Report of the

Comptroller and Auditor General of India

on
Food Corporation of India

for the year ended March 2016

Union Government
Ministry of Consumer Affairs,
Food and Public Distribution
Report No. 18 of 2017
 Report No. 18 of 2017

CONTENTS

Chapter Subject Page Number

Preface iii

I. Introduction 1

II. Debt Management 11

III. Labour Management and Incentive Payments 23

IV. Implementation of Private Entrepreneur Guarantee Scheme 47

for Construction of Godowns in Punjab

V. Compliance Audit Paragraphs 57

List of Abbreviations 71

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 Report No. 18 of 2017

PREFACE

The Food Corporation of India (FCI) a Statutory Corporation under the Department of Food and
Public Distribution, Ministry of Consumer Affairs, Food and Public Distribution was
established to fulfil the objectives of effective price support operations, distribution of food
grains throughout the country for public distribution system and maintaining satisfactory level
of operational/buffer stocks of food grains.
This Report contains results of three areas covered in audit viz. Debt Management, Labour
Management and Incentive Payments and Implementation of Private Entrepreneurs Guarantee
(PEG) Scheme in Punjab. These areas were selected due to high cost of working capital in FCI;
high handling cost of departmental labour and delay in augmentation of storage capacity
through private participation respectively.
The audit of debt management revealed that FCI had to pay huge amount of interest on funds
raised from external sources, as it did not get the food subsidy reimbursement in time from the
Government of India (GoI). FCI also could not recover huge receivables from various
Ministries, Departments and State Governments, outstanding for a long period of time. The
labour management in FCI suffered from deficiencies like non-rationalisation of departmental
labour and non-elimination of proxy labour. FCI also paid huge inadmissible incentive to its
labour in violation of applicable rules and judicial judgments/directives. The PEG Scheme was
found to be badly delayed and suffered from lapses in the implementation, resulting in excess
expenditure.
This Report also contains, five individual paragraphs (two of which relate to fraudulent
payments) emerging out of compliance audit.
This Audit Report on the accounts of FCI for the year ending March 2016 has been prepared for
submission to the Government under Section 19-A of the Comptroller & Auditor General’s
(Duties, Powers and Conditions of Service) Act, 1971, as amended in 1984.
The Audit was conducted in conformity with the Auditing Standards issued by the Comptroller
and Auditor General of India.

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 Report No. 18 of 2017

OVERVIEW

This report contains detailed observations on three areas i.e. Debt Management, Labour
Management & Incentive Payment and Implementation of Private Entrepreneurs Guarantee
Scheme (PEG) in Punjab region and five individual observations (two of which relate to
fraudulent payments amounting to ` 72.28 crore) amounting to ` 2,772.98 crore.

The total expenditure incurred by FCI increased by 35 per cent from ` 1,05,355 crore to
` 1,42,487 crore during 2011-16; the food subsidy claimed by FCI increased by 53 per cent
from ` 67,694 crore in 2011-12 to ` 1,03,383 crore in 2015-16; the interest burden on FCI
increased by 65 per cent from ` 5,227 crore to ` 8,647 crore during the period 2011-16.

Corrections to the tune of ` 1,072 crore as Inter-Head adjustment and ` 1,976.67 crore as Intra-
Head adjustment were carried out in the accounts at the instance of Audit.

HIGHLIGHTS
The major findings in this report are mentioned below:
Debt Management
• Subsidy received every year by FCI was lower than claimed for from the GoI. On an
average only 67 per cent of subsidy claimed was released by the GoI over the last five
years because of which FCI had to borrow from other costlier means of finance viz. Cash
Credit (CC), Short term loans etc. resulting in heavy interest burden of ` 35,701.81 crore
during 2011-16.
(Para No. 2.3)
• An amount of ` 2,897.17 crore was outstanding from various Ministries/Departments
and State Governments.
(Para No. 2.4)

• FCI also failed to comply with the instructions of the Ministry of Consumer Affairs,
Food and Public Distribution to conduct efficiency analysis after every two quarters. No
analytical study was conducted of the monthly Cash Credit used by FCI on the subsidy
released by the GoI.
(Para No. 2.9)

• The risk management policy of FCI also did not sufficiently address the complex
financial needs of the Corporation.
(Para No. 2.10)

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Labour Management and Incentive Payments

