accepted on the basis of the
recommendation of the Branch Manager subject to the
condition that the promoters would bring in capital of
Exhibit 1: Letter from the Branch Manager to
the Regional Manager of the Telugu Bank Ltd.
To,
The Regional Manager 14 October, 1980
Telugu Bank Ltd.
Dear Sir,
Re: SSI Term Loan and OCC facility A/c
Rayalaseema Biscuits Company
Rayalaseema Biscuits Company, Kurnool, has
approached us for credit facilities: a term loan of Rs
11,50,000 against machinery, a term loan of Rs 7,50,000
against land and building, and working capital facility of
Rs 2,70,000. Earlier, we have issued a bank guarantee for
Rs 1,10,000 favouring Benzer and Co. Ltd. Bangalore. Sri
Pratap Reddy, Managing Director of RBC, has entered
into an agreement with Benzer to instal this unit with
registered office at Kurnool and the factory at a small
village in Kurnool district. Accordingly, the company
has acquired two acres of land in the village at a cost of
Rs 48,000. Since this is a backward area, the Industries
Department is giving a subsidy of 10 per cent on the
proposed plant, machinery and other equipment. The
total estimated cost of the project comes to Rs 31.09 lakh;
the company requires financial assistance to the extent of
Rs 21.70 lakh.
Rayalaseema Biscuits is venturing into establishing
a biscuit manufacturing unit with the cooperation of
Benzer who will act as C & F agents and will market to
the tune of 1,200 tonnes of biscuits a year. The capacity of
the unit is more than 2,700 tonnes a year. The additional
production of 1,500 tonnes could be supplied to Benzer
or marketed by RBC itself through its distributing
agencies. This unit is the first of its kind sponsored by
Benzer in the backward districts and, from the economic
point of view, it is feasible, viable, and profitable.
The Managing Director and the other director Mr
Kantha Rao are known to our bank for a long time. The
directors propose to invest their own capital to the extent
of Rs 5 lakh, collect Rs 3 lakh from subsidy sources, and
the rest we have to consider by way of a term loan and
OCC. The remaining amount of Rs 1.1 lakh towards
technical knowhow will be borne by the directors of the
44
Rs 6 lakh and unsecured loans of Rs 2.2 lakh before they
availed bank finance. The Regional Manager high-
lighted in his letter "...the directors of the company are
honest and creditworthy. They have been dealing with
the bank for a long time in the past...." The Branch
Manager's and the Regional Manager's letters are
reproduced in Exhibits 1 and 2.
company or by Benzer. The proposed unit is capable of
securing raw materials, power, and labour at reasonable
rates. It has received approval from the Industries
Department and a Provisional Registration Certificate
has been granted on 11 September 1980. The area where
the unit is located is eligible for incentives from the
Industries Department. The state incentive of interest-free
sales-tax loan will also be eligible on fixed assets, land,
building, and machinery worth Rs 20 lakh as per recent
amendments.
For this proposed advance, land, building, and
machinery will be taken under equitable mortgage and
stocks under hypothecation in addition to the personal
guarantee of the directors. The loan is repayable within
seven years from the commencement of the business with
a grace period of one year. The borrowers have agreed to
pay Rs 75,000 plus interest on quarterly basis. They are
agreeable to avail the open cash credit limits according to
our normal rates.
The proposed unit will produce all varieties of
biscuits. There is no problem in marketing as Benzer is
undertaking the responsibility to purchase the entire
quantity of biscuits on the basis of the agreement entered
into with the manufacturer. In turn, Benzer will effect
payment directly to the bankers to the credit of
Rayalaseema's account with us. Rayalaseema Biscuits is
giving a letter of authorization to deduct the usual
installments plus interest from the amounts so
received. There will not be any problem in repayment
of the loan since there is good demand and
marketability for the products.
If there is any deficiency in the total investment of the
project, the directors will meet it from their own
resources. Kindly consider the application on our usual
terms and conditions at an early date and communicate
the limits to us at the earliest.
Yours faithfully,
Manager
Kurnool Branch
Vikalpa

