The Hindu Business Line : Hitch over sale of residual stake in Modern Foods

But, contrary to the official version, the Government is yet to conclude the transaction for exiting completely from the bread maker by selling its residual stake of 26 per cent to the new owner — Hindustan Lever Ltd (HLL), even 8 months after the Cabinet Committee on Disinvestment (CCD) had cleared the sale on February 27 this year.

That day marked a new milestone in the privatisation process as the Government decided to exercise its "put option'' as outlined in the shareholders agreement and sell the residual stake to the private strategic partner who was given management control of the company through sale of 74 per cent stake on January 31, 2000.The sale fetched Rs 105.45 crore to the Government and Rs 20 crore to the company.

At the heart of the delay in concluding the deal is the "unholy" clause on post-closing adjustment, which entitles the strategic partner to claim refund for any accounting deficiencies that happened prior to the transfer of management control of the company.

In line with the provisions of the shareholders agreement, HLL has made a claim on the Government for approximately Rs 4 crore before paying up the Rs 44 crore for the 26 per cent stake at Rs 11,489.56 per share. The mode of payment of this Rs 4 crore has now become a bone of contention.

The Rs 4 crore post-closing adjustment is on account of under-provisioning in the accounts of Modern Foods for employees' gratuity liability for the period prior to disinvestment.

This issue was raised by the statutory auditors of Modern Foods when it was a Government company, while finalising the accounts for the year ended March 31, 1999.

The board of directors of Modern Foods in its Government avatar had in the director's report even agreed to it. However, this amount was not provided for till the company was privatised leading to a post-closure adjustment claim.

The Disinvestment Ministry considers the Rs 4 crore post-closure adjustment claim made by HLL as "legitimate" as endorsed by the accounting firm S.R. Batliboi. "This amount has to be paid to HLL, there is no doubt about it," Ministry sources said.

"The modalities of the payment and transfer of equity are being discussed with the Government, including the Rs 4-crore payable to HLL as post-closure adjustment," an HLL spokesman told Business Line.

Given this backdrop, HLL says that the Government still holds 26 per cent equity in Modern Foods. "The equity has not yet been transferred to HLL," the spokesman said.

HLL has indicated its willingness to the Government to complete the transaction at the earliest, subject to the resolution of the dispute on post-closure adjustment claim.

"We are awaiting a confirmation from the Government," the spokesman said.

For the Government, disinvestment continues to be an arduous journey.

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