An orphan industry?
Even as the Indian analytical instruments market is experiencing strong growth, companies are perturbed by a few serious problems. Nagesh M Joshi reports
|“As an industry our biggest problem is our smallness. It’s a mere $2 billion industry including the accessories and
supplies businesses. The government machinery doesn’t regard us large enough to pay attention to our problems”
– Dr Ashes Ganguli Director
Cryogen Instruments India
Broadly speaking, there are three key product categories denoting specific analysis and measu-rement techniques that form the basis of analytical instruments market. They are—chromatography instruments, mass spectrometers, and spectro-photometers. Close to 90 percent of the analytical instruments market is dominated by products based on these three techniques. Within these, there are products that offer a combination of techniques and a few specialised products for gas, liquids, and gels.
From a pharma company’s point of view, analytical instruments are key business enablers, as they help in complying with various quality and safety standards.
From the suppliers’ perspective, their market is booming, with the life sciences sector contributing 60 to 70 percent to the total analytical instruments spending. As per an Indian Analytical Instruments Association (IAIA) estimate, the analytical instruments market in India is growing at 15-20 percent year on year. If one compares this with the global growth rate of five to six percent, Indian analytical instruments players seem to be at the right place at the right time. However, along with this growth, there are some pitfalls.
The problems faced by these players range from government rules and practices, long sales cycles to working capital availability issues. Given the competitive pressures, these problems limit the ability of these players to chase higher growth targets and impact their profitability.
Capital retrieval risk
“One major issue we face regularly is about the delays involved in retrieving the capital invested with public service unit (PSU) customers in the form of bank guarantees,” informs Nitin M Kabbin, Director, Dionex India.
Government bodies or PSUs make their analytical instruments suppliers give a bank guarantee at the time of signing a contract of equipment supply and deployment. Usually, this amount is about ten percent of the equipment value. This securitisation helps a PSU or government department to ensure that the project implementation is done as per the pre-defined schedule, and that the supplier adheres to a strict SLA (service level agreement) during the deployment term and also during the post-sales maintenance period.
As a general business practice, the equipment vendor applies for a bank guarantee to the commercial bank. The bank pays this amount (applied for) to the customer organisation following a thorough assessment of the supply and deployment contract and the credit worthiness of the supplier. Typically, commercial banks charge an interest of 12 to 16 percent from the equipment suppliers, who avail of such finance options. During the project implementation term, the supplier pays back the financer by way of regular instalments. On successful completion of the project, the customer is expected to return the money taken in the form of the bank guarantee to the supplier.
However, in case of government and the PSU customers, this practice is not followed. Unfortunately, analytical instruments suppliers are unable to take any legal recourse, as the fine print of the customer-supplier contract includes an escape clause allowing the government/ PSU customers to retain the money as bank guarantee for 30 years.
“In our hunger for business, we, the equipment suppliers, overlook such finer clauses. However, the customers take undue advantages of such one-sided provisions and hold back our capital even after all the SLA or schedule requirements are complied with,” informs Kabbin. Kabbin’s company took up a specific matter with a reputed research institution, but the matter could not be resolved in its favour.
LoC, EMD blues
Gautam Rajan, Managing Director, Marsap Services, highlights another issue—that the domestic analytical equipment suppliers face, again with regard to government bodies and PSUs.
“In large contracts, PSU customers offer letter of credit (LOC) facility to MNC companies only. But they deny such a facility to the local manufacturers. Ideally, the government is expected to protect the interest of the local players. The picture is opposite in reality,” says Rajan.
As per the benefits offered to small and medium size enterprises, and the Micro, Small and Medium Enterprises Development Act-2006, PSU customers are required to waive off eligibility requirements, such as paying the earnest money deposit (EMD) at the time of bidding for tenders.
“Even in this case, PSU customers deny local instruments manufacturers their right. This amounts to flouting the basic guidelines that the government itself has laid,” opines Rajan. The concerned PSUs do not budge even after persuasive debates and requests by the domestic analytical instruments manufacturers, he adds.
What’s the best way to deal with EPCG clearance delays? Rohit Jain, Chartered Accountant, Economic Laws Practice, an advocates and solicitors firm, has this to say:
“The best way to resolve this problem is by lobbying for an introduction of the statutory provision to be made in the foreign trade policy, which would mandate any application for EPCG license for import of analytical equipment to be processed within a fixed time.
The industry association may lobby for such a provision by talking to the Ministry of Commerce and DGFT. A reasonable time for clearance may be fixed at one week.
