FINANCIAL MANAGEMENT IN ZORAM INDUSTRIAL DEVELOPMENT CORPORATION LTD. (ZIDCO)

1. Department of Commerce, Govt. Hrangbana College, India. 2. Department of Commerce, Mizoram University, India. ...................................................................................................................... Manuscript Info Abstract ......................... ........................................................................ Manuscript History Received: 08 March 2020 Final Accepted: 10 April 2020 Published: May 2020

presents major explanations of the public sector enterprises" weakness as well as proposal for its rectification from the full spectrum of management. The vast number of state owned enterprises has confronted the country with the basic dilemma of how the operating and financial autonomy required for the successful conduct of an enterprise be reconciled with the need for controls to assure public accountability and consistency in public policy. The book in two massive volumes with an array of experts in the field provides an incisive analysis of the central issues in debate about the future of the public enterprise sector. Singh (1991) writes on theory and practice of public enterprises, rationale of public enterprises in India, organisational set up of these enterprises, the need for balance in autonomy and accountability, managerial issues such as personnel management, industrial relations, finance and pricing. Finally the performance of public enterprises in the past is traced highlighting the various complexities that has resulted from state intervention. The study focuses on the SLPEs of Bihar with respect to their performance and problems has been given. The problems of continuous loss, managerial inefficiencies and excessive political interventions with no proper accountability are common problems identified in the present study.
Mittal (1992) presents a volume aimed at understanding the overall management perceptions of executives in the public sector to assess not only the specific operational tools and techniques used by these managers but what the major concerns of these enterprises are such as public enterprise and economic growth; managerial stress; controls; workers" participation and trade unionism. The book also looks into issues concerning the public sector management of SLPEs of Kerala, and the prevailing management practices of other countries such as Tanzania, Mexico, Canada and Africa.

Objective & Methodology:-
This article focus on the financial management of the Zoram Industrial Development Corporation Ltd. (ZIDCO), to explore the practices and the applications of finance in the corporation.
The study of financial management of ZIDCO has been primarily based on primary data(minutes and reports) from the corporation, personal interviews with personnel of ZIDCO and the data of the Comptroller and Auditor General of India (CAG) Annual Reports from1998-2012. The management of the company is vested in a Board of Directors (BOD) consisting of 11 directors, including a chairman and a managing director as on 31 March 2008. The Managing Director is the Chief Executive of the company who is assisted by one general manager, two managers and three deputy managers in the Head office at Aizawl. The Company has a branch office at Lunglei for recovery of loans.

Findings and Discussions:-
A comprehensive review on the activities of the Company was conducted during 1997-98 and included in the CAG Audit Report of Mizoram for the year ended 31 March 1998. It was discussed in the Committee on Public Undertakings (COPU) on 28 May 2001. The major recommendations of the COPU on the Action Taken Report of the management were as under: 1. the management should henceforth follow the guidelines in respect of presentation, appraisal, effective monitoring and post disbursement inspection study; 2. the management should take necessary steps to classify the overdue loans as per the guidelines of RBI; 3. the corporation should come up with realistic plan for achieving maximum recovery of overdues from the borrowers and recycle the fund for the benefit of the people and industrial promotion of the state; 4. the management should make provision for bad and doubtful debts in their accounts; 5. and stern action should be taken against the defaulters and the management should also curtail avoidable expense on establishment.
These recommendations were given by the CAG Report due to the poor recovery of loans. ZIDCO had sanctioned loan to 2375 units for a total amount Rs. 38.78 crore from its inception upto 1997-98. The audit review disclosed that due to poor recovery of overdue principal and interest from its borrowers, the company failed to recycle the funds refinanced by Industrial Development Bank of India (IDBI) by extending loan to further beneficiaries and continue to refinance by repayment of heavy overdues of IDBI which stood at Rs. 12.22 crore, Rs. 13.90 crore and Rs. 14.94 crore at the end of four years from 1993-94 to 1996-97. Recovery of overdues was very low varying from 5.29 to 12.89 per cent and overdue at the close of 1997-98 stood at Rs. 33.28 crore. The enterprise neither analyzed the inherent causes for mounting overdues and poor recoveries nor made age-wise analysis with a view to ascertain cases of doubtful recoveries. Further neither annual target for recovery had been fixed nor were any effective recovery drive, except issue of routine nature of reminders, for repayment initiated. A scrutiny of defaulting cases disclosed that poor recovery performance and consequent mounting overdues were attributable to lack of effective recovery drives, absence of pre-sanction financial, technical and other appraisals, lack of effective monitoring of implementation of projects and post-disbursement inspection which led to abandonment, or nonimplementation or mis-utilization of loans by the beneficiaries.

