‘An Enemy of the People’ and the battle for Haldia Petrochemicals

(Updated on Friday 13 December 2013)

Pratim Ranjan Bose

The West Bengal Chief Minister Mamata Banerjee is never known to be on the same page with her predecessor Buddhadeb Bhattachrejee of CPI (M). But, both may claim to have common grounds when it comes to Haldia Petrochemicals (HPL) and its lead-promoter, Purnendu Chatterjee.

Purnendu Chatterjee

The IIT-Kharagpur and University of California, Berkeley, trained engineer turned US-based venture capitalist, Chatterjee – who had once played an instrumental role in bringing the State on petrochemicals map of the country - is now, an An Enemy of the 'State’, as Henrik Ibsen might have preferred to put it.

His dogged resistance to the State’s claim of ownership on 15.5 crore shares - approximately nine per cent of the total equity - is now the only stumbling block between Banerjee’s Trinamool Government government and it’s much hyped disinvestment agenda in the ailing HPL. 

The fall guy

Purnendu Chatterjee's partnership with West Bengal government began in the mid 1990’s. That was nearly one-and-a-half decade, since the Jyoti Basu (1977-2000) government first mooted the proposal for attracting investment in the petrochemicals sector.

Buddhadeb Bhattacharjee

With major Industry groups in the country backing out, and the India Government-owned financial institutions dragging their feet to support the project; it took Purnendu’s The Chatterjee Group (TCG) to arrange finances, at the peak of Asian Financial Crisis and the resulting tightness in the money market, to give shape to Basu’s dream project. To his credit he enjoyed support of major global financiers.  

The state-of-the-art HPL facility started operations in 2001 – an year after Basu, vacated office to party colleague, Buddhadeb Bhattacharjee. After some initial hiccup, the company started making profits from 2004. But, Chatterjee’s love affair with the State Government turned sour.

According to the grapevine, the story goes back to a verbal duel between one of the topmost Indian Industrialists and Purnendu at a private meeting convened by the Chief Minister, sometime in end 2004.

Purnendu was correct in his argument. But, the Buddhadeb Bhattacharjee, who was overtaken by the aura of the internationally famous industrialist, was peeved. It is told that he has never met Purnendu again !

There is no one to validate this part of the story. But, going by the course of events one may argue, that Chatterjee went out of favour with the ruling politics that was keen to see him out of HPL.

In 2005 the State Government, with the support of lenders (holding 7.5 per cent stake) decided to issue 8.9 per cent strategic interest in Haldia Petrochemicals Ltd (HPL) to Indian Oil Corporation (IOC), overruling objections from TCG.

Purnendu contested the state action in the court of law, but at a cost both to The Chatterjee Group as well as HPL.

In early 2006, the state government discontinued the 12-year sales tax remission incentive scheme on HPL’s sales of motor spirit (a by-product) to oil companies.

It impacted the standalone naphtha-based petrochemicals project – that had already undertaken a major capacity expansion programme through internal accruals - nearly Rs. 300 crore of net profit annually.

Later in 2006, the Bhattacharjee government cancelled a private treaty, midway through its implementation, to sell nine per cent State shareholding to the private promoter. (The shares, which were first kept in a suspense account, later resurfaced in the balance-sheet of state investment arm.)

It denied TCG an opportunity to gain clear majority with over 50 per cent stake. The company now holds approximately 41 per cent stake in the petrochemicals project, as against the state ownership of 40 per cent (inclusive of the disputed 9 per cent).

The power game

Beginning 2005, the State Government directly or indirectly started dictating terms on the HPL management. The aim, insiders say, was to make Purnendu a loner in the company, where he is the single largest stakeholder and push the HPL management in the interest of the political masters.

Stories still make rounds, how a Purnendu nominated HPL management switched allegiance to State Government and further fuelled the rift between the promoters.

The state has a definitely advantage in this power game, as it used a fraction of the huge tax revenues earned from HPL (and its downstream industries) in making occasional contributions in HPL’s preference capital (total Rs 270 crore) to strengthen its case for control over the project management and, fighting legal cases against the private promoter.

