Reckless, politically motivated policy reversals by governments at the expense of industry have got the rap from the judiciary, again.
The Allahabad High Court has ruled that an abrupt suspension of a policy initiated by the Uttar Pradesh government in 2004 to attract investments in the sugar sector was “arbitrary” and done “without the application of mind” and directed the state to extend the promised incentives.
Under the policy, eligible mills were entitled to incentives including exemption from entry tax on sugar, trade tax on molasses, stamp duty and registration charges on purchase of land, purchase tax on cane and reimbursement on transport of sugar, and a capital subsidy of 10% on the investment made.
Though the court’s order came in a case filed by Bajaj Hindusthan — which made up for more than a third of investments worth roughly R9,000 crore in the scheme period — it could influence verdicts in cases filed by a dozen-odd mills against the state for the said policy withdrawal.
The court’s ruling came as a relief to the states’ sugar industry bogged down by the state’s irrational cane pricing policy. The sudden withdrawal of the incentives under the “sugar industry promotion policy” was the first decisive blow in at least two decades to the embattled sugar mills in the state.
In the order, the court said: “On the principle of promissory estoppel and legitimate expectation, the action of the respondents (the UP government) in denying the benefits under the sugar policy and the notifications issued under various Acts is deplorable, unreasonable and arbitrary which cannot be sustained. The petitioners (Bajaj Hindusthan) are liable to be given the benefits under various notifications issued in pursuance of the sugar policy on the units established by it.”
To lure investors, the Mulayam Singh-led state government had firmed up the policy in 2004 to offer tax breaks and other incentives for five years to companies that invest at least Rs 350 crore each and for 10 years to those spending Rs 500 crore or more on setting up of new units, including ancillary industries like power generation and distillery units, and expansion of existing units.
However, just within a week of Mayawati coming to power in 2007, the policy was “scrapped” through an executive order, leaving the mills that had taken huge loans to fund the expansion strapped for funds. While some mills that had made early investments under the policy, including Bajaj Hindusthan, had been granted the incentives for a while, many others couldn’t reap the benefits.
Millers said all major companies, including Bajaj Hindusthan, Balrampur Chini Mills, DCM Shriram, Simbhaoli Sugar Mills, Dalmia Sugar, Dhampur Sugar Mills, Dwarikesh Sugar Industries and Mawana Sugars, which had invested heavily, approached the high court separately against the state government’s decision. While some cases are being heard by the Allahabad High Court, some others are being heard by its Lucknow bench.
Bajaj Hindusthan had invested around Rs 3,000 crore and set up units at Bilai, Gangnauli, Thanabhawan, Budhana, Kinauni, Khambarkhera and Barkhera in the marketing year through September 2005. While it had received eligibility certificates to avail of benefits for all these units, getting the approval for its Maqsudapur plant in Shahjahanpur was under way. Sources said while Bajaj had got eligibility certificates and even reimbursements to the tune of Rs 60 crore in lieu of various incentives before the policy was sought to be scrapped, most other mills were not issued the eligibility certificates by then.
Among others, DCM Shriram had spent Rs 650 crore in setting up two sugar and one co-generation units apart from adding capacities to two existing plants. Dalmia Sugar had also invested over Rs 700 crore in establishing new factories and expanding capacity from 5,000 tonnes crushed per day (tcd) to 22,500 tcd.
Compounding the mills’ problems, successive years of elevated cane prices, fixed by the state government, and subdued sugar prices led to huge losses. Sugar mills in UP incurred losses to the tune of Rs 7,250 crore in the three years through 2013-14, with some like Mawana Sugars going to the Board for Industrial and Financial Reconstruction.
Interestingly, on a petition against such a policy in 2006, the state government had defended it, saying it had “extensively analysed the pros and cons of the impugned policy before formulating it”.
The latest verdict was in favour of Bajaj Hindusthan primarily on three counts: The doctrine of promissory estoppel that mandates the state to fulfil its promise; the court’s ruling that a legislative enactment made by a notification under a statute can’t be cancelled through an executive order; and non-withdrawal of notifications under which various exemptions and incentives were proposed to be extended.