381
The debt-equity ratio has been discussed in the previous pages, a repetition will not be made but briefly stated ZIDCO has had an average of 1.43 : 5 for the five years viz., [2005][2006][2007][2008][2009], which is quite safe and practical for the enterprise as it has a tendency for delay and non-repayment of overdues. A higher ratio would only expose the enterprise to deeper indebtedness.
The enterprise has received grants-in -aid as a source of funds periodically since inception. During 2004-08, ZIDCO had received the capital grant-in-aid of Rs. 7.35 crore from Ministry of Small Scale Industries (MSSI), Government of India (GOI) and Rs. 0.93 crore from Government of Mizoram (GOM) for implementation of Integrated Infrastructural Development Centre (IIDC) at Pukpui and Zote. It had also received the revenue grantin-aid of Rs. 3 crore from Government of Mizoram which was meant to wipe out the remaining balance of ginger loan borrowed from National Minorities Development and Finance Corporation (NMDFC), New Delhi. The company, however, had not maintained separate "grant-in-aid" register and assets register for receipt and utilisation of grant as per General Financial Rules (GFR) (Rule No.19); the revenue grant of Rs. 3 crore was not accounted for, as receipt of income from other sources (March 2008); the receipt of the grants from GOI and GOM and consequent utilisation in respect of capital work-in-progress, creation of assets for implementation of IIDC were not taken into accounts of the enterprise. The Government stated (October 2008) that the state enterprise maintained a separate set of accounts for implementation of IIDC as it had no right of ownership. The reply is contrary to the guidelines of the IIDC scheme stating that the implementing agency had right of the ownership of the IIDC Centres. As pointed out earlier, ZIDCO as is the case with all the SOEs in Mizoram is a sick company running on loss continuously, but ZIDCO is the most probable to recover of all the companies, this has been stated, in fact, by the CAG (2008). As part of the recovery process, the first step is to make corporate plans, particularly in making financing decision it becomes imperative that proper plans considering all different factors should be undertaken. Corporate plan indicates the long-term policy of a company and translates its corporate objectives into remarkable action plan both short term and long term for financing activities aimed at industrial development of the state. The COPU also recommended that the corporation should come up with realistic plans for achieving maximum recovery of overdues from the borrowers and recycle the fund for the benefit of people and industrial promotion to the state. Audit scrutiny revealed that the company had so far (March 2008) not formulated any corporate plan/long term policy for attaining the objective of industrial promotion in the State in terms of sanction, disbursement and recovery of overdues.
Investment Decision:ZIDCO is distinct from the other state enterprises, it is essentially a financial corporation and that it has had less difficulty in the acquisition of finance. These finances, however, are generally for specific purpose. The problem occurs in the effective and systematic implementation of investment. It has been severely commented by the CAG on many occasions for its defective financial management. The following observations were made in this regard. The approval of the BOD was also not obtained in respect of the above investments. It did not make any efforts to analyze the market interest rates from various FIs with a view to secure the best returns on investment by the Company. Thus, the investment of Rs.1.88 crore made in LIC and BALICL in 382 the names of officials of the enterprise not only failed to protect the ZIDCO"s interest, but was also in violation of the prescription and guidelines of the RBI and the AOA of the SOE. The Government stated (October 2008) that the enterprise had obtained the signed affidavit from the officials for which the investments were made. The reply does not explain why the SOE had obtained the affidavit which is legally not acceptable without consent of the respective insurance company for assigning the interest to the Company. ZIDCO had purchased a policy of Group Gratuity Scheme from LIC, Silchar branch valuing Rs. 48.90 lakh in the month of March 2007 covering 60 employees for which administrative approval of the BOD and the State Government was not obtained.
