Paam Pharmaceuticals Ltd has been declared a sick company by the Board for Industrial and Financial Reconstruction. This ruling has been given under section 3 (1) of the Sick Industrial Companies Act, which takes the complete erosion of the net worth of a company as a criterion for considering it sick.

Paam Pharmaceuticals had accumulated losses of Rs 127.1 crore as on 30 November 1998, against a paid-up capital of Rs 20.4 crore and free reserves of Rs 79.88 crore.

While declaring the company sick, a BIFR bench also quashed doubts expressed by banks and financial institutions on certain provisions the company had made in its balance sheet. These pertained to Rs 43.89 crore provided as bad debts and Rs 16.55 crore provided towards expired and soiled goods.

The Industrial Development Bank of India, the Punjab National Bank and UTI Bank submitted to the BIFR that the balance sheet of the company was fabricated "as all the expenditure during the last financial year appeared to have been inflated". The three banks have recalled their loans to the company.

Paam Pharma had recorded profits until 1996-97. But, the company incurred a net loss of Rs 130.86 crore for the period ending 30 November 1998, mainly on account of a high interest outgo of Rs 46.62 crore in 1997-98 compared to Rs 13.2 crore in the previous year. Similarly, bad debts accounted for Rs 43.9 crore (nil in the previous year) while provisions for expired and soiled goods were to the extent of Rs 16.55 crore (nil in the previous year).

"From the nature of exceptional loss or provision shown by the company in one accounting period, it appears that an attempt has been made by the company to avoid suits filed or likely to be filed against them," says the IDBI and PNB reports of submitted to BIFR. The company earned Rs 84 crore in profits during the 18-month period ended 30 November 1998 but had written off half of it without giving any explanation, the report alleged.

The company, in its response, furnished details of interest sources and deployment of funds, losses on account of sale of fixed assets, list of prior expenses and employment of important officials and certificate of the drug controller on soiled drugs.

Significantly, the BIFR declined to exclude the above entries from the balance sheet to arrive at the net worth of the company, as requested by the banks and financial institutions.

Paam Pharma responded to the allegations, saying medicines worth Rs 16 crore were destroyed in the presence of drug inspectors. Moreover, the company contended that soiled medicines, along with high value raw materials purchased for the expansion of its Bhivandi facility, dented the working capital cycle as it was unable to compete in the domestic market with the entry of multinationals.

Efforts to push the products in credit backfired as time-barred goods worth Rs 32 crore were retrieved and destroyed and their cost written off.

Anil Bhargava, managing director of Paam Pharmaceuticals,v claimed that banks were duly informed of the developments. There were no responses in the last two years. Accepting the company''s explanation, the BIFR reviewed the forms ascertaining its net worth and declared the company sick.