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INVESTIGATION The Dreambagger Nothing deters Abhey Oswal from talking big--not even the size of his past failures. A Team BT investigation. By Alam Srinivas & Gautam Chakravorthy
Hang on a minute before you start applauding. In the last 10 years, ever since the ambitious businessman from Ludhiana burst onto the Indian corporate scene with a Rs 500-crore equity issue, Oswal's dreams have come with one rider: they never seem to come true. Since 1982, Oswal's ventures have followed a predictable pattern: he raises money--either from the primary markets or the financial institutions--sets up projects or acquires units, and fails to run them profitably. When these units turn sick, the indomitable Oswal turns to others. Since 1989, he has either sold out or shut down 7 factories--after announcing optimistic expansion-plans for each of them. Among them: projects to manufacture rice-bran oil, soap, soyabean oil, and even a scheme to make portable rice-processing mills for small farmers! None of them has really worked, and the money raised for them has only been wasted.
In November, 1998, Oswal struck again, when Oswal Agro Mills declared a lock-out at its 21,000-tpa petrochemicals plant in Chembur (Mumbai). A decade ago, when the unit--then the only integrated complex in the private sector--was acquired from Union Carbide for Rs 58.50 crore, Oswal had claimed that its capacity would be increased to 300,000 tpa, which would "provide unlimited potential for future growth." That proved to be a pipedream since, according to Oswal himself, the petrochemicals plant incurred losses of Rs 1 crore per month in 1998. But its workers, who have taken the management to court over the closure, allege that Oswal deliberately allowed the plant to go sick and that, more seriously, he was siphoning off money from the company. Two months after the shut-down, the Income Tax Department swooped down on the Rs 1,046-crore Abhey Oswal Group's offices in Delhi, Mumbai, Ludhiana, and Phagwara (Punjab) in February, 1999, and even raided Oswal's Mehrauli (Delhi) farmhouse, and the residences of some of his key aides. BT's enquiries reveal that the raids were part of an investigation into the financial affairs of Oswal Agro Mills although no charges have been framed against anyone--yet. Yet, this hasn't stopped the one-time Mr Moneybags from dreaming. Even as the tax-man runs a fine tooth-comb through his group's financial dealings, Oswal ebulliently unveils ever-ambitious plans: an alumina plant here, a DAP project there, a power plant But the question is: who is the real Abhey Oswal? Is he a fickle entrepreneur who lacks the management skills necessary to make his businesses work? Or does he believe that raising money is an end in itself, and real profits lie in incurring losses? BT investigates the controversial businessman. The Petrochem Problem
On September 19, 1998, when 80 workers reported for work at Oswal Agro Mills' petrochemicals unit at Chembur, they were shocked. Abhey Oswal's son, Pankaj, 26, was supervising the 45-day closure of the plant for "repairs and maintenance." Two things, however, seemed out of place. First, the fact that the unit had never been shut down for maintenance since 1989. Second, a director on the board of Oswal Chemicals & Fertilizers, Pankaj, had had nothing to do with the management of Oswal Agro Mills until then. When the unit did not re-open for the next 70 days, the Oswal Petrochemicals Workers Union (OPWU) filed a case in the Maharashtra State Industrial Court, accusing the management of closing down the plant for good. The next day, on November 28, 1998, the management went ahead, and announced a lock-out. Says a candid Oswal: "The (Chembur) plant has become unviable." Since April, 1998, claims Oswal, the unit has been losing around Rs 1 crore per month owing to the falling prices of Low Density PolyEthylene (LDPE). In addition, he says, the plant suffers because of the lack of economies of scale. "The Maharashtra government has not given the green signal in the last 10 years to the company's proposal to expand its cracker-capacity from 21,000 tpa to 100,000 tpa. How can we (with such a small capacity) compete against Reliance, whose capacity is 750,000 tpa?" asks an exasperated