Monday, 7 January 2019

Air force holds back Rs 20,000 crore from HAL, as foreign vendors get paid

With zero cash balance, HAL takes Rs 781 crore loan to pay salaries

By Ajai Shukla
HAL, Bengaluru
Business Standard, 7th Jan 19


By the end of this financial year, the Indian Air Force (IAF) will soon owe Hindustan Aeronautics Ltd (HAL) dues of Rs 20,000 crore (Rs 200 billion), says its Chairman, R Madhavan, including Rs 7,000 crore (Rs 70 billion) carried forward from last year.

While the IAF has held back HAL’s payments, it has paid foreign vendors on schedule. Ministry of Defence (MoD) sources say Dassault Aerospace has got close to Rs 20,000 crore towards 36 Rafale fighters contracted in September 2016. Smaller sums, in the region of Rs 2,000 crore annually, have been paid to Boeing for contracts signed in 2015 for Apache and Chinook helicopters.

Dassault deliveries of the Rafale fighter are due to start later this year. The same is true of Boeing. On the other hand, as Madhavan points out: “The IAF owes HAL money for aircraft, helicopters and services that we have already delivered. Current dues are Rs 15,700 crore and will rise to Rs 20,000 crore by March 31.”

With no payments coming in, HAL had an unprecedented negative cash balance at the end of the year. The company’s 29,000 employees – already hurting from Defence Minister Nirmala Sitharaman’s statement in September that HAL was incapable of building the Rafale – entered New Year 2019 without their December salaries credited to their accounts.

Consequently, to meet the monthly salary bill of Rs 358 crore, and to keep HAL’s production lines running, which requires Rs 1,300-1,400 crore per month, the firm has – for the first time ever – taken a bank loan of Rs 781 crore in January.

HAL, traditionally a cash-rich firm, has steadily transferred Rs 11,024 crore of its cash reserves to the government. In 2015-16, the MoD ordered an “equity buy back scheme” that required HAL to transfer Rs 6,393 crore to the government. The firm made payment in two tranches – Rs 5,265 crore in 2015-16 and another Rs 1,128 crore in 2017-18.

In addition, over the past five years, HAL paid the government dividend and taxes worth Rs 4,631 crore: Rs 1,041 crore for 2013-14; Rs 576 crore for 2014-15; Rs 755 crore for 2015-16; Rs 963 crore for 2016-17 and Rs 1,295 crore for last year.

Madhavan says he will request the Defence Secretary to ask the IAF to pay at least part of its dues immediately. The army and navy have always paid on time. 

The IAF’s non-payment illustrates how foreign buys have strained its finances. Despite receiving the lion’s share of the defence capital budget this year – Rs 35,756 crore, compared to the army’s Rs 26,688 crore and the navy’s Rs 20,848 crore – payments to overseas vendors, particularly to Dassault for the Rafale, have left the IAF with no money to pay HAL for the equipment it has received. This includes Sukhoi-30MKI and Tejas fighters, upgrades to the Mirage 2000 and Jaguar fighter fleet, and large supplies of indigenous Dhruv and Rudra helicopters.

With little hope of getting payment soon, HAL has instituted austerity measures. A letter from the company’s finance director, which Business Standard has reviewed, states: “[The] current cash flow situation of the company is very critical. Against our annual budget requirements of Rs 19,334 crs (Rs 193.34 billion) during 2018-19, so far only Rs 6,415 crs (Rs 64.15 billion) has been allocated and the money collected… This has necessitated HAL to borrow funds from banks, which is Rs 781 crs (Rs 7.81 billion) as on 31.12.2018.”

“It has also been understood during the discussions held with MoD last week that further allocation of budget from IAF and other defence customers may not be forthcoming upto 31stMar 2019. This would result in a cash deficit of around Rs 6,000 crs (Rs 60 billion) upto 31stMarch 2019, even after considering postponement of major expenditure including certain procurements. Further the order book position of the company is not comfortable for long term sustainability.”

Contacted for comments, the MoD and the IAF have not responded.

HAL’s chairman admits that the IAF’s inability to pay its bills would affect the company’s share price. Its current price of Rs 814 per share is 30 per cent lower than its one-year-high of Rs 1,184. 

“Effectively, HAL’s shareholders are taking a hit on their share prices because the government is not paying its bills,” says a senior HAL official, speaking anonymously.

Asked whether HAL’s mandatory public statements reflected this decline, Madhavan stated: “Outstanding dues are reflected in HAL’s quarterly statements and reports. Until the last quarter, we had a cash balance of Rs 700 crore. But that has been steadily run down and the report for this quarter will reflect a negative cash balance.”

