HC says farmers have first rights on mills’ sugar sales

IN a crucial decision that would substantially erode banks’ collateral value and further discourage lending to the cashstarved sugar industry in Uttar Pradesh, the Allahabad High Court ruled on Friday that far mers who are yet to receive payment for cane supplies have the first right over mills’ sugar sales realisation, and not the lenders.

Disposing of a writ petition by Rashtriya Kisan Mazdoor Sangathan convenor VM Singh, the HC division bench comprising Chief Justice DY Chandrachud and justice Dilip Gupta directed district magistrates concerned to monitor as well as “cooperate” with defaulting mills in the state in offloading their sugar stocks at “best possible prices” and that all cane arrears, amounting to R4,626 crore, be cleared by October 31.

Industry executives apprehend forcible offloading of sugar stocks in such a manner will further drive down prices and widen losses of mills in a market already awash with supplies from four straight years of surplus production through 2013-13.

The court also directed that where there is a tagging agreement between a mill and its lender, the bank will be entitled to 15% of the sugar sales realisation while the far mers will get 85%.

Millers say banks have lent up to 85% of the sugar stock value and usually 85% of this working capital loan is meant for payment to farmers for cane purchases, which is central to what is known as the tagging agreement. Almost all mills in Uttar Pradesh have entered into tagging pacts with their lenders.

Each defaulting mill has to open an account in a nationalised bank and deposit proceeds from sugar sales in that to be paid to farmers, which will be monitored by respective district magistrates. The cane commissioner of the state will decide on interest on late payment of dues to farmers. Sources said an earlier request by mills to the cane commissioner to waive off any interest on late payment of arrears is still pending.

Analysts said the high court’s decision can be challenged not just by the sugar industry in Uttar Pradesh but by banks and institutions that stipulate lending norms, as it could set a bad precedent for other industries as well. This is because the farmer is just a supplier of a raw material and not a secured creditor legally, like a bank. So denying banks their first charge and giving precedence to raw material suppliers over banks perhaps goes against established lending norms, they said.

Abinash Verma, director general of Indian Sugar Mills Association, said: “Since the working capital limit of the banks, which was secured with the first charge, isn’t paid from sales of sugar stocks, there is a risk the banks may not find enough confidence to come forward and lend to mills any more.”

Moreover, forcible offloading of stocks would widen mills’ losses from the current R5.50 per kg on the sale of each kilogram of sugar to R31.50, they added. Even then, some millers argue, entire stocks in UP — estimated around 2.5-2.8 million tonnes as of August 31 — can’t be sold by October 31, as the state typically consumes just around 0.5 million tonnes of sugar a month.

If prices remain at the current level of around R31,500 per tonne, mills need to clear almost 1.5 million tonnes in less than two months, 50% more than the state’s usual consumption in two months, to clear all the arrears. While big mills have to offload a portion of their huge stocks to clear cane arrears, most of the smaller ones have to sell their entire inventories to pay the dues.

Mills in UP, which have already threatened to suspend operations in the next sugar season starting October, have consistently maintained that the state government’s “arbitrary” fixing of cane price at elevated levels when sugar prices remain subdued is to be blamed for the cane arrears. While the Centre had fixed the cane price at R210 per quintal, the state advised price of the raw material in UP was as high as R280 per quintal, although the state had initially offered incentive worth R11 per quintal.

Some millers expressed surprise at the court’s decision. “Instead of pulling up the state government which has created the mess, the high court effectively punished the banks that have nothing to do with the crisis. If such decisions are implemented, the state government will be even more emboldened to keep up with this damaging policy at the cost of the mills as well as the banking system,” said a senior executive with one of the mills. However, an elated Singh of the Rashtriya Kisan Mazdoor Sangathan said: “This is a historic order, especially when farmers are committing suicide. The court has taken cognizance of the fact and has come out with a beautiful order.”

It may be mentioned that on August 13, the HC had directed private mills to liquidate 15% of their sugar stocks in three weeks at a floor price of R3,100 per quintal. However, in its final verdict, the court has not mentioned any floor price for the sale. “While roughly R5,500 crore would have to be given to farmers in cane dues and interest, the rest of the realisation from stock sales can be used to pay off the banks,” said Singh.

Meanwhile, the banks are expected to approach the Supreme Court against the order.