Pal-Peugeot Ties Strained Over Capitalisation Of Losses

The alliance between Premier Automobiles Ltd (PAL) and Peugeot seems to be heading for a split over the issue of capitalisation of losses suffered by PAL-Peugeot in the current financial year due to the labour dispute at its Kalyan plant.

Peugeot, backed by global financial institutions, is pushing for capitalisation of the losses, while PAL says the move will not solve the company's problems, sources said.

Attempts to contact PAL-Peugeot deputy managing director J Manlay proved futile.

Owing to the labour strife in mid-1996, PAL is unable to invest fresh funds into the joint venture to offset the company's losses.

Capitalisation of losses, said PAL executives, will present an unrealistic picture of the company's financial health. The company will end up showing nominal profits, although it has actually incurred losses. This is against shareholders' interest, the executives added.

The company is also resisting Peugeot move to hike its stake in the venture by infusing fresh equity as it will dilute PAL's stake.

PAL chairman Vinod Doshi said the solution to the vexed financial problems lay in quick indigenisation of the Peugeot 309. The company, Doshi said, had made steady progress in the indigenisation process. Peugeot however had been dragging its feet on validating the indigenisation processes, industry sources said. "They are splitting hairs," the sources said.

The company's problems have been compounded by the ambiguity of the duty structure. "The company is still waiting for a clear picture to emerge on the whole duty structure. The questions as to which parts are to be considered as CKD (completely knocked down) and what would be the duty to be charged on them are still unanswered," sources pointed out.

The PAL management has asked Peugeot to cut CKD prices and release funds as loans to the joint venture. The company has a high inventory due to last year's labour disputes. The inventory carrying costs too have had a crippling effect.

PAL says Peugeot should advance loans to the company and, if need be, CKD and other equipment lying with the venture could be treated as security for the loan.

Besides, the Indian partner says Peugeot could use its name to raise bank loans abroad for the joint venture where the cost of funds is much lower than that in India.

"Peugeot with its good name could raise loans abroad at a 4.5-6 per cent interest rates as compared with the 18-20 per cent charged in India," sources said.

Given current market conditions, the company has decided to increase production of the diesel version of the Peugeot 309.