In March 1981, the bank sanctioned a term loan of
Rs. 17.66 lakh, open cash credit limit of Rs. 2.67 lakh,and
key cash credit limit of Rs. 3 lakh with stipulation that
promoters have to initially invest a capital of Rs 6 lakh
before release of any part of term loan.
The Branch Manager however did not insist on the
stipulation mentioned by the Regional Manager and
disbursed the amount sanctioned. Further, he made
payments directly to the promoters when the 'sanction
Vol.14,No.4, October-December 1989
stipulated that payments were to be made to the
suppliers of machinery after collecting margins from
the borrower. Most of the disbursements of the term
loan were cash payments made to the promoters and
the branch did not get copies of invoices relating to the
machinery purchased by the company. Further, the
bank did not create a charge on the assets of the
company within 30 days of disbursing the loan as was
statutorily required.
Project Implementation
There was considerable delay in implementing the
project as the State Electricity Board did not provide
power connection to the unit. Moreover, the company
did not send periodic progress reports to the bank.
However, bank officials occasionally visited the factory
site to keep themselves abreast of the work in progress.
The Technical Officer from the regional office inspected
the unit during 1982 and reported as follows:
The civil construction of the unit is complete and
the machinery has been erected. The machinery
has been verified as per the quotation of the sup-
pliers and it is found that it has been properly in-
stalled.
The company has applied to the Civil Supplies
Department for supply of sugar and maida. The
Branch Manager has confirmed that the disburse-
ment of loan amounts was made directly to the
suppliers and that the company paid an amount
of Rs 1 lakh to the Civil Supplies Department for
securing stocks of sugar and maida.
The unit is ready to commence production, but the
main hurdle is the power connection which has
not yet been obtained. It is learnt from the ap-
plicants that power supply was delayed because
neither the Rural Electrical Corporation nor the
State Electricity Board could take any decision on
whose jurisdiction this unit falls. After prolonged
persuasion, the State Electricity Board has agreed
to give power connection on 20 August 1982. The
transformer for power connection has been
erected.
Order for power connection was issued by the State
Electricity Board on 3 August 1982 and was received by
the company on 30 August 1982. The unit started
production on 22 December 1982, well over two years
behind schedule. The financial position of the company
as on 31 December 1982 is shown in Exhibit 3.
45

More Financial Assistance
Consequent to the delay in implementing the project,
the company required more working capital. It also re-
quested the bank for rescheduling the term loan.
Agreeing favourably to the request, the bank raised
the open cash credit limit to Rs 10 lakh, provided a clean
bills purchase limit of Rs 2 lakh, and cancelled the key
cash credit limit of Rs 3 lakh. During the year 1983, the
company had a turnover of Rs 4.35 lakh and incurred a
loss of Rs 5.46 lakh.
Change in Marketing Arrangement
In November 1983, the company approached Benzer
with a proposal that Benzer should purchase RBC's bis-
cuits under the brand name of "Benzer." In the earlier"
arrangement, biscuits were despatched to Benzer but
the title of the stocks held by Benzer remained
46
with RBC. Benzer distributed RBC's products to
dealers/consumers, and collected and despatched che-
ques drawn in favour of the manufacturer. Late realiza-
tion of these cheques led to an increase in the working
capital requirements of RBC. There was substantial in-
crease in the cost of materials and overheads too. As the
finished products were immediately despatched to Ben-
zer, RBC was unable to avail of the finance on finished
goods stocked; the realization on receivables was also
delayed. The bank would not consider any demand
bills purchase limit for the following reasons:
The goods delivered by the company to Benzer were
distributed to dealers/consumers by the latter.
These parties were unknown to the company and the
bank till the cheques/bills were presented for
realization.
In the revised marketing arrangement which came
into effect from 5 November 1983, Benzer agreed to
purchase the biscuits under the brand name of "Benzer"
provided the quality control staff of Benzer approved
the quality of biscuits. RBC extended to Benzer a credit
period of 60 days from the date of delivery. Benzer
advised RBC to draw bills under the Hundi system for
supplies made and such bills were to be accepted by
Benzer for payment on the due dates. The supply price
for each item and the commission payable to Benzer for
its services were fixed through negotiations.
During 1984, RBC's turnover had increased to Rs
30.98 lakh but losses too had gone up to Rs 12.47 lakh.
(The financial position of RBC for 1983 and 1984 is given
in Exhibit 4).
Labour Unrest
The packaging department at RBC consisted of 30
workers, mostly female. In April 1984, the workers of
RBC went on strike demanding a wage increase of Rs 3
a day on the existing rate of Rs 12 a day for these workers
who were categorized as unskilled labour. The union
contested this categorization and argued that packing
was a skilled job as it involved matching the packing
speed with the speed of production. The union pointed
out that it normally took 10 hours to pack eight hours
of production; if it was not a skilled job, any unskilled
worker would have done the job in just 8 hours. After
a month, the management revised the wage rate to Rs
15 per day and also offered an incentive of Rs 2 for extra
work done every day. Thus, the labour problem was
amicably settled.
Vikalpa
 In September 1984, RRC approached the bank for
renewing the open cash credit limit of Rs 10 lakh and
sanction Rs 20 lakh against usance bills. Apart from an
assurance to bring additional unsecured loan of Rs 10
lakh, the directors gave the following details to the
bank:

