Modern Foods - Disinvestment and After

"We are committed to making Modern a thriving and exciting business."

- Gunendra Kapur, Executive Director (Foods), Hindustan Lever Limited.

Modern Foods - Disinvestment and After: Introduction

In February 2000, as part of its disinvestment programme,1 the Government of India (GoI) sold Modern Food Industries (India) Limited (MFIL)2 to Hindustan Lever Limited (HLL) for Rs 1.05 billion. This was hailed as a major step in the GoI's disinvestment plan (Refer Exhibit I for a list of Public Sector Units (PSUs) approved by the GoI for disinvestment and Exhibit II for the important issues involved in disinvestment). However, some analysts questioned the GoI's decision to sell MFIL – a company with 14 production units spread across the country and almost 0.5 million square meters of land – for just Rs 1.05 billion. In 2000-01, employees at MFIL accused HLL of trying to shut down some manufacturing units by retrenching more than half of the 2,000 workforce and relying on third parties to meet production needs. By December 2000, 10 months after HLL took over MFIL, its accumulated losses went up to Rs 470.40 million as against its networth of Rs 330.1 billion. Subsequently, under the Sick Industries Act (SICA), MFIL was referred to the Board of Industrial and Financial Reconstruction (BIFR)3.

In 2001, HLL announced that MFIL would be able to make a cash profit in two years. It announced a turnaround strategy which involved improving the quality of the product and the raw materials (refined flour), improving the manufacturing process controls, and modernizing the plant and machinery. Existing distributors would be trained and new ones identified. HLL was also looking for new outlets that could sell bread. To implement this strategy, HLL invested Rs 80-90 million in MFIL.

Background Note

Modern Bakeries (India) Limited, incorporated in October 1965, was renamed Modern Food Industries (India) Limited (MFIL) on 11th November 1982. The company had 14 bakery units located in 13 cities and 6 other units at other places. Its products were bread, oil, flour, fruit pulp, fruit juice drinks, beverage concentrates and energy food. In the early 1990s, the bakery units accounted for 82% of the turnover of MFIL.

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1] In the early 1990s, the GoI initiated a disinvestment programme whereby its majority stake in the Public Sector Units would be sold to Private companies. By 2001, the GoI had sold its majority stake in only four (Lagan Jute Machinery Company Limited, MFIL, BALCO and CMC Limited) out of the 32 approved companies.
2] A wholly-owned government PSU under the department of food processing industries.
3] The Board for Industrial and Financial Reconstruction (BIFR) is responsible for the revival of companies declared sick. A company is declared sick if it has been incurring losses continuously for 3 years and it's networth turns negative.