Political postings pulp profits and principles!

TamilNadu Newsprints and Papers Ltd (TNPL) seems to have stood insulated from the political vagaries in the State. But should the state government continue to be involved in managing this business in the current environment?

In the early 1980s, when the Tamil Nadu Government set up an enterprise to manufacture newsprint without any significant private joint venture partner it marked a watershed moment. It was common for a state government to jointly invest in a business venture with a private entrepreneur, usually as a facilitating agency with some equity contribution, but promoting on its own initiative was indeed unusual.

Tamilnadu Newsprints and Papers Ltd [TNPL] pioneered the making of newsprint from bagasse – a waste product of the sugar industry – which was significantly being imported then. Bagasse was being burnt by the sugar makers to generate steam for the boiler and TNPL found a way to create significant value out of bagasse than mere steam generation. In fact, TNPL even offered steam to the sugar mills in barter for bagasse, thereby accessing a steady source of cost-effective raw material.

TNPL – from archives to present In the 1980s the renowned technocrat and chairman of the Seshasayee group of companies, S Viswanathan (SV), worked on a brilliant concept: production of newsprint and paper from sugarcane bagasse. There was stiff resistance from the bureaucrats who warned the risk of the state investing over Rs 200 crore on this project based on technology not proven across the globe on commercial scale. But SV convinced the then Chief Minister M G Ramachandran who backed him to the hilt. SV convinced the World Bank on the importance of the project for spreading literacy and successfully obtained a loan of $ 100 million.  He used to quip: “in a sugar mill, bagasse is the main product and sugar is the by-product!” He also set up a strong base for research and management systems for bagasse-based newsprint and paper production. These are still active. SV persuaded sugar mills in Tamil Nadu to spare their bagasse burnt as fuel, providing them coal-fired boilers with facility to handle coal. He also created the infrastructure for moving huge volumes of bagasse from several sugar mills to Karur, Tamil Nadu, where the state set up the TNPL plant. The company emerged as the most profitable of the state’s undertakings, with uninterrupted record of profits and dividends and registering continuous growth. Today it is one of the three largest paper mills in the country having the paper production 388,881 MT and packaging board plant production 183,770 MT for the year 2021-22. For years, nearly half the output of TNPL was newsprint. However, over the years other varieties of paper fetched higher prices and TNPL switched its production entirely to these phasing out newsprint. Industrial Economist [IE] has always batted for converting sugar bagasse to produce newsprint and paper. It will help India to compete with other global manufacturing nations of newsprint and paper. Also with more funding in research and development (currently FY 21-22 R&D expenditure is Rs 1187.01 lakh, percentage on turnover 0.30 per cent) in the paper industry will help to produce glazed and finer varieties of paper. It would result in increasing exports and in fetching more foreign exchange to India. (See the attached PDF of figures at a glance from TNPL annual report.) Following China, India must step up industrial production to large volumes to make it more competitive and cost effective.

The company has not suffered the fate of a typical public enterprise and has maintained a well acclaimed standard in its operations. It went public in 1995 and did an unprecedented restructuring of its capital. The paid-up capital of about Rs 100 crore felt bloated to attract investors’ interest and hence reduced Rs 30 crore of equity capital and replaced it by an equivalent debt by virtue of the order of the High Court. It raised fresh capital of the same amount that it wrote off and the revised subscribed equity came back to the original level of about Rs 98 crore. A restructuring that neither had hardly any precedent, nor implemented later by any other company with the only objective of accessing the public markets.

The discussion hereafter is not on the operational highs and lows of this enterprise, which seems to have stood insulated from the political vagaries in the State. It is on the moot issue whether the state government should continue to be involved in managing this business in the current environment.

State government and TNPL

The union government annually fixes a target for disinvestment though this is rarely met. The intent behind this is clear that the government should exit businesses other than the strategic ones like defence or where a significant public interest is at stake, for example Life Insurance Corporation.

Paper and newsprint are neither. They are out and out a commercial venture subject to typical problems of global glut and shortages that plays pranks on price and the competitiveness.

Shareholding and ownership

The state government directly owns 35.92 per cent of the equity shares (as promoter holdings) and indirectly about 4.06 per cent held by some of the state enterprises like TIDCO. By keeping the government holding less than 51 per cent the company escapes the definition of a government/public enterprise and avoids the audit by the Comptroller and Auditor General of India, though it is fully controlled by the State in substance.

The remaining about 60 per cent stake is held by non-institutional public holding (about 34 per cent) and domestic and foreign institutions (about 26 per cent). In effect, the shareholding is widely dispersed, even more than many private sector behemoths where the promoters tend to hold even a higher percentage. Such a shareholding pattern demands a high degree of governance and non-interference in the management by the government, which does not seem to be the case for the reasons mentioned herein.