RBC wants to start production in September itself.

The company has recently secured an order for 83

tonnes of biscuits.

RBC proposes to appoint an experienced man as

executive director.

Benzer agrees to accept hundies and market at least

100 tonnes of biscuits every month.
Extracts from the Technical Officer's note to the
Regional Manager regarding the above request are
Financial Crisis
given below:
However, by 14 June 1984, the company closed ... the liquidity of RBC is not satisfactory. There is
down its operations on account of a cash crunch.
a liquid deficit of Rs 8,38 lakh. There is negative
The company's liability towards the bank is shown
in Table 1. net worth of Rs 7.11 lakh and the total liabilities
are Rs 38.21 lakh. Already there is an amount of Rs
There were overdues of Rs 7.1 lakh in the term loan 22.31 lakh under long term liability against fixed
account, Rs 8.87 lakh because of deficits in stock, and Rs assets valued at Rs 23.58 lakh. The proposed
0.72 lakh overdue bills, a total of Rs 16.78 lakh against
bringing in of Rs 10 lakh as unsecured loan will
the total liability of Rs 29.38 lakh. The directors tried to
lease the unit to Leo Foods Limited, Hyderabad. But the be just sufficient to wipe off the liquid deficit and
terms of lease were not acceptable to the company and meet the margin for working capital. The com-
the bank. pany has realized that it lacks experience in the