• Non-rationalization of surplus departmental labour, deployment of costlier labour at
depots and non-pooling of departmental labour resulted in excess expenditure of
` 237.65 crore.
(Paras No. 3.2.1 to 3.2.3)
• The labour at various depots were found, as per records, to be handling very high
number of bags per day ranging from 998 to 1776 as against the norm of 105 bags per
day. This was indicative of existence of proxy labour in depots leading to exorbitant
incentive being paid to some labourers, a problem which FCI has not been able to tackle.
(Para No. 3.2.4)

• Inadmissible payments worth ` 435.18 crore were made in violation of the applicable
laws such as The Gratuity Act, 1972, Contributory Provident Fund, Productivity Link
Incentive and judgement of the Hon’ble Supreme Court on the issue.
(Paras No. 3.3.1 to 3.3.4 and 3.3.6)
• Suspected excess payment (` 12.12 crore) by way of improbable stack formation,
treatment of one activity (standardization work) as two or three different activities
(refilling/rebagging and weighment/stacking), excess certification of refilling work,
wrong certification of lead distance etc. were also detected.
(Paras No. 3.4.1 to 3.4.4)
• Deficient controls in the maintenance of booking-cum-output slips at the depots were
noticed which increased the risk of irregular practices.
(Paras No. 3.5.1 to 3.5.5)
Implementation of Private Entrepreneur Guarantee Scheme for Construction of
Godowns in Punjab
• Delay in award of contracts for construction of godowns to Private Entrepreneurs (PEs)
led to negligible implementation of the scheme in XI Plan (2007-12).
(Para No. 4.2.1)
• A substantial quantity of food grains was lying in open areas with State Government
Agencies (SGA) and hence 4.72 Lakh Metric Tonne (LMT) of wheat valuing
` 700.30 crore deteriorated and was declared as non-issuable to Targeted Public
Distribution Scheme. Moreover, despite huge quantities of wheat lying unprotected in
Covered and Plinth (CAP)/kacha plinth capacity of six LMT was dehired by FCI in two
districts during the period September 2012 to March 2016.
(Para No. 4.2.2)
• As ineligible bidders were awarded contracts for construction of godowns, undue benefit
of ` 21.04 crore as rent during the period 2012-13 to 2015-16 was passed on to the PEs.
(Para No. 4.3.1)

• Handling cost of ` 9.77 crore was incurred during the period from 2012-13 to 2015-16
due to taking over of godowns without railway sidings.
(Para No. 4.3.2)
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 Report No. 18 of 2017

• Incorrect measurement of distance by Punjab Grains Procurement Corporation Limited

(PUNGRAIN) and FCI resulted in excess expenditure of ` 8.36 crore on transportation
of food grains over the excess distance.
(Para No. 4.3.3)

Compliance Audit Paragraphs:

i. Recoveries relating to excess/irregular payments etc. to the tune of ` 32.18 crore were
made during 2015-16, at the instance of Audit.

ii. Undue payment of ` 23.02 crore was made to a handling contractor for fictitious work
upto 2014-15 due to non-adherence to the provisions of standing instructions/manual
regarding payment to handling contractors. Internal Audit and Vigilance teams deputed
subsequently reported fraudulent payment totaling ` 71.75 crore to the same contractor
and loss of interest of ` 13.39 crore on these fraudulent payments.
(Para No. 5.1)
iii. Fraudulent excess payments of ` 14.73 lakh and ` 37.89 lakh were made to the
transport contractors on account of payment on higher rate and for bills for longer
distance than actual for transportation of food grains.
(Para No. 5.2)
iv. Excess payment of ` 24.96 crore was made to the Uttar Pradesh Government and its
Agencies on account of cost of gunny bags and gunny depreciation for procurement of
paddy and delivery of rice during Kharif Marketing Season (KMS) 2014-15. FCI
recovered ` 2.96 crore after Audit pointed out the excess payment and recovery of the
balance ` 22.00 crore was yet to be made.
(Para No. 5.3)
v. FCI sold wheat to bulk consumers at a rate below cost under open market sale scheme
during 2013-14 leading to non-recovery to the tune of ` 38.99 crore.
(Para No. 5.4)
vi. FCI could not adjust input Value Added Tax (VAT) while making payment of output
VAT due to improper collection/maintenance of Tax documents and made an
avoidable payment of ` 25.01 crore on account of output VAT in Uttar Pradesh. Non
refund/adjustment of this avoidable payment also led to consequential loss of interest
amounting to ` 13.02 crore on credit being availed by FCI.
(Para No. 5.5)

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Chapter-I
Introduction
This chapter, provides an overview of Food Corporation of India (FCI), significant
findings from audit of Financial Statements of FCI and recoveries at the instance of
Audit.