In contrast, TCG was in a discomfort. As the key driver of project management, in 2004, he convinced partners in not sharing dividend and use it in expanding the petrochemicals capacity and product diversification.

During the power game, it offered State an extra handle to Willy-nilly force HPL Board to follow its decisions by virtue of its preference holding. (As per the Indian law, if company does not pay dividend for more than three years, preference shares earn voting rights)

The situation was reverse for TCG. With investments locked in the project, there was not much way for him to arrange fresh equity finances for HPL from the funds backing TCG. (And, till date he couldn’t recover a penny from HPL.)

Moreover, the financial institutions, mostly owned by the Indian Government, were not ready to support Purnendu’s cause, inviting ire of ruling politics in West Bengal had offered the key support to the UPA-I coalition government (2004-09) in Delhi.

Pushed on the back foot, Purnendu opted for defending his case in the Court of Law. And, the more he took legal recourse, the State power painted him black. He was often described as the prime hurdle in ensuring growth of HPL.

Mission: Kill HPL

After nearly six years long protracted legal battle, the Supreme Court finally ruled in favour of IOC’s entry in the project with 8.9 per cent stake, in September 2011. But, the ego-battle did not help the cause of HPL.

The petrochemicals project reported net profits till 2007-08, but at a lower pace than estimated, due to an additional Rs 300 crore a year negative impact (on sales tax) on the bottom line, since 2006.

To add to the company’s trouble, the expansion scheme drifted way beyond the original time and cost estimations. The project was finally announced completed – without following the necessary formalities on project closure - in 2010, at nearly Rs 1500 crore – nearly two-and-a-half times the original estimates.

This coupled with a general slowdown in petrochemicals margin and the curious case of imposition of 5 per cent import duty on naphtha by the India Government in 2008, sucked the blood out of HPL.

The decision to impose import duty was interesting in more than one ways. First, being the only standalone naphtha-based petrochemicals project in the country, HPL was singularly hit by the decision. Second, and most important, it was imposed by a coalition government in Delhi that was in power (2004-2009) by virtue of key support from the ruling CPI (M) in West Bengal.

The decision was reversed in 2011, causing nearly Rs 350 crore annual drain on HPL’s strained resources. The profit went to domestic refiners - including IOC - who sold domestic naphtha at prices comparable to the higher landed cost. It also went in favour of HPL’s competitors, led by Reliance, in the petrochemicals sector.

By the time Buddhadeb Bhattacharjee government fell, in May 2011, HPL was losing nearly Rs 50-100 crore a month.

As in September, 2013, the company reported a negative net worth. It has little money to buy adequate feedstock and run the plant optimally leading to further cost push. Considering the lopsided finances, bankers denied working capital finance till the promoters resolve the legal disputes to ensure smooth functioning.

Everything remaining same, HPL will be referred to the Board for Industrial and Financial Reconstruction (BIFR), as a ‘sick’ company, at the end of this fiscal on March 31, 2014.

The mission to teach Purnendu a lesson has put the company on a death bed.

The M-factor and Court directive

The Mamata Banerjee Government had an opportunity to settle the dispute between promoters and give HPL a fresh lease of life.

Barely a few days after assuming office, Banerjee reopened the dialogue with Purnendu. He was also invited to chair the HPL board meetings through a temporary arrangement (with appointments renewed in every meeting).

Mamata Banerjee

The beginning has encouraged Purnendu to refer a “change of climate” and an “air of collaboration”.

With his active participation, the company management also took up the uphill task of improving the operational efficiency and bring the balance sheet in order. To its credit HPL averted ‘reporting’ (for erosion of 50 per cent of peak net worth) to BIFR during 2011-12, when the petrochemicals margins across the industry were running at a record low.

But, the hope for a reproachment didn't last long, as Mamata Banerjee decided to wait for the Supreme Court verdict on a petition filed by Purnendu (on ownership issues and inclusion of IOC with 8.9 per cent stake as approved by HPL board in 2005). This is to ensure that her arch-rival CPI (M) doesn't get an opportunity to accuse her of out of court settlement benefiting the private promoter.