Utilisation of borrowed fund :As on 31 st March 2008 the State Government had provided total guarantee of Rs. 24.67 crore to SIDBI and NMDFC on behalf of ZIDCO for repayment of the term loan and also assisted ZIDCO by providing grant and loan for repayment of Rs.3 crore to NMDFC (March 2007) and Rs.8.72 crore to SIDBI (June 2008). The enterprise made a loan payment of Rs. 2.88 crore to the FIs as against the recovery of Rs.10.42 crore from borrowers by diverting balance amount of Rs.7.54 crore to meet the administrative and management expenses. The State Government was forced to bail out ZIDCO from the debt by sanctioning a grant of Rs.3 crore (March 2007) and Rs. 8.72 crore interest free loan for repayment of loan of NMDFC and SIDBI respectively to avoid invoking guarantees provided to FIs due to irregular repayment. Thus, due to diversion of borrowed amount and irregular repayment to the FIs, the SOE was faced with a serious setback in its lending operation to secure further funds from the FIs which resulted in shortage of funds for disbursement while depleting the State exchequer to the extent of the amount settled. Kolkata), was not permissible as per AoA of ZIDCO. It did not appraise the project evaluation such as credit worthiness, margin money, repayment capacity and marketing of the products before disbursement of the loan. It had not entered into any agreement for creating charges such as mortgage of land and hypothecation of plant and machinery and stock against the security for disbursement of Rs. 2.80 crore for term and working capital loan. No security had been obtained against the loan (March 2008). The borrower had not repaid any installment. Thus, due to sanction and disbursement of loan of Rs. 2.80 crore in violation of the procedure of lending without creation of charges, the recovery of loan by repossession of the assets was not enforceable under the State Finance Corporation Act. The Government while accepting the fact stated (October 2008) that the loans were disbursed at the instance of GOM entirely out of the funds provided by them. The reply does not explain as to why ZIDCO did not follow the procedure for sanction and disbursement of loan. Loan under Hire Purchase Scheme :ZIDCO had sanctioned and disbursed a loan of Rs. 25,000 to 50 members aggregating to the total value of Rs.12.50 lakh in November 2005 for purchase of Agarbati stick making machines with interest of seven per cent per annum for repayment within three years. On review of the sanction and disbursement of the loans, it was revealed that the method of selection and identification of borrowers was not made available; agreements with the borrowers for hypothecation of plant and machinery were not entered into; pre and post inspections were not conducted to ensure that borrowers utilised the loan for purchase of machinery; marketability of products of borrowers was not assessed before sanctioning the loan; an amount of only Rs.9,392 against the outstanding loan of Rs.12.50 lakh was repaid (March 2008). Thus, sanction of only loan without obtaining security, non-hypothecation of plant and machinery, irregular repayment and non-assessing marketability of the products led to non-recovery of loan. The Government stated (October 2008) that the SOE had already started repossession of the plant and machinery from the defaulted borrowers. The details of borrowers and repossession of assets from them were not made available to audit.
Housing loan to Government employees :ZIDCO had sanctioned and disbursed the housing loan of Rs.10 crore for construction of houses to 474 officials working in State / Central Government / Public Sector Undertaking in Mizoram, financed by HUDCO under State Government Guarantee in the years 2005-06 and 2006-07. The important terms and conditions for granting housing loan, inter alia, included that the applicant must be in permanent service of Government / PSU and the loan shall be secured by Land Settlement Certificate as collateral security. On scrutiny of the sanction and disbursement, it was found that most of the borrowers did not follow the terms and conditions of HUDCO. The borrowers submitted the same standard estimates instead of submitting their own individual estimates according to the plan of their house; on test check of 30 cases it was noticed in 11 cases that names of borrowers were not matching with the names given in Land Settlement Certificates; non-384 encumbrance certificate in the names of the borrower was not obtained up to the date of loan sanctioned; ZIDCO had not conducted the post-inspection after disbursement of housing loan to find out whether the loan was utilised for construction; and completion certificate of the houses was not available on record. Thus, for construction of houses by the borrowers as per the terms and conditions of HUDCO could not be vouched safe in audit (CAG Audit Report 2008).
Disbursement of loan for Multi-Storeyed Car Parking Complex:HUDCO sanctioned (September 2005) Rs. 2.77 crore for construction of five multi-storeyed car parking complex at Aizawl. However, ZIDCO disbursed (June 2006 to October 2007) the entire amount to three promoters depriving other two promoters loan of Rs.1 crore. On scrutiny of the records of sanction and disbursement, audit further found that ZIDCO had not reappraised the Debt Equity Ratio, Margin of Safety and means of financing as per Detailed Project Report (DPR) for assessing the repaying capacity. ZIDCO had not collected the two months" installments from the borrowers as fixed deposit with commercial bank or Public Deposit Scheme (PDS) of HUDCO by opening escrow account as stipulated in the HUDCO sanctioned letter. It had not obtained the comprehensive insurance policies from the borrowers for construction of the multi-storeyed car parking complex for protecting the loan amount against the natural calamities and other perils. The Government stated (October 2008) that the SOE had adequate security to cover the loan. Timely and effective recovery of dues is the most critical component for any financing company for sustaining its capacity to finance and reduce risk of debts. ZIDCO has to initiate action against defaulting borrowers under the provisions of SFC Act, 1951 as follows: 1. Issue notice to defaulting borrower under section 30, to discharge forthwith liabilities to the company. 2. Issue of notice under section 29, to take over the management or possession of assets or both of the industrial concerns. 3. Sell the property pledged, mortgaged, hypothecated or assigned as security.
