'Unsustainable' Rubco owes Rs 322 crore as interest to 450 cooperative societies, says ED

Kannur: The Directorate of Enforcement (ED), investigating the loan scam at Karuvannur Service Cooperative Bank, said the state government-backed Rubco-- one of the most recognised brands from Kerala -- is not a sustainable entity because of its mounting interest liabilities and widening losses.

Kerala State Rubber Co-operative Ltd or Rubco owed Rs 322.41 crore as interest to 450 agricultural cooperative societies and its cumulative losses stood at a staggering Rs 905.65 crore as of March 31, 2023, said ED. "Rubco is not a sustainable entity as its liabilities towards other primary agricultural cooperative societies are increasing day to day in huge volume," the central agency said.

Rubco makes and markets furniture from rubber wood, mattresses, flip-flops, thread rubber for tyres, and virgin coconut oil.
ED commented on the financial health of the "sick entity" Rubco in a counter-affidavit submitted to the High Court of Kerala to oppose a bail application of an accused in the Karuvannur bank loan scam on January 15.

A top official of Rubco said the society has been defaulting on its contributions to the Employees Provident Fund since 2008, money it already deducted from employees and its 50% share. Rubco has around 1,000 employees.

In 2020, the Central Government Industrial Tribunal-cum-Labour Court in Ernakulam ordered Rubco to remit 70% of the contribution but it has failed to do so, said Rubco's Managing Director Haridasan P V. For the past six months, the salaries have been disbursed with a one-month delay, he told Onmanorama.

But around 100 employees at Rubco's Rubberised Coir Mattress Factory at Kottayam's Pampady went on protest on Tuesday when their salary was delayed for 77 days. They said they submitted a complaint to Chief Minister Pinarayi Vijayan during his Nava Kerala Sadas campaign but Rubco continued to default on paying salaries.

Shareholders and depositors
Rubco sold its shares to raise Rs 69.33 crore as paid-up capital. Of that, Rs 9.26 crore or 13.36% is contributions from 450 primary agricultural cooperative credit societies (PACS). The state government pitched with Rs 59.43 crore or 85.72%. The remaining 1% came from the District Cooperative Bank, industrial cooperative societies, and the Rubber Board, a statutory body constituted by the government of India.

Managing Director Haridasan said the losses and the mounting interest liability were not because of bad management but because the government did not promptly reimburse the money it shelled out to buy rubber from the market at a premium. It is a 25-year-old legacy, he said.

Soon after Rubco was established in 1997, the state government asked it to procure rubber from cultivators to stabilise the market. Prices had plunged to below Rs 30 per kg in 1998 from Rs 50 a few years before.

The government directed the Rubco to buy rubber at a premium of Rs 2 and it would reimburse the money with an additional 50 paise as handling charges, Haridasan said. Rubco procured 5,000 tonnes of rubber directly from the cultivators. It also exported the rubber at a loss as directed by the government to stabilise the domestic market, he said. "But the government took five to seven years to return the money (the extra Rs 2.5 per kg)," he said.

When the government returned the money, it was sufficient to set off the interest during that period, he said. "The capital remained as such. We could not find a source to service or repay this loan," Haridasan said.

Rubco was making baby steps then. Ten of its projects (factories) were in the making but they were delayed by eight to 10 years because of "fund diversion and fund blocking from procurement", he said.

That is the reason for Rubco's financial crisis and it accumulated over 25 years, he said. "It affected our working and capacity utilisation," the managing director said.

When Rubco did not have working capital, it approached its shareholders -- the 450 agricultural cooperative societies and the State Cooperative Bank. Initially, it borrowed Rs 34 crore from the State Cooperative Bank and the entire money was used for rubber procurement. "The government stood guarantee for the loan," he said.

In the early 2000s, Rubco took another Rs 60 crore as fixed deposits from cooperative societies at an interest rate of 16% to 17%, Haridasan said. "The interest is accumulated and added back. It had a cumulative effect and it has reached that figure of Rs 332 crore," the managing director said.

He said Rubco would not be able to service the entire debt with its current size. "The debt will have to be restructured and interest reduced," he said.

ED's affidavit said Rubco owed the embattled Karuvannur Service Cooperative Bank Rs 8.26 crore, mostly the money it received as fixed deposits and the interest on it and the security deposit it paid to become Rubco's distributor in Thrissur district.

When the bank ran into trouble, it wrote to Rubco twice -- on October 26, 2021, and December 23, 2022 -- to Rubco to settle its dues. "Rubco wrote back expressing its inability to return the money and hold its demand till its loans are restructured," the affidavit said.

Revival plan in the making
Around one year ago, the government contacted the Indian Institute of Management-Kozhikode to draft a revival plan for Rubco.

Rubco also submitted to the government a proposal to restructure its debt and a revival package of Rs 50 crore to Rs 60 crore to launch new products. IIM-Kozhikode will have to vet the proposal, said Managing Director Haridasan.

Rubco's proposal included making furniture using imported wood apart from treated rubber wood, and medium-density fibreboard (MDF) and high-density fibreboard (HDF), the two trendiest materials in woodworking. MDF and HDF are made by combining wood fibre and glue under immense pressure and heat. "MDF and HDF units will take care of our waste wood," he said.

Rubco has also proposed to make latex mattresses. It now makes spring mattresses, rubberised coir mattresses, and rebound mattresses. "Rubco is one of the most recognised brands, and our products are accepted because of their quality and genuineness. Once the liquidity crisis is sorted out, Rubco will come up," the MD said, countering the ED's conclusion that it is not a sustainable entity. But IIM-Kozhikode has not yet taken up the assignment.