1.1 FCI - An Overview

FCI, set up under the Food Corporation Act 1964, is the main agency for implementation
of Food Management Policies of the Government of India (GoI). The primary duty of
FCI is to undertake procurement, storage, movement, transportation, distribution and sale
of food grains. FCI functions under the Department of Food and Public Distribution,
Ministry of Consumer Affairs, Food and Public Distribution (Ministry) to fulfil the
following objectives of the Food Policy:
• effective price support operations for safeguarding interests of the farmers;
• distribution of food grains throughout the country for public distribution system
(PDS1);
• maintaining satisfactory level of operational and buffer stocks of food grains to
ensure National Food Security.
1.1.1 Organisational set up
The overall management of the affairs of FCI is vested with the Board of Directors
consisting of 12 Directors and headed by the Chairman and Managing Director. All the
Directors are appointed by the GoI. The Board, however, presently (February 2017)
consists of only eight2 Directors.
FCI carries out its functions through a country-wide network of offices with Headquarters
at Delhi, five zonal3 Offices, 25 Regional Offices, 169 District Offices and 1,927 depots
under its control. FCI had 21,047 Category I to IV employees and 47,912 workers as on
31 March 2016 which was 57 per cent and 83 per cent of the sanctioned strengths of
36,982 and 57,498 respectively.
1.1.2 Operational performance
The operational activities of FCI may be broadly classified under procurement, storage
and distribution.

1
The system for distribution of essential commodities to the ration card holders through fair price
shops.
2
Presently Board is represented by one Chairman & Managing Director of FCI, two Directors from
the Ministry, one Director from Department of Agriculture, Co-operation & Farmers Welfare, one-
ex officio Director (Managing Director of Central Warehousing Corporation) and one Director from
Food, Civil Supplies & Consumer Protection Department of Madhya Pradesh, one Director from
Food, Department of Civil Supplies and Consumer Affairs of Punjab and one Non-official Director.
3
East, North-East, North, South, West.

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1.1.3 Procurement
FCI being the main agency of the GoI for implementation of Food Management Policies
undertakes procurement of food grains with the broad objectives of ensuring Minimum
Support Price (MSP) to the farmers and availability of food grains to the weaker sections
at affordable prices.
Under the existing procurement policy of the GoI, food grains for the Central Pool are
procured by various agencies such as FCI, State Government Agencies (SGAs) and
private rice millers4. Procurement of wheat and paddy for the Central Pool is carried out
on open ended basis at MSP fixed during each Rabi/Kharif crop season by the GoI on the
basis of recommendation of the Commission of Agricultural Costs and Prices. FCI also
procures rice obtained out of paddy procured for the Central Pool by the State
Governments and their agencies under the price support scheme. Paddy and wheat
procured directly by the State Governments under Decentralised Procurement (DCP)
scheme for distribution under Targeted Public Distribution System (TPDS) and Other
Welfare Schemes (OWS) also form part of the Central Pool. Any surplus stock over their
requirement is taken over by FCI for the Central Pool and in case of any shortfall in
procurement against allocation made by the GoI for distribution to TPDS, FCI meets the
deficit out of the Central Pool.
Production, mandi arrival and procurement of food grains (wheat and rice) during
2011-12 to 2015-16 were as shown below:
Table 1.1: Year-wise production, mandi arrival and procurement of wheat for the
Central Pool by FCI and State Government Agencies
Lakh Metric Tonne (LMT)
Rabi Marketing Production Mandi Procurement
season arrival FCI SGAs Total
(1) (2) (3) (4) (5) (6)=(4)+(5)
2011-12 939.03 324.62 39.74 243.61 283.35
2012-13 948.82 404.55 49.93 331.55 381.48
2013-14 935.06 293.16 38.95 211.97 250.92
2014-15 958.49 347.22 35.33 244.90 280.23
2015-16 865.26 327.53 29.84 251.04 280.88
Total 4,646.66 1,697.08 193.79 1,283.07 1,476.86
As depicted in the Table above, procurement of wheat by FCI actually decreased from a
peak of 49.93 LMT in Rabi Marketing Season (RMS) 2012-13 to 35.33 LMT in 2014-15
and further slipped considerably to 29.84 LMT in RMS 2015-16. At the same time
procurement of wheat by SGAs was at all-time high in RMS 2012-13 which came down
to 251.04 LMT in RMS 2015-16.
Share of procurement of wheat arrived in mandi during RMS 2011-12 to RMS 2015-16
by different agencies is indicated in the following Chart 1.1:

