The Anubhav Plantations Scam

Details

Themes: Corporate scams / Controversies
Period : 1992 - 1998
Organization : Anubhav Group / Anubhav Plantations
Pub Date : 2002
Countries : India
Industry : Agriculture / Farming & Fishing / Financial Services

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Case Code : FINC009
Case Length : 09 Pages
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How the Schemes Worked

Most of the plantation firms had a skewed capital structure. According to CRISIL's findings, on an average, while Rs 35 lakh was contributed from the promoter's side, the public funds raised were usually above Rs 300 crore. Most of these companies did not even have sufficient crop insurance. Also, the offer documents of these companies did not highlight the risks involved. The lack of industry regulation made it virtually impossible for the average investor to distinguish between a fly-by-night operator and a genuine player.

Table II
The Risks in Plantation Schemes - A Crisil Report

Over dependence on retail funds	Inadequate equity base resulting in high leverage
Non-disclosure of promoters' stake	Due diligence for public raising of funds not done
Huge asset-liability gap	Erratic cash inflows
No access to organized sources of funding	Exposed to vagaries of nature
Excessive expenditure for raising resources	Inadequate cash inflows leading to low debt servicing capability
Lack of standard accounting practices gives companies the opportunity to follow liberal accounting policies

Source: ICMR

Most of these companies were reluctant to provide information about themselves. During investigations conducted by Business India, officials at Parasrampuria Plantations refused to even talk to the magazine. However, when the magazine sent people posing as investors, the response was extremely enthusiastic. Investigations regarding the schemes being offered by various companies across the country indicated that things were definitely out of joint. Even those companies who talked to the magazine's reporters were not able to convincingly answer the questions posed to them.

One major issue concerning these plantation schemes was the valuation of the teak and the teak units. Most of the companies were selling the teak trees at Rs 1500-2000 per tree. This was significantly higher than the Rs 10-15 figure quoted by NABARD, which had years of proven experience in agriculture.⁴ Reacting to this, the plantation companies said that forest cultivation was totally different from running private plantations, which spent a lot more on irrigation and fertilizers. In a study conducted by the Maharashtra Revenue and Forest Department (MRFD) on private plantations, the total cost of raising and harvesting a teak tree was estimated to be around Rs 400.

Even if one ignored NABARD's figures, the plantation companies were still charging the investors at least four to five times more than what experts thought was reasonable. However, the plantation people rejected these estimates. Natesan said, "These estimates are incorrect. Our charge of about Rs 1500 per tree has been arrived at after reckoning maintenance, pruning, weeding, even security."

Another debatable issue concerned the future yield of timber per tree and its price. The assumptions of yield and the price of teak 15-20 years later were critical for computing the expected return on investment. A study by the Indian Institute of Forest Management, Bhopal, concluded that the yield projections of private teak companies were nearly seven times the highest known yields in a time frame of 20-25 years. Another study by Maharashtra forestry officials revealed that while young teak trees up to about six years old responded spectacularly to increased irrigation and soil nutrients, the efficacy of the inputs declined notably as trees aged beyond seven years. A MRFD official commented, "Even if one reckons sites with the best quality soil, the timber yield of trees with a girth of 60 cm and above in 15 years would be about 5.1 cubic feet per tree."

Natesan dismissed these claims as being 'absurd and wrong.' He quoted the figures of Anubhav's 50-acre plantation in Bhavnagar in Gujarat, which had 65,000 teak trees. He said, "Over a period of six years, we have already obtained a yield of 8-9 cubic feet.

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4] National Bank for Agricultural & Rural Development (NABARD) was established to provide credit for the promotion of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts in rural areas, with a view to promoting integrated rural development and securing prosperity for rural areas.