Debt rejig via CDR to bail out sugar industry mulled

The government is considering conversion of some part of debt of troubled sugar companies into equity as part of a proposed "sugar package" to prop up the debt-ridden industry.

Some big players in the sector have already savoured a Rs 2,000 crore of debt restructuring but the sugar industry's finances continue to be bitter.

The government has decided that the measures for sugar companies will be implemented through the corporate debt restructuring (CDR) mechanism. It has asked the Reserve Bank of India (RBI) and National Bank for Agricultural and Rural Development (Nabard) to suggest a detailed financial restructuring package for sugar companies.

The RBI has already held meetings with lenders to prepare the contours of the restructuring, banking sources said.

The sugar industry would become the first one having gone for outright conversion of some debt into equity for availing of a debt restructuring benefit.

This will lower the debt-equity ratio of sugar companies and also reduce their debt servicing burden. The government is expected to unveil the package for "revitalisation" of the sugar industry during the budget session of the Parliament.

It will also include measures for the co-operative sugar factories and will entrust the responsibility of implementing them to the state governments.

The sugar industry has been in great financial stress since 2001. The committee on revitalisation of sugar industry, which submitted its report to the government recently, has estimated that the total defaults on term loans by sugar factories was about Rs 1,200 crore as on March 31 last year and the deficit in stock value would be about Rs 2,500 crore as on September 30, 2004.

Deficit in stock value means sugar stocks are less than the working capital advances taken.

The committee has recommended that the minimum loan outstanding to be eligible for CDR benefits should be brought down to Rs 10 crore from Rs 20 crore for the sugar sector. This will make more sugar companies eligible under the CDR scheme.

Huge increases in production up to 2002-03 has been followed by low sugar production in 2003-04 and projections of low output in 2004-05 also, on account of drought and pest infestation in certain major sugar producing states. Although this has resulted in stabilisation of sugar prices, the loss in production has compounded the problems of the sugar industry.

The loss in production is not only likely to reduce the ability of sugar factories to service their debts, but may even affect running of the sugar factory because of inadequate availability of working capital, the committee said.

Low capacity utilisation resulting from low availability of cane is likely to lead to higher costs of production. As many as 100 factories are unlikely to come into production in 2004-05 because of non-availability of cane, creating difficulties in meeting fixed costs and wages.

The production of sugar increased continuously from 2000-01 reaching an all time high of 201 lakh tonne in 2002-03. As a result of this high production, the ex-factory realisation of sugar fell steeply, falling as low as Rs 1,000 per quintal.

Because of low cash flows, the sugar factories registered deficit in their stock value and were unable to service debts, the committee said.

Deficit in stock value has seriously affected cash flows and the ability of sugar mills to service debts and interest on loans for modernisation, expansion and by-product utilisation. Even routine maintenance was affected in the case of many factories, the committee said.

It said lack of availability of cane in 2003-04 and the resultant 50 per cent utilisation of capacity and low production of sugar have further eroded the ability of sugar factories in drought-affected states to service their debts.