Why three of India's iconic state trading firms risk being shut down

While MMTC is just about managing to stay afloat for now, STC and PEC have posted losses long and hard enough for the Centre to call for their total shutdown

The Metals and Minerals Trading Corporation of India (MMTC) calls itself the country's largest public-sector trading body and one of the highest earners of foreign exchange, while the State Trading Corporation (STC) has defined independent India's export growth. Both central public sector enterprises (CPSEs) are also in danger of being shut down, along with the smaller PEC Limited.

Official figures place MMTC's turnover at Rs 12,500 crore and employee count at 950 as of March 2019. STC, on the other hand, employed early 600 people in 2018-19 and had a turnover of Rs 10,825 crore in 2017-18. But like other major public sector enterprises, the big numbers share space with equally large financial losses.

Case in point, STC's annual report for 2018-19 showed a jaw-dropping Rs 881-crore loss. "This was in addition to a severe liquidity crisis being faced by the company, as all the lender banks have reported STC's account as NPA due to non-payment of interest on the banking limits," according to senior officials.

MMTC has managed to placate policymakers by raising annual profit after taxes in 2018-19 to Rs 81.43 crore, from Rs 48.84 crore in the year before. But with massive overheads, both the State Trading Corporation and the PEC Limited have reported losses long and hard enough for the Centre to now call for their total shutdown.

Historical imprint

The STC was set up in 1956 primarily to undertake trade with the emerging socialist democracies of eastern Europe such as Bulgaria, Romania, Poland and the now-defunct states of Czechoslovakia and East Germany. However, India's painstaking efforts to build a working exports sector meant that STC had to undertake bulk trade in agro commodities and industrial raw materials with Soviet Russia. 

"The Soviet Union was the exclusive market, or a major destination, for many STC exports like air compressors, fruit juices, textiles, tobacco, leather and processed foods," Hanumanthu Lajipathi Rai, ex-Vice-Chancellor of Srikakulam's B R Ambedkar University, says in his book Indo-Soviet Trade Relations.

Carved out of the STC, MMTC was created to specialise in the trading of minerals, ores and non-ferrous metals, later on taking up trade in fertilisers. It also became a big proponent of Indo-Soviet trade. "MMTC was instrumental in getting large quantities of some of the costly-critical industrial raw materials (fertiliser, urea, sulphur, zinc, aluminium and steel) for India," Rai adds. The value of MMTC's imports from Soviet Russia increased from 25 per cent in 1972-73 to 53.6 per cent in 1984-85. 

An advantageous position in facilitating mega shipments also meant that state trading firms provided a crucial fulcrum in in diplomatic discussions. Case in point, the United States continues to hold India responsible for the STC's delivery of 60 tonnes of Thionyl Chloride to Iran in 1989. The highly reactive chemical is a potential precursor for a nerve agent or mustard gas. 

While the Chemical Weapons Convention in 1997 definitively banned its use, back then the destructive poison was regularly being deployed by Iraqi President Saddam Hussein's regime in its war against Iran. "Tehran was desperate to develop an arsenal of its own and being cornered by the US from accessing global trade routes, relied on Transpek Private Limited - an Indian firm - who sold the chemical to the STC," said a senior functionary of the Nuclear Threat Initiative (NTI), a non-profit organisation working against nuclear and biological threats.

The smallest of the firms, the PEC, was carved out of STC’s railway equipment division in 1971-72 to take over the canalised business. It later diversified into turnkey projects, especially outside India and to aid and assist in the promotion of exports of Indian engineering equipment. The PEC website proudly claims to have completed 57 projects in more than 23 countries. But financial records vanish after 2014-15, when the firm posted a loss of more than Rs 208 crore.

Deep rot

The Comptroller and Auditor General (CAG) has repeatedly pulled up the bodies for possible fraud, mismanagement and lack of financial planning, while government departments like consumer affairs and agriculture have been accused of causing loss to public sector trading corporations.

In 2011, the CAG said the firms had incurred a loss of Rs 1,201 crore on import and sale of pulses between 2006 and 2011, due to serious deficiencies in the design, implementation and monitoring of procurement schemes. As a result, schemes to import pulses to bring down prices in the domestic market went wrong and only a handful of major private traders benefited. Out of the test-checked sale of 838,000 tonnes of pulses, it was found that 608,000 tonnes (73 per cent) were sold to just four large buyers, the government auditor said.

Later in 2015, as part of a compliance audit report, the top watchdog again flayed the bodies. "The entire activity of identifying supplier, buyer, storage, arranging for shipment, etc. was performed by associates which were private parties," it pointed out.

Over the past two decades, the three CPSEs failed to assess the creditworthiness of associates and have been financing risky ventures without adequate safeguards. As a result, they suffered losses because of inadequate security against the amount financed and, in some cases, they were not even able to secure the pledged stock.

The latest focus on the three trading corporations began last month after a review of investments by central public sector enterprises in publicly listed state-level entities. There are about 500 state-level public enterprises, of which 200 are reportedly making losses.

The share prices of the two listed firms have also never been able to reach anywhere close to their historic highs which peaked more than a decade back. STC's shares reached a high of Rs 830 per share way back in 2007, while MMTC saw its best run in 2010, when the cost of each share crossed Rs 1,226. Now, the shares cost Rs 88 and Rs 18, respectively.

Going forward

The government is planning to reduce its stake in state-owned trading firm MMTC from the current 90 per cent to 75 per cent, as mandated by the Securities and Exchange Board of India (Sebi), senior officials sad. But, this will be done only after a final decision is taken on shutting down loss-making STC and PEC, which are in worse financial shape, they said.

Sebi guidelines mandate that every listed entity will have to maintain a minimum public shareholding of 25 per cent. The government’s stake in MMTC stood at 89.9 per cent at the beginning of the second quarter of the current financial year. For now, commerce department officials say, MMTC has been told to immediately revamp operations, cut costs by retreating from loss-making joint ventures and unviable markets. MMTC has also been asked to calculate the value of land and properties held by it. MMTC Chairman and Managing Director Ved Prakash last week said the company was preparing to shut down three of its 20 offices.

However, trade experts have raised concerns about undoing decades of public policy. "The government has focused on market-oriented policies but it needs to be kept in mind that market distortions are a part of that equation. China has continuously supported its state trading corporations, while in India, the role of public trading bodies hasn't been defined well after an initial push," trade expert and Jawaharlal Nehru University professor Biswajit Dhar, said. Dhar added that India should safeguard its interests through the bodies, by allowing concessional rates for the purchase of farm goods and cutting out middlemen from the supply chains of key agro commodities.

The commerce department had prepared a Cabinet note in 2018, suggesting PEC and STC be merged. The department had also suggested that the government bear the expenses for voluntary retirement scheme to be offered to STC employees. While the government wholly owns PEC, it has about 90 per cent stake in STC. However, the proposal was turned down then.

As recently as 2017, the government had also hired a consultancy firm to create a revival road map for the two bodies, whose earnings have swung massively in recent years. Now, the Cabinet Committee on Economic Affairs may by next month decide the fate of all three firms, sources said.