4
Levy rice scheme discontinued by the Ministry w.e.f. April 2016.

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Chart 1.1: Share of FCI and State Government Agencies in procurement of wheat for the
Central Pool during 2011-12 to 2015-16

FCI As can be seen from the Chart 1.1,

13% FCI had a share of only 13 per cent in
procurement of wheat for the Central
Pool during 2011-12 to 2015-16. Thus,
the role of FCI in procurement of
wheat for the Central Pool is limited as
SGAs 87 per cent of the procurement is being
87% carried out by SGAs.

Details of year wise procurement of paddy are given in the following Table 1.2:

Table 1.2: Year-wise production, mandi arrival and procurement of paddy5 for the
Central Pool by FCI and State Government Agencies
(LMT)
Kharif Production Mandi Procurement
Marketing arrival
Season
FCI SGAs Total
(1) (2) (3) (4) (5) (6)=(4)+(5)
2011-12 1,043.20 375.20 91.10 259.31 350.41
2012-13 1,030.00 403.34 70.33 270.11 340.44
2013-14 1,061.90 399.32 60.30 261.30 321.60
2014-15 1,054.83 677.63 3.75 419.44 423.19
2015-16 1,033.60 521.90 12.11 329.83 341.94
Total 5,223.53 2,377.39 237.59 1,539.99 1,777.58

As depicted in the Table above, mandi arrival of paddy increased from 375.20 LMT to
677.63 LMT during Kharif Marketing Season (KMS) 2011-12 to 2014-15 and decreased
to 521.90 LMT during 2015-16. However, procurement by FCI fell considerably from
91.10 LMT during KMS 2011-12 to 12.11 LMT in KMS 2015-16. On the other hand,
procurement of paddy by SGAs increased from 259.31 LMT in KMS 2011-12 to 419.44
LMT in KMS 2014-15 and subsequently decreased to 329.83 LMT in 2015-16.

Share of procurement from paddy arrived in mandi during KMS 2011-12 to KMS 2015-
16 by different agencies is indicated in the following Chart 1.2:

5
In terms of rice.

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Chart 1.2: Share of FCI and State Government Agencies in procurement of paddy
for the Central Pool during 2011-12 to 2015-16

FCI As can be seen from the Chart 1.2, FCI

13% had a share of only 13 per cent in
procurement of paddy for the Central
Pool during 2011-12 to 2015-16. Thus,
the role of FCI in procurement of paddy
for the Central Pool is relatively small.
SGAs
87%

1.1.4 Storage

Storage plan of FCI has to cater to the storage requirements for holding operational and
buffer stock of food grains and also to meet the requirement of TPDS and various
schemes undertaken by the GoI. FCI stores food grains in own godowns as well as in
godowns hired from Central Warehousing Corporation (CWC), State Warehousing
Corporations (SWC), State Government Agencies and Private Parties.

FCI has a network of 1,927 storage depots with a total storage capacity of 357.89 LMT
(March 2016). The details of storage capacity (owned and hired) during the period from
2011-12 to 2015-16 are shown below:
Table 1.3: FCI’s storage capacity (owned and hired) during 2011-12 to 2015-16
(LMT)
Year FCI Total FCI
Covered Cover and Plinth (CAP6)
Owned Hired Total Owned Hired Total
(1) (2) (3) (4)=(2)+(3) (5) (6) (7)=(5)+(6) (8)=(4)+(7)
2011-12 130.03 172.13 302.16 26.37 7.51 33.88 336.04
2012-13 129.96 209.95 339.91 26.37 11.07 37.44 377.35
2013-14 130.03 208.62 338.65 26.38 3.87 30.25 368.90
2014-15 127.16 202.02 329.18 26.02 1.43 27.45 356.63
2015-16 128.05 203.80 331.85 26.02 0.02 26.04 357.89

As depicted in the Table 1.3, the owned Cover and Plinth (CAP) capacity of FCI
remained stagnant during 2011-12 to 2015-16 whereas its covered owned capacity
showed a slight decrease from 130.03 LMT in 2011-12 to 128.05 LMT in 2015-16. The

6
CAP is an improvised arrangement for storing food grains in the open, generally on a plinth which
is supposed to be damp- and rat-proof. The grain bags are stacked in a standard size on wooden
dunnage. The stacks are covered with 250 micron Low-Density Polyethylene sheets from the top and
all four sides. Food grains such as wheat, maize, gram, paddy, and sorghum are generally stored in
CAP storage for 6-12 month periods. It is being widely used by the FCI for bagged grains.