Oswal. That's something he should have thought about then. In the late 1980s, the Maharashtra State Pollution Control Board banned fresh investments in Mumbai's A-zone areas, which includes Chembur. Yet, after he took over the unit, Oswal maintained that its cracker capacity would be expanded to 300,000 tpa. In fact, the company's 1995-96 Annual Report clearly states: "The company plans to modernise and expand its petrochemicals complex at Chembur The project will be taken up in July, 1997, and will be completed by December, 1998." Hollow promises. Given a choice, Oswal would like to shut down the plant for good. But on March 9, 1999, the Mumbai High Court upheld the January 25, 1999, judgement of the State Industrial Court, directing the management to lift the lock-out. However, the former also allowed the company to appeal against its order before a Division Bench of the same court. Selling the plant is another option but, given its uneconomic size, finding a buyer will be well-nigh impossible. However, the unputdownable entrepreneur has a few solutions up his sleeve: "Even if we have to close down the unit, the company's future growth will come from the new Projects Construction Division, which has orders of Rs 500 crore." What he doesn't say is that most of these orders relate to the DAP plant he has proposed. The other idea, he explains, "is to shift the plant from Chembur to Ratnagiri (Maharashtra), pump in Rs 300 crore, expand capacity to 100,000 tpa, and restart it in 2 years." However, the OPWU's General Secretary, S.L. Dharmadhikari, 47, differs: "This is just a gambit to help him sell the 65 acres of land in Chembur, whose commercial price is estimated at Rs 250 crore." Denies Oswal: "We have not even thought about selling the land. Our first priority is to either cut down the unit's huge losses (by drastically reducing the wage-bill), or make it profitable." True, since disposing of the land is easier said than done. First, there is the court-order restraining a lock-out and, second, the Maharashtra government clears such sales only on a case-by-case basis. But then, Oswal is known to take his chances with governments. The way he did with his much-hyped Rs 51-crore rice-bran oil project. In 1984, when Oswal Agro Furane unveiled it, it included the setting up of a composite 100 per cent export-oriented unit: 2 paddy-shelling units to separate husk from rice, return the processed rice to farmers, run the husk through a furfural-extraction process to obtain edible rice bran oil, and use the remaining waste to generate captive power. In its 1987 Annual Report, the company claimed to have the largest rice-processing plant in the world, and the largest edible rice-bran oil unit in India. Yet, Oswal Agro Furane went belly-up in 1996. Why? Because Oswal made one fundamental miscalculation. He had thought, wrongly, that since India was a net edible oils importer at that time, the government would allow him to sell rice-bran oil locally under the deemed export status. However, a Supreme Court judgement in April, 1996, held that Oswal Agro Furane was liable to pay a cumulative excise duty-cum-penalty of Rs 41.31 crore for selling edible rice-bran oil in the domestic markets and for exporting non-basmati rice, which was canalised through the Agricultural & Processed Foods Export Development Authority. That, obviously, spelt doom for Oswal Agro Furane since its net worth was just Rs 59.89 crore on March 31, 1996. Other units in the Oswal Group have suffered similar fates albeit for different reasons. For example, Oswal Agro Mills' soap unit in Ludhiana--which clocked sales of Rs 71.81 crore (43,952 tonnes) in 1989-90--had to be closed down in 1991. The reason: the break-up of the erstwhile Soviet Union led to a slump in exports, and paralysed its operations although Oswal claimed that the unit sold nearly 30,000 tonnes of soap in the domestic market in 1987-88. Soyabean oil-extraction was another area which enthused Oswal in the second half of the Eighties. In 1985-86, he expanded Oswal Agro Mills' oil-extraction capacity from 1 lakh tpa to 1.35 lakh tpa, and Oswal Chemicals & Fertilizers (then known as Bindal Agro Chem) set up a new 60,000-tpa unit in 1986-87. But, in 1994-95, both were closed down after the failure of the soyabean crop, and