Besides above, ZIDCO also settles cases of heavy overdues, after considering their merits, under the scheme of one time settlement (OTS) by recovering dues of principal and some of the interest, liquidated damages, charges etc.
Non-performing assets:Reserve Bank of India, issued (March 1994) guidelines to classify the loan assets into four categories depending upon their chances of realization as standard assets, sub-standard assets, doubtful assets and loss assets. However, the SOE classified the assets only as standard assets and doubtful assets (non-performing assets). In 2008, the total amount of Rs. 59.92 crore was overdue for recovery as compared to Rs. 47.51 crore in 2004. ZIDCO had not fixed annual target for recovery of the loan and did not analyse the reasons for decline in recovery of loans nor did it take any effective steps to improve the recovery. No records were made available regarding the number of units visited by the recovery staff and number of recovery campaigns held. Even periodical (monthly/quarterly) demand notices to the borrowers were not sent regularly. The matter was not supervised or monitored effectively at the top management level nor did it get adequate attention at Board level. The SOE had not filed any case for recovery of loan from defaulted borrowers under SFC Act and Recovery Act. The ZIDCO received a total grant of Rs. 8.28 crore (March 2008) from Government of India and Government of Mizoram out of total sanction of Rs.9.37 crore and the balance of Rs.1.09 crore was yet to be received. As of March 2008, it had incurred the total expenditure of Rs. 7.43 crore out of total grant plus interest of Rs.8.40 crore. Rs. 89 lakh was utilised towards administration and management expenses in violation of the guidelines issued by Government of India. The SOE had not obtained the stamped receipts where the payment exceeded Rs. 5,000 in violation of the provisions of the statutory regulations. ZIDCO had retained huge amounts in the savings bank account for more than 15 days without depositing the same in fixed deposit account to earn more interest.
As per the DPR, ZIDCO had to create the infrastructural facilities such as site development & civil works, internal roads, drainage & sewerage system, water supply and tele-communication system for housing industrial units. The work was executed by the Project Manager departmentally who was authorised to incur the expenditure with strict compliance to the codal formalities and accounting practices. Even after completion of the project of IIDC at Pukpui (May 2005), the SOE had not initiated any action to transfer the land in the name of the SOE and also had not initiated to extend the lease period from 25 years to 33-66 years for IIDC Zote as suggested. ZIDCO had not floated tenders for execution of the civil works. As a result, the completion of the work with regard to economy could not be assessed by audit. The SOE had incurred expenditure of Rs.3.07 crore against the estimates of Rs.6.51 crore in some of the items in IIDCs Pukpui and Zote. In the absence of completion certificate for execution of work with reference to the DPR, the expenditure incurred below estimates could not be vouchsafed in respect of omission/reduction/deviation of works. The SOE had incurred expenditure of Rs. 94.46 lakh in IIDC Pukpui and Zote for construction of guest house and chowkidar quarters (Rs. 32.49 lakh), industrial shed (Rs.11.92 lakh), plantation of trees (Rs.1.09 lakh), black topping of road (Rs.47.53 lakh) and purchase of two motor cycles (Rs.1.09 lakh) which were not included in the estimate of the approved DPRs. The SOE also incurred excess expenditure of Rs.13.56 lakh over the sanctioned amount for construction of administrative block in IIDCs Pukpui. The SOE had incurred an expenditure of Rs.49.05 lakh at Pukpui and Rs.52.26 lakh at Zote for payment of labour charges for site development and other works. In the absence of daily payment register, muster roll and measurement books, the 386 payment could not be vouched with the actual work completed. It had incurred an expenditure of Rs.31.71 lakh at Pukpui and Rs.26.56 lakh at Zote by hiring JCB for site development and other civil works without floating tenders. The payments were made by hand vouchers without proper bill of JCB owners. The SOE had not maintained the measurement book for measuring the work. An amount of Rs.13.78 lakh was incurred for purchase of groceries such as rice, chana and dal for providing food to labourers at IIDC Pukpui. It appeared doubtful as one bill was obtained (August 2008) from the supplier of construction material M/s. C.T. Enterprises for purchase of groceries in bulk (75 quintals average) without having adequate storage place at the work site. An amount of Rs.1.42 lakh was paid for plantation of trees in IIDCs without having the details of source of purchase/receipt of plants/trees. Thus, due to non-observance of the codal formalities as prescribed by the funding agencies viz. Government of India and Government of Mizoram, expenditure of Rs.7.43 crore as mentioned above lacked adequate documentation. The Government, while admitting the fact, stated (October 2008) that the SOE had completed various works incurring less expenditure due to efficient management. Further, the tendering system was not followed in selection of contractors due to lack of adequate number of eligible