A 3-decade old saga of error at HLL, Lipton

NEW DELHI: “If you use a poor headline, it does not matter how hard you labour over your copy because your copy will not be read,” said noted ad guru John Caples.
Something similar seems to have happened with Hindustan Lever Limited (HLL) and its sister concern Lipton India Limited (LIL) over three decades ago (1983-84) when a company official recorded a payment received by Lipton India, in the balance sheet, under the header “loans and advances”.

An amount of Rs 10.38 crore was transferred by Lipton as ‘advance’ payment to meet running expenses of two Vanaspati manufacturing factories to HLL.

The header spelled trouble for both the companies. For, the Enforcement Directorate (ED) charged the two companies under Foreign Exchange Regulation Act (FERA) in 1990 placing reliance on the header recorded in the companies’ balance sheets.

More than three decades later, the Prevention of Money Laundering (PMLA) Tribunal has set aside a penalty of Rs 25 lakh levied by ED on the companies. The Tribunal has also scrapped the penalties of Rs 5 lakh each imposed on Directors of the companies charged by ED with ‘vicarious liability’. These included Dr A S Ganguly, the then chairman of the Board of Directors who, the Tribunal in its last month order held “was in any event not concerned with the day-to-day functioning” of HLL.

The controversy finds its genesis in a decision taken by HLL and LIL in 1983-84 when the duo decided that the entire business of manufacture and sale of Vanaspati, which was being carried out by HLL, would be transferred to Lipton India Limited (LIL).

Accordingly, four factories which were only manufacturing Vanaspati were straightaway transferred to LIL.

However, in respect of two factories which were manufacturing products other than Vanaspati, it was decided that till all formalities are completed including transfer of licence to import the raw material and the industrial licence to manufacture Vanaspati etc., the manufacture of Vanaspati as an interim arrangement would be continued to be carried out by HLL, but would be done, for and on behalf of LIL. All expenses, profits and losses, were thereafter to be, to the account of LIL in relation to the business of Vanaspati.

It was in this background that an amount of Rs 10.38 crore was transferred by LIL to HLL. The payment was recorded as “loans and advances” in the books of the companies with an ‘explanatory note’ which mentioned that the payment has been made as a “transitory arrangement”.

The Tribunal, in its last month order, recorded that ED issued a notice to the company under FERA — which it described as a “draconian law” in its order — based on the entry of “loans and advances”. The Tribunal recorded that ED ignored the explanatory note which clearly laid down the conditions for making the “interim” arrangement. The note, the Tribunal order reads, made it clear that the said payment should be viewed as advance and not loan.

The order recorded that the company (LIL) had admitted in its letter to the Reserve Bank of India (RBI) that it (LIL) had failed to obtain permission from the Central bank before transferring the payment under a relevant provision of FERA.

The Tribunal, however, has held that there is no “case or justification for imposition of penalty” by ED on the company.