Thiruvananthapuram: Kerala State Industrial Development Corporation (KSIDC) has, in the last decade, violated its own loan policy, recklessly ignored its credit rating mechanism, and discarded the mandatory project appraisals to extend lavish financial support to a company that was hauled up for tax evasion and another that eventually got liquidated.

Kairali Steels & Alloys Pvt Ltd (Kairali TMT), a top steel bar manufacturer, and Propyl Packaging Pvt Ltd, once a leading plastic packaging manufacturing company, are the two entities. This was revealed in the Report of the Comptroller and Auditor General of India on State Public Enterprises, which was tabled in the Assembly on March 25.

In April 2022, the executive director of Kairali Steels & Alloys Pvt. Ltd (Kairali TMT) was arrested for allegedly using fake input tax credits to evade taxes. Before this, and even after the tax fraud came to light, KSIDC had gone out of its way to support Kairali TMT.

The state government introduced two schemes in May 2020 to help Micro Small and Medium Enterprises (MSMEs) weather the COVID-19 battering: the Vyavasaya Bhadratha Scheme (Industries Security Scheme) and the COVID-19 Samashwasa Padhathi (COVID Relief Scheme). These were exclusively for MSMEs, but Kairali TMT, a large-scale industry with a turnover of over ₹250 crore, was given ₹2 crore under both these schemes.

Curiously, the Board of Directors (BoD) ratified these irregular loan sanctions in December 2022, after the company's executive director was arrested for tax fraud. The CAG said the BoD was "not competent to approve deviation in the schemes introduced by the Government".

In 2020, KSIDC extended a term loan of ₹20 crore to Kairali TMT without conducting the mandatory project appraisal and credit rating. To sanction the additional loan, KSIDC relied on the assessments carried out in the previous year for a loan of ₹15 crore.

"Since the credit rating assessment in 2019 considered the past performance of the unit up to 2018-19, at the time of sanction of the second loan (October 2020), one more year had elapsed and the performance of 2019-20 should have been included in the period under consideration to assess the eligibility and performance of the unit," the CAG report said.

The case of Propyl Packaging, the other company that enjoyed KSIDC's illegitimate largesse, is even more curious.

The e-auction of Propyl Packaging's assets was held on August 14, 2023. There were signs that the company was faltering and still KSIDC persisted with its support. The company went into closure from July 2018 and the money it has to pay KSIDC back stood at ₹30.17 crore in February 2024.

In 2010, an inflated credit rating led Propyl Packaging to secure a loan of ₹10.18 crore at a relatively lower rate of interest. Tossing aside its credit rating framework, KSIDC did not take into consideration Propyl's negative turnover growth of up to 6.69 per cent in the preceding three years, meagre net profit ratio of 1 per cent, and continuous declining profit trend, all of which reflected Propyl's poor cash flow.

KSIDC had given Propyl a credit score of 77 in 2010. But the CAG said the score should have been only 64. The higher marks led to Propyl enjoying a lower interest of 11.50 per cent, when according to the CAG, the company should have been charged 12.50 per cent.

KSIDC granted Propyl a second loan of ₹1.05 crore a year later in October 2011, applying the same faulty credit rating used to assess the company's financial health a year ago. Such a shoddy credit assessment was done for Kairali TMT, too.

The 2010 loan was to be repaid by March 2019 and the second by June 2020. Propyl Packaging defaulted and KSIDC, the CAG noted, "did not take any fruitful action against the loanee or promoters to recover the dues."

KSIDC did nothing even after it was clear that Propyl's promoters had violated another major condition. The promoter directors had executed an undertaking that their shares would not be transferred and that they would not resign their positions without the consent of KSIDC.

Fact is, just two years after granting the second loan, the promoters' share dwindled from 79 per cent to 6.28 per cent, and KSIDC was not intimated. "This rendered the personal guarantee of the promoters virtually meaningless," the CAG noted.

There was a graver observation by the CAG. "KSIDC did not initiate any action against the promoters for breach of the loan conditions," the report said.