the resultant increase in prices. Explains Ashok Gulati, 44, nabard Professor, Institute of Economic Growth: "Any business which deals in primary commodities has to face the inherent vagaries of price-fluctuations." Oswal's ability to conveniently forget failure is remarkable. For example, in 1985-86, Oswal Agro Mills announced that it was going to build portable rice-processing mills, which would result in another Green Revolution since "farmers will be able to sell their polished rice directly to consumers." The company did sell 166 mills (average selling-price: Rs 80,000 per mill) the following year, but not a single one thereafter. According to a senior manager in the company: "The product did not get a response from farmers, and it would have constituted only a minuscule percentage of our turnover." The case of Oswal Chemicals & Fertilizers' alcohol-based LDPE unit is even more fascinating. Purchased from ICI in 1987 with the intention of shifting the 15,357-tpa unit from West Bengal--an alcohol-deficient area--to Uttar Pradesh, the plan was dropped in 1988. Four years later, when the government announced the decontrol of molasses, the prices of alcohol shot up 10 times, and the plant became unviable. After keeping it closed for nearly 6 years, Oswal decided to shift the unit to Shahjahanpur (Uttar Pradesh). Finally, on March 1, 1998, the plant began production at its new site, which includes a captive distillery unit. "This dilly-dallying," says Vijay Bhushan, 40, a Delhi-based stockbroker, "ensured that Oswal was unable to generate adequate returns from his operations to keep his shareholders happy." The Financial Jugglery
More than the wrong calls in his business strategy, what is curious about Oswal's empire is his penchant for playing around with money. For instance, ever since Oswal Agro Mills took over the Chembur unit in 1989, it has financed several other projects. In 1989-90, it gave a Rs 11-crore interest-free loan to its sister company, Oswal Agro Furane. And the company's auditors, Gupta Bhalla & Associates, noted in the 1997-98 balance-sheet that there was no "stipulation for recovery" of that loan as Oswal Agro Furane had turned sick. This is the oldest trick in the book: pull out money from healthy companies to finance ventures in other companies in the group, and push the cash-cows to the brink of sickness. In this context, according to Jayant Thakur, 33, a Mumbai-based chartered accountant: "Given our corporate reality, the recent liberalisation relating to inter-corporate investments and loans needs a second look. We need to ensure adequate checks and balances." Or else, promoters like Oswal will have a free run. On March 31, 1998, Oswal Agro Mills' exposure to companies in the group was Rs 250 crore as loans and advances, and another Rs 154.53 crore as investments. Explains Oswal: "There is nothing wrong with such an exposure, and these are legal and normal inter-corporate investments within the group." But some of the loans may have been extended to investment companies that could well be Oswal's stockmarket vehicles. Indeed, Oswal's skills were obvious many times in the late 1980s, when he raised Rs 1,000 crore from the capital markets. For instance, in 1988, Oswal Agro Mills came out with successive rights (Rs 60 crore) and bonus (ratio of 1:2) issues. And the bears realised that they could make a killing because the ex-rights, ex-bonus price of the scrip could come down to Rs 53. Instead, even as brokers watched in amazement, the scrip-price shot up to Rs 145 before settling at an ex-rights price of Rs 104. Subsequently, the price soared again to Rs 130, stabilising at Rs 80 (ex-rights, ex-bonus). Miraculous. In January, 1989, the story was repeated to an extent when Oswal Agro Mills decided to float its Rs 300-crore convertible debentures issue to finance the acquisition of the Chembur unit. First, the scrip continued to hover at Rs 100 despite selling-pressure. Then, it was shifted to spot-trading, thus preventing speculative selling. Finally, 5 nationalised banks were roped in to lend to its shareholders so that they could subscribe to the issue. After being mute witness to these machinations, investors may have lost confidence in Oswal. Agrees Vijay Mehta, 45, CEO, mefcom, a merchant banker to many of the issues