NEW DELHI: You may have never heard of MSTC, a Kolkata based company under the administrative control of the Ministry of Steel. Engaged in the business of procuring industrial raw materials in bulk mainly for the steel industry, MSTC is a Mini Ratna that also acts as a regulating authority for export of metal scraps.
The PSU, however, is in news for all the wrong reasons. A scam worth Rs 611 crore in gold jewellery exports has been revealed by the Comptroller and Auditor General (CAG), and MSTC is in the dock. The CAG, whose reports have detailed wrongs wrought by the firm over successive years, says, “The company ventured into this business in spite of the fact that there was high risk involved in it, with a meagre return. Moreover, the demand for foreign jewellery in the foreign market was not assessed. The company ventured into this risky business without safeguarding its own financial interests.
Thus, there were serious lapses on the part of the management.” Attempts by The Sunday Standard to contact the management got no response, with MSTC senior officers declining comment, or feigning ignorance. Ironically, as the website of the company, shows, MSTC had in 2007 adopted ‘Guidelines— 2007’ issued by the Department of Public Enterprises (DPE) on ‘Corporate Governance’, which mandates implementation of policies to include staff responsibilities in relation to fraud prevention and identification, and the management’s responsibility for investigation of fraud.
MSTC’s latest trouble can be traced to July 2007, when it decided to enter the business of exporting gems and gold jewellery on a post-shipment basis, without opening letters of credit. In 2008-09, MSTC entered into agreements with six associates for export of gold jewellery. The Mumbai firms— Space Mercantile, Joshi Bullion Gems and Jewellery of Andheri, Bonito Impex of Santa Cruz, Apollo Trading and Ushma Jewellers and Packing Exports Pvt Ltd, Bond Gems Pvt Ltd, and K A Malle Pharmaceuticals Ltd of Malad—were to identify foreign buyers, obtain export orders and export jewellery in the name of the company. As per the agreed arrangement, the company was required to pay up to 80 per cent of the export bill to the associates as advance, and the balance 20 per cent was to be released after full payment by the foreign buyer.
The foreign buyers were required to pay the export proceeds within 170 days of dispatch.
In 2008-09, the associates exported gold jewellery worth Rs 638.20 crore to 47 foreign buyers in the United Arab Emirates, with insurance coverage from Export Credit Guarantee Corporation (ECGC) and ICICI Lombard. Of the 47 buyers, 46 did not pay their dues, amounting to Rs 598.63 crore. The company has ended up with a financial burden of Rs 611.79 crore. The company lodged claims with the insurers for non-payment of dues by the buyers, but the claims were rejected. The CAG points out in its report, “Insurance claims were lodged between November 2009 and January 2010 with ECGC and ICICIL. Both the insurers, however, rejected the claims on the ground that as per the agreement with the associates, all the risks and costs were to be borne by them in the event of non-payment by foreign buyers, and in this case, the risk of the company arose due to non-realisation of advances from the associates, who were the actual exporters.” MSTC had accepted proposals of these dubious firms without even verifying their credentials.
It also turned a blind eye to the credentials of the foreign buyers identified by these firms.
Says the CAG report, “No physical inspection of the offices and manufacturing premises of the Associates, were carried out by the company before entering into agreements with them. The company, thus, did not take due care in selecting the Associates. Rather, it extended due favour to them, by allowing to carry out the export transactions with each other.” The audit revealed that 18 of the 47 foreign buyers, selected for exporting the gold jewellery, were not in the jewellery business, but in wholesale trade of stainless steel, food stuff, building material and garments. These 18 buyers were shown to have received 39 per cent of the total gold jewellery exports.
Besides them, eight foreign buyers, to whom gold jewellery worth Rs 100 crore was exported, were not traceable, while 13 other foreign buyers refused to accept any liability, of export dues of Rs 187 crore, since the contracted jewellery was never delivered to them. The CAG report states, “Thus, the company did not carry out due diligence in identifying the foreign buyers and left it completely with the Associates, who were the ultimate beneficiaries in the export transactions.
The management stated that it relied on due diligence made by the insurers regarding the foreign players. This contention was, however, not acceptable, since as per the insurance policies, the company was required to carry out due diligence in granting credit to the foreign buyers, and the insurers did not make any independent investigation in this respect.” The CAG report says, since the quantum of return in the deal—1. 25 to 1.5 per cent—was not commensurate with the risk involved, MSTC’s decision was “not economically justified”.
The management had contended in October 2010, that the company’s risk exposure was hedged through credit insurance policy. But the CAG has rejected this as not acceptable as well, since the risk involved was payment of advances to associates without any financial security, and non-recovery of the same in the event of non-realisation of export proceeds.
The matter had been reported to the ministry in November 2010, but a reply is still awaited.