contractors. The reply does not justify as to why the company could not follow the codal procedures with adequate documentation for execution of works. According to the MOU, PSC was to provide its expert services, technology, hardware, software, training, consulting and other support for setting up and running of call centre and ITES Training Centre, which would be under the supervision, management and control of PSC. In addition, PSC would bear the working capital cost and maintain all equipments including normal wear and tear. ZIDCO"s obligations were to provide suitable place for setting up the CTC, assist in selecting the trainees and to provide for the capital cost of Rs.1.09 crore of the project. PSC was to be responsible for the running the CTC and ZIDCO would receive Rs.1 lakh per month after one year of successful operation of the CTC and 20 percent of the membership fees collected. ZIDCO would not have any control over the operation management and supervision of the CTC. The MOU could be terminated by a mutual agreement in writing by both the parties and would remain in force for a period of 10 years unless extended by agreement in writing between the parties. The Government of Mizoram sanctioned in November, 2008 Rs.1 crore to ZIDCO for setting up the CTC which was released by ZIDCO to PSC during September 2008 to January 2009.

387
Audit scrutiny (January 2010) revealed that the MOU executed by ZIDCO with PSC did not safeguard the interest of ZIDCO as it gave full control of the finances and assets created from the funds received from ZIDCO. ZIDCO had no control over the management or assets created to ensure that the objectives for which the CTC was to be established, would be implemented by PSC. Further, in the absence of specifications and configurations of the hardware and software to be supplied as per MOU, which were most essential were not specified in the MOU. The justification for arriving at the capital cost of Rs.1.09 crore for these items listed was absent. The MOU also did not incorporate any suitable clause for levy of penalty/or to forestall PSC from abandoning the operations within the period of agreement.
The Call and Training Centre started operations in October 2008 and was closed down during July 2009 after being in operation for only about nine months due to reasons such as strike by employees and financial constraints of the PSC. The CTC has not open since then, a joint verification to assess feasibility of re-opening the CTC was carried out (December 2009) by a team consisting of high level officers of the state government and the officials of ZIDCO. The verification suggested termination of the contract with PSC. The project of setting up the CTC was taken up by ZIDCO/Government of Mizoram without conducting a feasibility study or preparing a project report. The basis of the offer and selection of PSC, records on infrastructure, trainees enrolled, training fees and membership fees collected were not available for scrutiny. The failure to conduct joint review of operations as provided by the MOU led to the closure of the operations by PSC within a period of nine months from the start of operations. Thus, the investment of Rs.1 crore turned out as a failed venture, attributing to bad managerial and financial decisions. There is always a question as to what part and extent political intervention has played, however, this is unanswerable as there is lack of evidence.

Conclusion:-
ZIDCO is the oldest of the five SOEs in Mizoram, the pioneer and set up supposedly to be a model for government company, however, the financial institution seems to be plagued with failure after failure.There has been no declaration of dividend throughout the 33 years of its existence. On inference from the discussion of the performance of ZIDCO in the various activities it has undertaken, the fault to a very great extent is accountable to management and lack of proper investment decisions. The business of the SOE is managed by the Board of Directors. It is very essential to conduct the Board meeting regularly for taking decisions on important matters in respect of policy decision, loan sanctioning and implementation of the industrial projects with the assistance of Government of India, State Government and financial institutions. According to Section 285 of the Companies Act, 1956, meeting of the Board of Directors shall be held at least once in every three month. The Board meeting was held only once in a year during the period from 2004-05 to 2007-08. The activity of financing various industrial projects by providing term loan is becoming more and more competitive day-by-day. Operating in liberal and global environment, the company is exposed to various kinds of risks. Therefore, effective risk management is essential for achieving financial soundness and profitability. ZIDCO had not drawn any corporate plan for financing activities and term lending schemes for attracting the entrepreneurs in consonance with the industrial policy of the state. It did not have any investment policy for investing its surplus funds. The defective pre-sanction appraisal of the projects and ineffective follow up and monitoring of the assisted units by the SOE resulted in non recovery of dues. With no effective internal control systems in place, the SOE was ill equipped in risk management and was highly susceptible to faulty financial management.