Vol.14, No.4, October-December 1989 47

 field and wishes to bring in an experienced man
as executive director.
The branch manager recommends the
renewal of open cash credit of Rs 10 lakh and
sanctioning of additional documentary usance
bills purchase limit of Rs 20 lakh. He is of the
opinion that early sanction of usance bills will
avoid further loss.As the limits are interlinked
with the financial commitments of the unit and as
it is also difficult for directors to invest fresh capi-
tal without assurance from our side, it is needless
to say that the unit will be in the doldrums once
again if the necessary limits are not given. On 11
September 1984, the branch informed me over
phone that usance bills outstanding of Rs 72,000
has been realized and the company has also
remitted a sum of Rs 70,000 towards open cash
credit liability which has come down to Rs 8.17
lakh.
However, the position of this unit is alarming
and we may have to decide whether we have to
recall the advance or to renew the limits and con-
sider additional usance bills limit.
To renew the limits, we have to consider the
following factors:
Whether the present management will be
able to manage the unit properly.
*
The name of the new executive director and
his experience in the line.
Unsecured loans of Rs 10 lakh.
As there is the time factor, we may recom-
mend renewal of limits and sanction Rs 20 lakh
usance bills limit with the following conditions:
The company should wipe off the deficit in
open cash credit immediately with un
secured loans.
The credentials and experience of the new ex
ecutive director should be verified by the
manager.
A special report should be submitted by the
branch every fortnight covering the follow
ing information: stock on hand (copy of the
statement), liability, drawing power, produc
tion made, sales made, and bills position.
48
In response to this official note, the Regional
Manager recommended renewal of open cash credit
limit of Rs 10 lakh and usance bills limit of Rs 20 lakh
with the three conditions as detailed above. But RBC
failed in its attempts to bring in Rs 10 lakh as unsecured
loan and the unit could not be revived. The directors
pleaded for more time to revive the unit. Subsequently,
the directors decided to split up and Kantha Rao opted
out to give full managerial control to Pratap Reddy.
Meanwhile, the bank advertised for the disposal of the
unit but met with poor response. Pratap Reddy was not
in favour of selling the unit since he wanted to lease it
to the Banglore Biscuits Company (BBC).
Leasing Arrangement
During November 1986, RBC got a sanction from the
bank to lease the unit to BBC provided:
RBC paid at least Rs 3 lakh against its dues to the bank
before enforcement of the contract.
RBC agreed to pay Rs 50,000 a month to the bank after
the commencement of the job work.
The bank reserved the right to increase the monthly
payment. Though the monthly repayment of Rs
50,000 was meagre, the bank consented to this
condition as there was a possibility of increasing it if
RBC could lease out another two shifts.
The period of lease was two years. Raw materials
and other input costs except power and labour were to
be borne by BBC. RBC would receive Rs 1,600 a tonne
towards conversion charges and would undertake to
manufacture 100 tonnes of biscuits a month on a single
shift basis. BBC agreed to provide cash advance of Rs 4
lakh and post their supervisory staff for controlling the
quality and movement of stocks; BBC would bear the
salaries of their staff.
Performance of the Contract
RBC paid Rs 3 lakh to the bank and cleared its arrears
with the State Electricity Board. The company made a
trial run and informed BBC that it would take up the
conversion job from 15 February 1987. However,
production could not start owing to non-allotment of
the ISI certificate. Ultimately, the certificate was ob-
tained in June 1987 and production commenced in July.
The bank did not receive any payment until then.
Meanwhile, Kantha Rao requested the bank to
relieve him from the company's liability by taking the
properties of Pratap Reddy. A meeting was held in the
zonal office of the bank on 20 May 1987 in which Pratap
Vikalpa

RBC continued to be irregular in paying its month-
ly instalments to the bank. In June 1988 its financial
position worsened. (See Exhibit 5 for details). The
Branch Manager reviewed the situation and concluded
that the managing director was not showing interest in
Vol.14,No.4, October-December 1989
making good use of the lease arrangement with the
BBC. His conclusions were based on the following ob-
servations:
The managing director of the company had shifted
his registered office outside the present location
leaving the affairs of the company to a manager
who did not have any experience in the manage
ment and technical aspects of the unit.
When power cuts were imposed on all industrial
units in the area by the Electricity Board, he did not
present his case before the board for exemption as
a sick unit under revival.
He had allowed the affairs of the company to drift.
He did not accede to the request of BBC for increas
ing the staff in the packing section to match
production rate of the finished products.
Instead of reducing the liability of the bank and
saving the interest burden on overdues, he had al
lowed the outstandings to pile up without making
any arrangements for repaying.
He had defaulted on the instalments to the bank
and had diverted part of the surplus amount to pay
the electricity bills. Though he had shown keen in
terest in obtaining concessions which were avail
able to sick units, he was not really interested in
reviving the unit.
The biscuit industry was booming since 1986 and
the company did not take advantage of this fact. The
Branch Manager was, thus, of the opinion that unless
there was a change in management, the unit could not
become viable.
49