IN AN interview soon after Modern Food was privatised, Arun Jaitley, who was Disinvestment Minister at the time, declared it was not the job of the Government to make bread. Five years later, the former PSU's new owners seem to believe it's not their job either. The company's flagship factory is on the verge of being shut down so the land can be used for more "productive purposes"; bread production is to be outsourced as a "low cost solution" to the losses the company is still incurring, and the remaining employees are being encouraged to accept a new VRS package.

This is not the way things were supposed to have gone. The January 2000 sale of Modern Food Industries Ltd (MFIL) to HLL — subsidiary of FMCG multinational Unilever — was hailed by the erstwhile BJP-led National Democratic Alliance Government as a landmark event that would establish a new paradigm in the revival of inefficient public sector companies. "It is a success story inasmuch as all jobs have been saved and an attempt has been made to revive a loss-making unit," Mr. Jaitley told the Rajya Sabha soon after. So carried away by his salesman-like zeal was he that at the end of May 2000 he told The Hindu employment would actually go up in the company.

He couldn't have been more mistaken.

When HLL took charge of Modern Food, the total number of employees was 2,037. The PSU also owned nearly 4,50,000 square metres of prime land in cities across India, including Delhi, Mumbai, Chennai, Bangalore, and Kolkata. Today, it is not clear how many workers the company still employs. What we do know is that as of August 31, 2003, the numbers were down by 51 per cent to 1,007. (Reply to Lok Sabha unstarred question by Arun Shourie, December 3, 2003). With the company pushing another round of VRS, especially in Delhi, the union now estimates there are less than 700 workers remaining. It says a majority of MFIL's 21 units have been closed and alleges bread is being produced by contract labour in outsourced "sweatshops."

Not by bread alone

As for MFIL's land, one 8,000 sq metre plot in Bangalore has been sold for Rs.2.48 crore and a 20,000 sq metre plot in Faridabad on Mathura Road outside Delhi is currently on offer. Chesterton Meghraj, the property dealers handling the sale, say the plot is likely to sell for around Rs.15-20 crore. According to the Modern Food Industries Employees Union, the company's move to get its land on Lawrence Road, Delhi — where its main bread unit is located — converted to freehold is also the prelude to its eventual sale as real estate.

Even as it is selling its land holdings in and around Delhi, MFIL placed an advertisement last month seeking to rent industrial premises for setting up a bread manufacturing unit. Asked about this anomaly, an HLL spokesman told The Hindu , "Lawrence Rd is a costly location for a bread factory, when one takes into account all costs... It was therefore decided that it would be in the best interests of the company if the losses incurred by the unit could be stopped and all assets deployed for productive purposes."

The main asset to be redeployed, of course, is land. When MFIL was privatised — 74 per cent of its equity was first sold to HLL for Rs.105.45 crore, and the remaining 26 per cent handed over for Rs.44 crore — the union, independent analysts and several MPs from the Left and the Congress (including Manmohan Singh) had alleged the land had not been valued correctly and might alone be worth much more than the Rs.150 crore paid by HLL for MFIL. The NDA sought to refute allegations of undervaluation and assured its critics the new owners would not be able to dispose of the land as they liked. Estimates of high land value are "somewhat misleading," Jaswant Singh told the Rajya Sabha on April 27, 2000, as Leader of the House. "Land is there only notionally. It is leasehold land. It is meant specifically for the function, it is specifically for the purpose of food processing."

HLL in default?

Officials and Ministers also put the word out that the Shareholders Agreement between HLL and the Government of India made it mandatory for the new owners of Modern Food to obtain government approval for any sale of MFIL's land for a specified period, even after the entire government equity is divested. This assurance was widely reported at the time and not contradicted by anybody. Speaking in the Lok Sabha on August 14, 2003, Mr. Shourie too hinted that HLL was not free to do as it pleased. "The employees of MFIL have... alleged that the Strategic Partner had sold assets and discontinued the bakery business in violation of the terms of the Shareholders Agreement, which will be gone into by the Fact-Finding Committee [set up by the Prime Minister]," he assured the House. This statement was made after the Government had already sold its remaining 26 per cent stake in Modern Food to HLL.

Asked last week by The Hindu whether HLL had sought prior approval from the Government for the sale of the Faridabad and other properties, a company spokesman denied this was necessary. "There is no pre-condition regarding sale of land or for that matter the sale of any of the assets of MFIL, as the final sale of Government of India shares in MFIL to HLL was an unconditional and purely commercial transaction."

HLL also denies it has any plans of quitting the bread-making business and says the land is being sold to retire debt. "HLL/MFIL is committed to turning around MFIL," the company spokesman insisted. "It is our intention to reduce the losses at our loss-making bread units, and indeed Delhi is our highest loss-making unit... Accordingly, unviable operations at any location will be placed under a close business scrutiny, and if outsourcing is indeed the appropriate low-cost solution, this will be resorted to."

Whatever the spin, the sale of land and the closure of units suggest HLL sees greater value in MFIL's underlying assets than in its core business of making bread. The irony is that the previous government anticipated this problem. "Perhaps the biggest concern on the part of the government in case of strategic sale of PSUs is that of asset stripping by the strategic partner (SP)," a Department of Disinvestment website document on strategic sale agreements states. "Most of the PSUs have valuable assets in the shape of plant and machinery, land, buildings etc. The SP may well dispose of these assets, make money on that and quit, leaving another sick industry behind... Therefore a clause on affirmative rights of government in case of sale etc. of assets after takeover should exist."

To give the devil his due, this added caution on behalf of the DoD and its two erstwhile Ministers, Mr. Jaitley and Mr. Shourie, might well have been an afterthought given the bad experience of Modern. But what is unacceptable is the way in which whistleblowers were victimised by the company and dismissed by Ministers as troublemakers. Right from the start, union leaders like Gobind Yadav, V.K. Narang, and Ganesh Thakur had cautioned the Government that the new owners were not interested in reviving Modern Food. Mr. Yadav was suspended by MFIL's management and dismissed in 2002. However, he has since won his case in the labour court and the Delhi High Court has ordered MFIL to reinstate him with back wages.

At the end of the day, the story of India's first full-scale privatisation is not a happy one. The employees say that since the purpose of the privatisation has not been served, MFIL should once again be nationalised. At a minimum, they say, the sale of land without government clearance — though HLL says this is not needed — might well constitute an "event of default", allowing the Government to "buy back" MFIL's shares at 25 per cent less than the sale price. Whatever the Manmohan Singh Government decides, this much is clear: old free market dogmas like privatisation aren't panaceas. When the policy is past its sell-by date, the bread it produces is also likely to be stale.

*Kind courtsey of The Hindu (5 May 2005)