floated by the Oswal Group: "There is a crisis of confidence among Oswal's shareholders. They have realised that whatever Oswal does, (only) he is the real beneficiary. That explains why investors are not excited about Oswal Chemicals & Fertilizers, which has the highest dividend yield compared to its scrip-price." Agrees Prithvi Haldea, 48, CEO, Prime Database: "Although the group raised huge amounts from the markets in the 1980s, Oswal has acquired the tag of being investor-unfriendly. Therefore, he never tried to tap the markets after his not-so-successful Rs 500-crore issue in 1989." Even Oswal has, in the past, admitted that there is nothing wrong with a company's management buying its own shares--and, mind you, he was talking in an era when buyback was not even being thought about. What provides credence to the allegations is the ownership-pattern of the privately-held investment companies--which have received loans from the group's cash cows--and their business objectives as stated in the Articles of Association. For example, Echolac Investment & Trading and Bon Bon Investment & Trading had an additional objective, apart from trading in shares and goods, to "trade in shares of Oswal Agro Mills, Oswal Chemicals & Fertilizers, and Oswal Agro Furane." And a quick survey of the list of directors of the investment companies reveals that:
Obviously, when Oswal Agro Mills started performing badly, the money-flow was reversed. Since 1996-97, the company has begun to recall its loans, dispose of its investments, and recall other dues from privately-held investment companies. First, in 1996-97, Oswal Agro Mills redeemed Rs 129 crore of optional, zero-interest convertible debentures (face value: Rs 100; interest: 12 per cent per annum) in 14 investment companies. That earned it Rs 11.85 crore, more than 50 per cent of its net profits of Rs 23.30 crore. Then, in 1997-98, Oswal Agro Mills' share premium account increased by Rs 101.25 crore to Rs 446.49 crore, when investment companies--which had been allotted 3.75 crore shares at Rs 50 (including a Rs 40-premium) in 1995, and were partially paid-up to the extent of Re 1--were asked to pay up the entire amount. And another Rs 63.67 crore of investments in 4 privately-held entities were sold off at a profit of Rs 28.81 crore, accounting for nearly 80 per cent of the net profits that year. And Oswal claims that he is cleaning up the company's balance-sheet. "Oswal Agro Mills' balance-sheet," he says, "will look totally different in 1998-99. It will show an inflow of nearly Rs 250 crore. We plan to recover all the outstanding loans and advances given to various investment companies, and the money will be used to partly fund the promoters' equity-contributions for the new projects." However, the only way in which these investment companies can repay the loans to Oswal Agro Mills is by taking fresh loans from other companies in the group, or raising money through debt instruments or private placements, or by selling off their holdings. The third option is hardly feasible since the scrip-prices of all the companies in the group have crashed: Oswal Agro Mills was down from a high of Rs 137 in April, 1992, to Rs 8 in March, 1999, Oswal Chemicals & Fertilizers has slumped from Rs 90 in March, 1992, to Rs 14 in March, 1999, and Oswal Agro Furane is sick. Any takers? Probably not. However, Oswal, while refusing to divulge any details, claims: "The investment companies have already tied up the finances." The Political Factor
Oswal may be holding a trump-card close to his chest. Businessmen like him know the importance of political clout. Way back in 1989, when he bagged the licence to set up a 7.26-lakh tpa urea unit at Shahjahanpur, it was his proximity to the Congress (I)--including the former Union Minister For Petroleum, Satish Sharma--that swung the deal. In fact, in 1996, Oswal was accused of part-financing the Narasimha Rao Government's attempt to bribe the Members of Parliament belonging to the Jharkhand Mukti Morcha. In a Press release issued in November, 1996, Oswal denied these allegations: "We have had no dealings of the alleged nature with Capt. Satish Sharma, or with any other person." And he says that his critics have deliberately linked his name with certain politicians. "We have always got