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Rayalaseema Biscuits Company, Kurnool

S Raghunath

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
Sickness in industry, more so sickness in lakh against its share capital of Rs 11 lakh. The chances
of recovering the dues from liquidation of stocks ap-
small scale industries, has become a national peared bleak. Though the advances were partly secured
concern. Is sickness primarily due to by personal guarantees of the directors, the bank could
ineptitude and dishonesty of management? Is hardly recover 70 to 80 per cent of the dues. Surya
it because of the destructive attitude of Narayan was convinced that RBC could be turned
labour unions? Is it due to non-disbursement around with a change in management. Nonetheless, he
of funds by banks? These are some of the was contemplating enforcement of the personal
guarantees given by the directors.
questions that are confronting academics,
industrialists, and policy-makers. This case
would enable the readers to get a glimpse of The Company
the causes that lead to sickness and what RBC was established in 1980 as a private company to
might be done to prevent sickness. manufacture biscuits in the small scale sector. It was
promoted by two directors Pratap Reddy and Kan-
S Raghunath is presently Assistant Professor of tha Rao. Pratap Reddy, a man of substantial means, was
the Correspondent of a college and a non-practising
Management at Lai Bahadur Shastri National lawyer. Kantha Rao was an agriculturist turned success-
Academy of Administration, Mussoorie. 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
'Preparation of this case in its present form was inspired by a train some of the employees.
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 Finance
and the Editorial Board gratefully acknowledge his The total cost of the project was estimated at Rs 31 lakh.
contributions at various stages of preparation of the case. In September 1980, the promoters approached Telugu
This case was prepared during S Raghunath's tenure as Bank for a term loan of Rs 19 lakh and working capital
Research Associate at the Indian Institute of Management, Ah- finance of Rs 2.7 lakh. At that time, they did not sub-
medabad. mit a detailed project report to the bank, but gave an
outline of the project, details of machinery and

Vol.14,No.4, October-December 1989 43

ment, and working capital requirements. On 14 Oc- Rs 6 lakh and unsecured loans of Rs 2.2 lakh before they
tober 1980, the Branch Manager recommended RBCs availed bank finance. The Regional Manager high-
proposal to the Regional Manager. On 30 October 1980, lighted in his letter "...the directors of the company are
the Regional Manager wrote to the Head Office that honest and creditworthy. They have been dealing with
RBC's proposal could be accepted on the basis of the the bank for a long time in the past...." The Branch
recommendation of the Branch Manager subject to the Manager's and the Regional Manager's letters are
condition that the promoters would bring in capital of reproduced in Exhibits 1 and 2.
company or by Benzer. The proposed unit is capable of
Exhibit 1: Letter from the Branch Manager to securing raw materials, power, and labour at reasonable
the Regional Manager of the Telugu Bank Ltd. rates. It has received approval from the Industries
To, Department and a Provisional Registration Certificate
The Regional Manager 14 October, 1980 has been granted on 11 September 1980. The area where
Telugu Bank Ltd. the unit is located is eligible for incentives from the
Dear Sir, Industries Department. The state incentive of interest-free
sales-tax loan will also be eligible on fixed assets, land,
Re: SSI Term Loan and OCC facility A/c building, and machinery worth Rs 20 lakh as per recent
Rayalaseema Biscuits Company
Rayalaseema Biscuits Company, Kurnool, has
approached us for credit facilities: a term loan of Rs For this proposed advance, land, building, and
11,50,000 against machinery, a term loan of Rs 7,50,000 machinery will be taken under equitable mortgage and
against land and building, and working capital facility of stocks under hypothecation in addition to the personal
Rs 2,70,000. Earlier, we have issued a bank guarantee for guarantee of the directors. The loan is repayable within
Rs 1,10,000 favouring Benzer and Co. Ltd. Bangalore. Sri seven years from the commencement of the business with
Pratap Reddy, Managing Director of RBC, has entered a grace period of one year. The borrowers have agreed to
into an agreement with Benzer to instal this unit with pay Rs 75,000 plus interest on quarterly basis. They are
registered office at Kurnool and the factory at a small agreeable to avail the open cash credit limits according to
village in Kurnool district. Accordingly, the company our normal rates.
has acquired two acres of land in the village at a cost of
Rs 48,000. Since this is a backward area, the Industries The proposed unit will produce all varieties of
Department is giving a subsidy of 10 per cent on the biscuits. There is no problem in marketing as Benzer is
proposed plant, machinery and other equipment. The undertaking the responsibility to purchase the entire
total estimated cost of the project comes to Rs 31.09 lakh; quantity of biscuits on the basis of the agreement entered
the company requires financial assistance to the extent of into with the manufacturer. In turn, Benzer will effect
Rs 21.70 lakh. payment directly to the bankers to the credit of
Rayalaseema's account with us. Rayalaseema Biscuits is
Rayalaseema Biscuits is venturing into establishing giving a letter of authorization to deduct the usual
a biscuit manufacturing unit with the cooperation of installments plus interest from the amounts so
Benzer who will act as C & F agents and will market to received. There will not be any problem in repayment
the tune of 1,200 tonnes of biscuits a year. The capacity of of the loan since there is good demand and
the unit is more than 2,700 tonnes a year. The additional marketability for the products.
production of 1,500 tonnes could be supplied to Benzer
or marketed by RBC itself through its distributing If there is any deficiency in the total investment of the
agencies. This unit is the first of its kind sponsored by project, the directors will meet it from their own
Benzer in the backward districts and, from the economic resources. Kindly consider the application on our usual
point of view, it is feasible, viable, and profitable. terms and conditions at an early date and communicate
the limits to us at the earliest.
The Managing Director and the other director Mr
Kantha Rao are known to our bank for a long time. The Yours faithfully,
directors propose to invest their own capital to the extent
of Rs 5 lakh, collect Rs 3 lakh from subsidy sources, and Manager
the rest we have to consider by way of a term loan and Kurnool Branch
OCC. The remaining amount of Rs 1.1 lakh towards
technical knowhow will be borne by the directors of the