Everchanging management and the rationale behind

In the 13 months between May 2021 and June 2022 the company had seen five different chairman and managing directors (CMDs) (See Table 1).

It is obvious that the nomination and remuneration committee has no independent role in the appointments and the writ of the government runs. It is not clear if the State government as the single biggest shareholder holding in excess of 26 per cent has special privileges under the charter of incorporation. Assuming there is, such distortions which existed in the days prior to the formulation of corporate governance rules under clause 49 of the listing agreement have no place in the current governance framework.

The persons were shuttled around at such a rate, that the Business responsibility report (BRR) provided in Annexure VIII to the main report of the Board of Directors which was signed on 18 May 2022 by the then Chairman and MD, Mr S Krishnan IAS, mentions that the person responsible for business as Dr M Saikumar IAS, who was in fact appointed only on 12 June 2022 as the Chairman and Managing Director! The agency that scribed the BRR must have done so after 12 June when Dr M Saikumar IAS had assumed charge but omitted to note that the main director’ report had been signed on 18 May when the results may have been approved during the fourth quarter board meeting!

So much for the diligence of the other directors, auditors, company officials and the advertisement agency that normally takes care of these functions!!

Appointments and reappointments

There is likelihood that the nomination committee fears the consequences of exercising its independent judgment. The independent directors may be getting appointed largely at the pleasure of the government as the single major shareholder. However, there is some ray of hope though very dim and minimal, going by some recent pattern of voting (see Table 2).

Table 2: TNPL Directors – recent pattern of voting

Ind. Dir – Independent Director

The above data demonstrates that some institution(s) though constituting a small fraction of the total institutional holdings have registered their disapproval of government imposing its writ in the appointment of the CMD, which has the maximum negative votes. The reappointment of the independent directors has also attracted a negative voting by an institution. These are healthy signs, though an infant step in demonstrating their displeasure. The rest of the institutional holders, that hold about 26 per cent, should also join hands and loudly demand higher standards of governance.

It is to be observed that the reappointment and the fresh appointment of the four independent directors was not part of the original notice of the AGM issued on 11 August 2022. It was made as an addendum on 13 September 2022, following a board meeting held on 12 September, four days before the voting was to commence, on 17 September. It is difficult not to discern politics in the manner these appointments were initiated.

Owing a business by state government

The compulsion for this business to be owned and managed by the State defies comprehension. There is no policy currently to supply free writing paper to anyone in the State which may perhaps justify such a venture. It does not matter to the common consumer whether the paper or the note book she buys is made by a company with 40 per cent shareholding of the State or run by a dacoit, if the product is good and the price, reasonable.

The government earned a measly sum of Rs 20 crore by way of dividend even in the best years when the dividend was declared at 75 per cent (2015-16, 2016-17 and 2018-19). The market cap has hardly moved in the 10-year between 2012 and 2022, during which time another paper maker operating in the neighbourhood, where incidentally the TN government through its investment arm The Tamil Nadu Industrial Investment Corporation Limited [TIIC] is the single biggest shareholder, multiplied by almost six times!

Seshasayee Papers Boards Ltd is professionally managed where TIIC though the biggest single holder just gets a minority number of board seats and no management control.

Unlike the investment of the state in Titan watches, which has been a multi bagger, the paper industry has little attraction from a stock price angle and it may make eminent sense to divest it at a strategic value and, may be, retain a token stake with a single board seat as memorabilia of the pioneering step that one of the predecessor governments took four decades back.

Need for stability in management

Surprisingly, there is a lot stickiness of the institutional holdings in the company despite its failure to create any shareholder value. Till such time the seminal decision to sell is taken, the Government should appoint a professional Managing Director and stop the musical chair of changing the top person every few months. The independent directors should function independently and thwart the political interference. SEBI should stop being a spectator and pull up the Board to question how these decisions were approved and scrutinise the minutes for checking the reasons.

As a parting word, it would be unfair to level the criticisms as above if no attempt is made to check if there are better examples among State PSUs on the issue of stuffing the board with government officials. As Gujarat usually picks itself for comparison, the two major listed PSUs manufacturing fertilisers were looked at. The pattern is quite similar with multiple IAS officers serving on the boards. However, the post of the Managing Director is held by a different individual though belonging to the state service.

It is also to be recorded that the level of disclosure by TNPL in its website is commendable.

Some market data^@

^@ The data is as available in the public domain and approx. as of 12 Nov 2022.