our licences, including the one to build the urea plant at Shahjahanpur, due to our entrepreneurial and management abilities. And we have proved it by running the plant successfully too." That has not reduced the tenor of the charges. In fact, when the project-cost of the fertiliser plant went up from Rs 695 crore to Rs 1,400 crore in 1994, Oswal once again turned to his patrons with a request: he wanted the financial institutions to sanction him additional loans since, by then, he could no longer raise money from the stockmarkets. Not surprisingly, in 1994, the financial institutions agreed to lend another Rs 550 crore to the company. And, in 1996, the financial institutions, led by the Industrial Development Bank of India (IDBI), agreed to finance the company's next mega project, the Rs 1,830-crore DAP plant at Paradip. When the financial institutions need his help, Oswal readily obliges. In October, 1998, when the Unit Trust of India's us-64 faced a crisis, Oswal Agro Mills invested Rs 15.50 crore in units to prop it up. Coincidentally, the UTI plans to invest Rs 80 crore in Oswal's DAP project. To adjust to the political realities, the company has donated Rs 10 lakh (Corporation Bank cheque no. 413563, dated October 8, 1998) to the Shiv Udyog Sena, a wing of the Shiv Sena. Although Oswal claims that the donation was legal and transparent, the crucial question: will political links help Oswal overcome the flaws in his business strategy? Not really. For one, his forays into new areas--such as DAP, alumina, and aluminium--need huge investments. Over the next 3 years, Oswal will have to generate a promoter's contribution of Rs 4,000 crore to finance those projects. Where will he get the money from? After the closure of the Chembur unit, only Oswal Chemicals & Fertilizers' urea unit (capacity: 7.26 lakh tpa) can generate enough cash to do so. Although Oswal Agro Mills had reserves of Rs 530 crore on March 31, 1998, its bottomline is under pressure. In 1997-98, the company would have incurred a net loss but for a Rs 28.81-crore profit from the sale of investments, and Rs 18.75 crore of income from dividends. Even Oswal Chemicals & Fertilizers, despite its profits, is not on a strong wicket. Out of its net profits of Rs 95.82 crore in 1997-98, the outgo because of dividend-payments was Rs 90.97 crore. Despite these downsides, Oswal seems unfazed: "Our critics thought we would be unable to raise the money for the urea project. But they were proved wrong. The same will happen in the future too." However, the fact remains that the new businesses Oswal is targeting are dominated by well-entrenched players, where breaking in won't be easy. According to the Fertiliser Association of India (FAI), DAP units are plagued with rising raw material costs, and delayed subsidy payments (Rs 530 crore). Agrees Uttam Gupta, 45, Chief Economist, FAI: "The profit-margins of even the existing units are likely to fall owing to the delays in the settlement of the subsidies, and newly-commissioned plants are likely to be in deep trouble." Worse, Oswal's only benefactors, the financial institutions, are no longer as pliable as they used to be. Plagued by non-performing assets, they can ill-afford to finance promoters who play around with their money. With the primary markets too unlikely to be willing to support Oswal, raising money for his future mega-plans will prove to be difficult. And even private placements will be difficult since lenders are unlikely to touch an entrepreneur with such a track-record. In that case, yesterday's Mr Moneybags could well become tomorrow's Mr Dreambagger. |
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You could be tempted to call him the most
versatile of entrepreneurs. Then again, you could be tempted to call him the most bizarre
of businessmen. Abhey Oswal has tried his hand at everything: agri-business,
petrochemicals, fertilisers His current favourite is aluminium, and, as the portly
50-year-old will grandly tell you, despite these terrible times, he plans to pump in Rs
13,000 crore to set up an integrated unit to manufacture 1 million tonnes per annum (mtpa)
of alumina and 500,000 tpa of aluminium, and a 1,000-mw power plant--apart from a Rs
1,830-crore di-ammonium phosphate (DAP) plant--at Paradip (Orissa). Impressed? 