44 Vikalpa
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-
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
In March 1981, the bank sanctioned a term loan of transformer for power connection has been
Rs. 17.66 lakh, open cash credit limit of Rs. 2.67 lakh,and erected.
key cash credit limit of Rs. 3 lakh with stipulation that
promoters have to initially invest a capital of Rs 6 lakh Order for power connection was issued by the State
before release of any part of term loan. Electricity Board on 3 August 1982 and was received by
The Branch Manager however did not insist on the the company on 30 August 1982. The unit started
stipulation mentioned by the Regional Manager and production on 22 December 1982, well over two years
behind schedule. The financial position of the company
disbursed the amount sanctioned. Further, he made
as on 31 December 1982 is shown in Exhibit 3.
payments directly to the promoters when the 'sanction

Vol.14,No.4, October-December 1989 45

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
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).
More Financial Assistance
Labour Unrest
Consequent to the delay in implementing the project,
the company required more working capital. It also re- The packaging department at RBC consisted of 30
quested the bank for rescheduling the term loan. workers, mostly female. In April 1984, the workers of
RBC went on strike demanding a wage increase of Rs 3
Agreeing favourably to the request, the bank raised a day on the existing rate of Rs 12 a day for these workers
the open cash credit limit to Rs 10 lakh, provided a clean who were categorized as unskilled labour. The union
bills purchase limit of Rs 2 lakh, and cancelled the key contested this categorization and argued that packing
cash credit limit of Rs 3 lakh. During the year 1983, the was a skilled job as it involved matching the packing
company had a turnover of Rs 4.35 lakh and incurred a speed with the speed of production. The union pointed
loss of Rs 5.46 lakh. out that it normally took 10 hours to pack eight hours
Change in Marketing Arrangement of production; if it was not a skilled job, any unskilled
worker would have done the job in just 8 hours. After
In November 1983, the company approached Benzer
a month, the management revised the wage rate to Rs
with a proposal that Benzer should purchase RBC's bis-
15 per day and also offered an incentive of Rs 2 for extra
cuits under the brand name of "Benzer." In the earlier"
work done every day. Thus, the labour problem was
arrangement, biscuits were despatched to Benzer but
amicably settled.
the title of the stocks held by Benzer remained