The fast clearance procedure has been introduced under the foreign trade policy for the EOUs / SEZs / star export houses. Similar provisions may also be introduced for the clearance of analytical instruments. This will substantially reduce the delays involved in the clearance of payments to be made to analytical instruments suppliers.
Another issue raised by Rajan of Marsap, who is also the secretary of IAIA, is of the delays involved in Export Promotion of Capital Goods (EPCG) clearance. In some cases this adversely affects the cash flows of the supplier companies. Under the EPCG scheme, pharma companies may import capital goods and spares at a duty rate of five percent, provided they fulfil the export obligation of six to eight times of the duty saved. Every duty sop under EPCG is required to be validated by government officials. This procedure results in delay in the delivery of goods.
For instance, even when a supply agreement is reached and the goods are imported by the local distributor of an overseas analytical instruments manufacturer, the pharma company refuses to accept delivery till its EPCG claim is validated by the government. “This affects our cash flows as we pay our principals (overseas manufacturers) upfront but customer refuses to pay before the delivery, which is delayed,” Rajan informs.
This issue has become less of a hassle today as against in the past, as the EPCG claims are processed faster than before, observes Kabbin.
The parentless child
Dr Ashes Ganguly, Director, Cryogen Instruments India, a domestic analytical instruments maker, aptly summarises the industry’s problems by calling it a ‘parentless child’.
“As an industry, our biggest problem is our smallness. It’s a mere $2 billion industry, including the accessories and supplies businesses. The government machinery doesn’t regard us large enough to pay attention to our problems,” says Ganguli.
The industry representatives do have good relationships with various officials and ministers from Ministry of Science and Technology, Environment, Department of Pharmaceuticals, the Ministry of Chemicals and Petrochemicals, or the Department of Education. However, due to its ‘smallness’ it has not become a strong pressure group when it comes to policies and legislation.
The challenge for Indian analytical instruments players, therefore, is two-fold—quickening the rate of growth so that they become ‘visible’, and improving their lobbying skills so that they are ‘audible’.
Suhail Nathani, Partner, Economic Laws Practice, a reputed solicitors and advocates firm, advises the analytical instruments companies to challenge the unjust actions of their customers in court. If the facts of these cases are presented appropriately, there are chances of getting a favourable verdict, he says
Release of bank guarantees
The inordinate delay in the release of a bank guarantee is not a new issue. It’s common for the PSUs to withhold the bank guarantees above and beyond the stipulated period. There are two aspects to this. One, the inordinately long periods for which they require the bank guarantee to be kept and the other is the release of it. The rationale behind retaining bank guarantee is, as long as the equipment is in service, the PSUs must have recourse to the seller for support. While the intention is laudable, it’s the implementation which creates problems. That’s true with telecommunications equipment, or licensing.
A common belief in the community supplying to the government and PSUs is that getting a bank guarantee back is virtually impossible. Several of them even factor it as the cost of the equipment they supply. (If bank guarantee is 10 percent, then that is added to the equipment’s cost.) However, it may not always be possible to do so, given the highly competitive market.
The delay in release of the bank guarantee has become a type of harassment to the equipment suppliers. In all such cases, the courts have taken diametrically opposite views. At times they have come down heavily against the PSUs, as well as the officers working in the PSUs. On the other hand, there are instances where the courts are lenient because the government and PSUs are eventually assumed to be acting in the best interest of the people. So the courts are more lax in terms of statutory deadlines and delays and condolence of delays.
But in egregious cases, there is a well established body of law on retention and return of bank guarantees. The equipment supplier may certainly get a relief from the court. A reasonable period to have a pronouncement from the court may be six months. As a business option, the reputed analytical instruments manufacturers may also request their PSU customers to consider obtaining undertakings or the tax demands in stead of bank guarantees.
Denial of LoC facility to domestic manufacturers
The second issue is with regards to denial of LoC facility to domestic manufacturers. Unless there is a serious rationale or a logical reason behind putting a discriminatory burden on the domestic manufacturer, no court will sustain such act as justifiable. The PSUs can be called upon by the court to explain the rationale behind such practice or actions, and this rationale has to be justifiable, reasonable, and should not be discriminatory or in bad faith.
Denial of EMD waiver rights to SMEs
If there is such a provision of exemption of EMD for the small companies, it is the law of the land and has to be complied with. For all such instances where law has not been complied with, especially by the government or the PSUs, there is a legal recourse. Courts, in all such cases, are fully empowered and sensitive to such matters to give an interim relief.