On the surface of it, things don’t look so hot for BEML—formerly Bharat Earth Movers Limited, a public sector company under the ministry of defence and maker of construction equipment and rail and metro coaches, but now most famous for supplying the Indian army with heavy duty Tatra trucks in order to negotiate rough terrains, carrying troops and heavy payloads. The company, 54 per cent of which is owned by the government, is a stock market favourite, but now under the intense scrutiny as the Central Bureau of Investigation (CBI) has commenced a probe into the alleged irregularities in the purchase of Tatra heavy duty trucks, assembled by BEML, over the last two decades.
The inciting incident that set the cat amongst the pigeons was a statement by the Chief of Army Staff, General V K Singh, that he was offered a bribe of Rs 14 core to sanction the purchase of 600 Kolos Tatra high-mobility vehicles. The main charge subsequently levied against BEML is that it imports the truck for around Rs 40 lakh and sells it to Army at almost double the cost. The Tatra trucks, which were made by Czech major Tatra, were supplied to BEML as completely knocked down (CKD) kits and were assembled by BEML at Bangalore, KGF, Mysore and Palakkad units. This has been allegedly going on for many years putting in jeopardy BEML’s status as the preferred supplier to the armed forces.
BEML, which is aiming at a business of $1 billion (about Rs 5,000 crore) in 2012-13, gets barely 20 per cent of its business (In 2010-11, BEML reported a turnover of Rs 3,623 crore) from the Ministry of Defence in India through its heavy equipment businesses, such as earth moving, transport, mining and aerospace amongst others. No surprise then, that it was betting big on the modernisation of the Indian Army.
This controversy couldn’t have arrived at a worse time. The defence budget has been going up substantially year on year and the company was in prime position to get contracts to make tank engines and transmissions for India’s main battle tank, Arjun, in addition to exploring overseas prospects. BEML declined to share its perspectives for this story.
If this isn’t bad enough, the Indian Army is considering rejecting the single vendor system for procuring high mobility vehicles. It has formulated new parameters and has already floated a request for proposal (RFP) in 2010 for supply of new set of trucks.
All of this suggests that BEML is as good as toast. Yet, analysts tracking the company closely think that the current controversy will not have a significant impact on BEML as a quality supplier of products to armed forces. “There is nothing wrong in the Tatra truck supplied by BEML, but the manner in which it was procured from Tatra and supplied to Army at high cost is questionable,” said Major Gen Dhruv C Katoch, additional director, Centre for Land Warfare Studies (CLAWS), a Delhi-based autonomous think tank on strategic studies. “BEML is a defence company and why will the ministry of defence blacklist its own company? At the most, it may punish the individual who is behind the wrongdoings and may change its chairman.” The simple fact is that the company is majority government-owned and the one predictable aspect of the government is that it is not likely to oust any member of its brood.
Then, there is the notion that an entire company shouldn’t be dragged through the mud because of the actions of a handful. “It is only an individual who may be behind the irregularities in the truck deal and we cannot blame the entire company. It is now up to the investigating agency to find out the culprits and punish them,” said a non-executive director of BEML, who does not want to be identified.
Other experts draw a parallel to the infamous Bofors deal in which the equipment was priced higher but was of a good quality. The Bofors case, considered one of the biggest scams in the history of Indian defence sector, was valued at around Rs 64 crore for the procurement of 155 mm field Howitzer.
One indication of BEML’s purported immunity lies in the value of the company’s shares which one would have expected to get pummelled by the recent accusations—instead, it actually touched a monthly high of Rs 603 on April 10, 2012 trade on the BSE.
Senior officials of defence ministry and Army reiterated this stand to the members of the Parliamentary Standing Committee on Defence. The officers told the standing committee that Tatra trucks had performed well for the forces, and the procurement process can be done without a middleman or commission agents.
The fact is., that even if the order inflow from the defence sector slows down until the air is cleared on corruption charges, BEML has other divisions which can keep its engines running. Despite being a defence public sector undertaking, BEML, has over the years diversified into non-defence areas. Today, it derives 42.17 per cent of its turnover from mining and construction business, 36.76 per cent from rail and metro business and the balance from other businesses.
For the year ended March 2012, BEML was expected to clock revenue of Rs 1,500 crore from the railway business and Rs 1,000 crore from the defence segment. In FY12, the company secured an order worth Rs 1,400 crore from the Army for supply of 204 units of Armoured Recovery Vehicles (ARVs) based on T72 tanks but also received an order for supply of 135 intermediate metro coaches from Delhi Metro Rail Corporation Limited (DMRCL), Natarajan told Business Standard in an interview recently. He said its turnover from the mining and construction equipment business during the fiscal 2011-12, is set to grow by 25 per cent to Rs 2,000 crore.
“We have a strong order book of Rs 6,000 crore on hand, and deliverable in two years. We expect at least Rs 200 crore business from international operations this year,” Natarajan said. The company has recently entered into a contract with a Holland-based company, Vosta, to manufacture and supply machines for marine and river desilting applications—the lone Indian company to do so. The company is also hoping to ride the boom in the metro rail sectors in Indian cities.
Not bad for a company that should be on the ropes.