46 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

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 In response to this official note, the Regional
as executive director. Manager recommended renewal of open cash credit
limit of Rs 10 lakh and usance bills limit of Rs 20 lakh
The branch manager recommends the with the three conditions as detailed above. But RBC
renewal of open cash credit of Rs 10 lakh and failed in its attempts to bring in Rs 10 lakh as unsecured
sanctioning of additional documentary usance loan and the unit could not be revived. The directors
bills purchase limit of Rs 20 lakh. He is of the pleaded for more time to revive the unit. Subsequently,
opinion that early sanction of usance bills will the directors decided to split up and Kantha Rao opted
avoid further loss.As the limits are interlinked out to give full managerial control to Pratap Reddy.
with the financial commitments of the unit and as Meanwhile, the bank advertised for the disposal of the
it is also difficult for directors to invest fresh capi- unit but met with poor response. Pratap Reddy was not
tal without assurance from our side, it is needless in favour of selling the unit since he wanted to lease it
to say that the unit will be in the doldrums once to the Banglore Biscuits Company (BBC).
again if the necessary limits are not given. On 11
September 1984, the branch informed me over Leasing Arrangement
phone that usance bills outstanding of Rs 72,000 During November 1986, RBC got a sanction from the
has been realized and the company has also bank to lease the unit to BBC provided:
remitted a sum of Rs 70,000 towards open cash RBC paid at least Rs 3 lakh against its dues to the bank
credit liability which has come down to Rs 8.17 before enforcement of the contract.
RBC agreed to pay Rs 50,000 a month to the bank after
However, the position of this unit is alarming the commencement of the job work.
and we may have to decide whether we have to The bank reserved the right to increase the monthly
recall the advance or to renew the limits and con- payment. Though the monthly repayment of Rs
sider additional usance bills limit. 50,000 was meagre, the bank consented to this
condition as there was a possibility of increasing it if
To renew the limits, we have to consider the RBC could lease out another two shifts.
following factors:
The period of lease was two years. Raw materials
Whether the present management will be and other input costs except power and labour were to
able to manage the unit properly. be borne by BBC. RBC would receive Rs 1,600 a tonne
towards conversion charges and would undertake to
The name of the new executive director and
manufacture 100 tonnes of biscuits a month on a single
his experience in the line.
shift basis. BBC agreed to provide cash advance of Rs 4
Unsecured loans of Rs 10 lakh. lakh and post their supervisory staff for controlling the
quality and movement of stocks; BBC would bear the
As there is the time factor, we may recom- salaries of their staff.
mend renewal of limits and sanction Rs 20 lakh
usance bills limit with the following conditions: Performance of the Contract
The company should wipe off the deficit in RBC paid Rs 3 lakh to the bank and cleared its arrears
open cash credit immediately with un with the State Electricity Board. The company made a
secured loans. trial run and informed BBC that it would take up the
conversion job from 15 February 1987. However,
The credentials and experience of the new ex production could not start owing to non-allotment of
ecutive director should be verified by the the ISI certificate. Ultimately, the certificate was ob-
manager. tained in June 1987 and production commenced in July.
The bank did not receive any payment until then.
A special report should be submitted by the
branch every fortnight covering the follow Meanwhile, Kantha Rao requested the bank to
ing information: stock on hand (copy of the relieve him from the company's liability by taking the
statement), liability, drawing power, produc properties of Pratap Reddy. A meeting was held in the
tion made, sales made, and bills position. zonal office of the bank on 20 May 1987 in which Pratap

48 Vikalpa
making good use of the lease arrangement with the
BBC. His conclusions were based on the following ob-
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.

RBC continued to be irregular in paying its month- The biscuit industry was booming since 1986 and
ly instalments to the bank. In June 1988 its financial the company did not take advantage of this fact. The
position worsened. (See Exhibit 5 for details). The Branch Manager was, thus, of the opinion that unless
Branch Manager reviewed the situation and concluded there was a change in management, the unit could not
that the managing director was not showing interest in become viable.

Vol.14,No.4, October-December 1989 49