Even more worrisome is the impact on HAL’s work of the funds shortfall. “We have been maintaining the serviceability of the IAF’s aircraft fleet, but next year this may be affected badly. If we are unable to pay for raw materials and spares, how will we keep the fleet going?” wonders Madhavan. 

Also affected will be a range of HAL-funded projects. The enhancement of Tejas production capacity from eight to 16 fighters per month requires HAL and the IAF to share the Rs 1,381 crore cost. There will be no money for this.

Separately, HAL is funding the Rs 500 crore development of the HTT-40 basic trainer, which is nearing completion but could grind to a halt. HAL is also putting in Rs 200 crore towards the development of the Light Combat Helicopter (LCH), until the IAF places an order. The vitally important Light Utility Helicopter (LUH) project also requires HAL funding.

A key question that remains is how a publicly listed company, which includes seven independent directors on its board, has entered a negative cash balance position without any evident protest from on the board.

Business Standard asked the seven independent directors on HAL’s board –former Indian Railway Accounts Service officer, Dipali Khanna; former IAS officer, Siddharth (who goes by a single name); chartered accountant, Neelakanta Iyer; former Garden Reach Shipbuilders & Engineers chief, Rear Admiral KC Sekhar (retired);  Centre for Policy Studies chief, Jatinder Kumar Bajaj, former Bharat Electronics Ltd executive, Anil Kumar and former banker, Dr S Malla Reddy – whether they had raised any red flags as HAL’s financial situation deteriorated. None of them responded to emailed questions.

On Friday, Sitharaman told Parliament that HAL already had orders worth Rs one lakh crore (Rs 1 trillion) in the pipeline. While HAL has already rebutted that statement, the revelations about the IAF’s non-payment indicates that the current crisis is not only about a shortage of orders; but even more about non-payment for orders received and fully discharged.

9 comments:

Unknown said...

If that true its a setback for the country,goverment must make it position clear

Unknown said...

They already had clarified that HAL is not fit for our Defense requirements hence they are awarding offset contracts to most capable private "PLAYERS"

raveen k pai said...

When a personal decision is made in I interest of his political party then money rules not nation

Madanjit Singh said...

No doubt that lies are tumbling out of political motormouths.This cannot be allowed to continue 'in our names'

PRAKS said...

Blame it on N E _ _ U or Blame it on F_ _U . Cos HAL not equipped to handle offsets but 10 day old AA company qualified to handle Rafale offsets. Amazing 😢🤑😢🤑😢🤑😲🙃😭

Anonymous said...

Great article, exposes the reality of how PSUs are neglected even as the Government blames them for under-achievement. Is it any surprise that HAL is not able to deliver the Tejas on time?

The IAF messed up big time by selecting the Rafale over far cheaper but adequately-capable aircraft such as the F-18 or the Gripen. At $200M per aircraft, the Rafale leaves little money left for anything else .... and the axe falls on the PSUs like HAL even as private sector newcomers like Reliance reap the largesse of offsets.

As for the "independent" members of HAL's board, we all know how they are appointed. They are not management stalwarts, they are mainly retired babus given cushy sinecures in return for decades of docile service to their political masters. They are there for the fishes and loaves of office, not for asking uncomfortable questions to the HAL management or the biggest shareholder, the MoD.

Anonymous said...

Nice article. Need similar analysis on why HAL flagship projects like IJT HTT LCH eyc are floundering with no end in sight. They will get LCA orders today or tomorrow but how much more time is needed to deliver IOC aircrafts? It's only 12 delivered in the last 4 years! They also need to reduce manpower as a company of its size cannot have 30000 employees. All DPSU will always have orders, just a matter of time. Take HSL case for instance. It's good to sympathise but can't ignore inefficiencies.

Anonymous said...

This NDA II Govt is great for Jumela and Surgical strikes Some achiments of Defence Minister Sitaram and her mentor Jaitley

1. Surgical Strick on GoI deficit last year by listing HAL at a Price that valued it almost the same a Saab Sweden and bailing out the IPO thru LIC and GIC subscription. Great white wash .The big ticket LCA order was the promise almost 14 back to the investors when HAL was floated and repeated Sita in agniparkish in parliament during Rafael debate. Ram nam Satya hi.

2 In Kamov Russiness are getting 49% equity and not investing any cash. So HAL will pay cash buy Technology capital goods pay for TOT to Russians and they still get 49% Why?

3 HAL has been given a new responsibility by RM. Doing Defence Expo in Chennai in March 2018 and now Aero Show in Bengalrore. Seems like RM wanting to get political mileage in Chennai ... Earlier these events were done by Defence Expo agency. Is this misuse of power ....

Sandeep Ghosh said...

Ajai Sir,

Please do a follow up on this, I have a suspicion that other PSU's like BDL, BEL, MDL, CSL, GRSE are also up next on this design to weaken Indian DPSU's.

regards