Supreme Court did come out with a verdict on September 30, 2013. It validated IOC’s inclusion in the project, as a minority shareholder, but turned down TCG’s plea on ownership dispute (the treaty for transfer of 9 per cent stake holding that was scrapped by Buddhadeb Bhattacharjee government in 2006) on the ground that the specific sections (397/402) of Companies Act under which the reprieve was sought were not applicable in the particular case.

To put it straight, the court, did not take a position on the “private agreement” between State government and TCG on January 12, 2002, for transfer of majority control, under the garb of technicalities and, left the options open for Purnendu to seek legal redressal for the alleged “breach of trust”. 

Disinvestment agenda and re-run of power game

The rest of the story (Read this ) was followed the known pattern.

In October 2011, Mamata Banerjee Government decided to auction its interests in HPL Purnendu welcomed the State decision for disinvestment, as it would free HPL from the political and bureaucratic control.

But he denied giving up his demand for nine per cent stake that was bundled with the disinvestment offer for 40 per cent of equity stake. He was also keen that the State goes by the shareholder’s agreement that underlines that Purnendu has the first right of refusal on state holding to be sold at a ‘fair value’ to be determined by a valuer.

His stubborn resistance peeved ‘Didi’ – as Banerjee is fondly referred. Her generals swung into action. State went ahead with its agenda to auction the 40 per cent shareholding overruling objections from the private promoter and a note of caution from the HPL management. 

Based on advises by a panel of legal experts, including a former Chief Justice of India, HPL advised the government to settle the ownership dispute, so as to ensure the flow of bank finance and a smooth execution of the disinvestment agenda. 
In response, the HPL top management was shown the door, unceremoniously.
In a repetition of the history, the State took control of the HPL Boardroom on June 19, 2012, and appointed a new managing director of its choice, to pursue its disinvestment plan. “We found him (Purnendu) stalling moves that could be in the best interest of the company,” West Bengal Industry Minister Partha Chatterjee explained after the board meet.

HPL, now pitted against its private sector co-promoter, is once again gripped by the legal dispute.

The end-game

The share-auction did take place on October 10, 2013 backed by a Calcutta High Court ruling in the middle of this year. Indian Oil Corporation which already controls 8.9 per cent in the project, agreed to pay as much as Rs 25.10 per share, as against the current book value of Rs (-) 6 per share, to gain control over the project that is located in the backyard of IOC’s Haldia refinery. 
Apparently the proposal was a win-win for both sides. But, the ownership dispute put a spoke in the wheel. 
After years of protracted legal battle in different courts in the country, on January 10, the Supreme Court finally allowed Purnendu to approach the ICC International Court of Arbitration, in Paris, to settle the ownership dispute. 
The arbitration clause was incorporated in 2002 agreement between State and TCG, to ensure speedy justice. But, HPL and the State government felt the agreement became invalid following subsequent agreements (between the State and Chatterjee) in 2003 and 2004 and, the Supreme Court judgement in September 2011. 
in its December 10, judgement the apex court not merely favoured Chatterjee’s appeal but, also observed that 2002 treaty is a “principal agreement” that “continues to be in force along with its arbitration clauses”. The observation has given Chatterjee an extra edge to argue his case, before the international panel. 
And, till the proceedings reach a conclusive stage in Paris, there is little scope for State to sell the disputed 9 per cent stake. Even if it is allowed to sell the rest 31 per cent, rest assured no one will be ready to pay as high a price for the same, as was IOC offered in October 2013 auction. Because, a favourable verdict in Paris, may catapult Purnendu in the driver's seat with 51 per cent interest. 
But that may not end HPL's woes. Because, Mamata Banerjee government is now determined to keep Purnendu out of Haldia come what may? State Commerce and Industry Minister and Chairman of HPL, Partha Chatterjee made it clear that West Bengal Government will not smoke the peace pipe.
HPL may die in this ego battle. But, Purnendu should be taught a lesson, for not succumbing to pressure.
After all, the State can never be wrong. 

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Picture courtesy: The HinduBusiness Line.