Ultratech engineered scarcity to profit: SFIO

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Aug 29 2011, 09:57am hrs
A probe by the Serious Fraud Investigation Office (SFIO) has revealed that Ultratech, the country's largest cement maker owned by the Aditya Birla group, made undue profits in the three financial years up to 2010-11 by creating artificial scarcity of the commodity through production and supply manipulation.

The SFIO report, submitted to the corporate affairs ministry on July 27, was part of a larger probe initiated by the body to find out whether the countrys leading cement manufacturers Ultratech, ACC and Ambuja ran a cartel. The SFIO conducted separate probes into the practices of these companies and its reports are currently being examined by the ministry. In parallel, the Competition Commission of India is also looking into a compliant of cartel-like behaviour by these cement companies.

In response to a detailed questionnaire from FE, chief legal officer of Aditya Birla Group Ashok Gupta said: At this stage, we are not able to comment on the points raised in your mail as this would not be proper while the matter is still under consideration by the authorities. All we can say that the report lacks understanding of cement industry's working, he said.

When contacted, corporate affairs secretary Naved Masood told FE: We have received the SFIO report (on Ultratech). We are awaiting responses from the company. After we get their response we will decide how to proceed from there.

The three companies Ultratech, ACC and Ambuja together enjoy nearly 40% share in India's cement market. Ultratech has a market share of 16-18%, while ACC and Ambuja hold market shares of 9.6% and 10% respectively.

The probe into Ultratechs practices was carried out on the basis of a Registrar of Companies report which urged the ministry to examine the records of Ultratech to find out the factual position of the company.

In its preliminary report on Ultratech, RoC had found capacity utilisation and profit and gross profit of the company not moving in tandem. The RoC said that while there was a marginal increase of 0.28% in capacity utilisation in 2005-06, net profit had jumped from R2.85 crore to R229.76 crore or 8061%.

Similarly, while the companys capacity utilisation in 2007-08 and 2008-09 had reduced, net profit increased from R782.20 crore in 2006-07 to R1007.61 crore in 2007-08, to marginally decline in 2008-09.

Sources said that RoC had concluded that since capacity utilisation and net profit did not move in tandem, it suggested irregularity in the operations of the company, in a way detrimental to the interest of the public/consumers at large. Following the RoC report, the ministry directed SFIO to carry out an investigation into the company on June 2 this year.

On a closer scrutiny of the companys production units, the SFIO found that the companys actual production had significant variations and as a trend it is as high as 120%.

SFIOs investigation was limited to only examining whether Ultratech resorted to price manipulation for maximising profits or not. For this purpose, the investigation agency based their probe on four parameters: studying the installed capacity of the company, opening and closing of stock of cement and monthly dispatches of each of its 11 manufacturing plants of the company.

Apart from that, the investigation agency also studied closely the marketing arrangement set up by the firm. Though Ultratech has 22 manufacturing units, SFIO restricted its investigation to 11 of these since the remaining were added only on July 1, 2010 following the companys amalgamation of its manufacturing units with Samrudhi Cement.

After examining each of its 11 manufacturing units SFIO submitted a detailed status report on each of these. For instance, the investigation officers found that while the companys Awarpur Cement plant at Maharasthra had an installed capacity of 300,000 MT, the actual production varied from month to month. While in April 2008 actual production had reached 331,735 MT or 110% of its installed capacity, in December 2008 its actual production however fell to 55% of its installed capacity at 164,950 MT.

The report also noted that other external factors which could have affected production were also absent like shortage of power, labour problem, machinery breakdown, shortage of railway rakes, demand constraints and shortage of raw material. Hence, they concluded that plant after plant was showing the same pattern.

It said, It is amply clear that the purpose is to periodically provide the market the signal of shortage so as to push the price up, then encash on it by higher production and then before the price could slide down again lower production giving once again a signal of shortage and keep on repeating the cycle.