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hiring of covered storage space by FCI increased from 172.13 LMT in 2011-12 to 202.02
LMT in 2014-15 and then rose marginally to 203.80 LMT in 2015-16.

As per the standing instructions issued by the GoI, the SGAs are required to deliver
wheat to central pool immediately after its procurement unless FCI is unable to accept it
for reasons which are to be conveyed in writing. Carry over charges (storage charges and
interest) beyond 30 June each year shall be payable to SGAs only on that quantity of
wheat which FCI refuses to accept before 30 June each year. Due to constraints in
available storage capacity, FCI could not take over stock of wheat procured by SGAs for
the Central Pool within the prescribed time frame of June of each year. The food grains
thus continued to be stored in the godowns in the SGAs which led to increase in payment
of carry over charges to SGAs from ` 1,635 crore in 2011-12 to ` 3,018.44 crore in
2014-15 for holding of food grains beyond the prescribed time.

1.1.5 Distribution

In order to achieve the food security of the country, FCI also undertakes distribution of
food grains under TPDS/National Food Security Act (NFSA), 2013 and Other Welfare
Schemes (OWS). The food grains are transported throughout India and issued to the State
Government nominees at the rates declared by the GoI for further distribution under
TPDS. FCI, on the instructions from the GoI, also sells wheat at predetermined prices in
the open market from time to time to enhance the supply and thereby to moderate the
open market prices. Wheat and rice are also allocated to State Governments for retail sale
through non-TPDS channels under Open Market Sale Scheme (OMSS).

The allocation and offtake of food grains (wheat and rice) for the period of five years
from 2011-12 is indicated in the following Charts 1.3 and 1.4:

Chart 1.3: Allocation and Off-take of wheat during 2011-12 to 2015-16

(LMT)
500
436.00
381.58 376.83
400
324.77 332.42 341.09
Allotment
306.14 271.59 315.73
300
242.68
Offtake
200

100

0
2011-12 2012-13 2013-14 2014-15 2015-16

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Chart 1.4: Allocation and Off-take of rice during 2011-12 to 2015-16

(LMT)
500
384.20 366.65 344.31 372.86 343.31
400
320.54 326.41 355.69 321.34
291.98 Allotment
300

200 Offtake

100

0
2011-12 2012-13 2013-14 2014-15 2015-16

As depicted in the Charts above (1.3 and 1.4), off-take of food grains (wheat and rice) has
persistently been short against the respective yearly allocation throughout the period from
2011-12 to 2015-16. Against wheat allocation of 1860.27 LMT, 1468.56 LMT was lifted
during the five years ending 2015-16. Similarly, off-take of rice was 1615.96 LMT
against an allocated quantity of 1811.33 LMT during the same period.

1.1.6 Food subsidy

The difference between the economic cost (acquisition cost including incidental
expenses, administrative overheads, handlings, shortages, etc.) and sales realization at
Central Issue Price (CIP) under TPDS and Other Welfare Schemes (OWS) for wheat and
rice is reimbursed to FCI as food subsidy by the GoI. In addition, food subsidy also
includes buffer subsidy for carrying cost of buffer stock maintained by FCI and carry
over charges paid to SGAs for stocks held by them beyond the prescribed time frame.
The details of food subsidy released by the GoI to FCI during the last five years ending
March 2016 are given below:
Table 1.4: Details of food subsidy claimed by FCI, subsidy released by the GoI and
outstanding subsidy during the period 2011-12 to 2015-16
(` in crore)
Year Opening Subsidy Subsidy released during the year Closing Yearly gap Percentage
balance claimed balance in subsidy of subsidy
during the reimburse- released in
For the Against Total
year ment the year
year earlier
incurred
years
(1) (2) (3) (4) (5) (6)=(4)+(5) (7)=(2)+(3)-6) (8)=(3)-(4) (9)
2011-12 15,668.87 67,693.90 57,116.50 2,819.45 59,935.95 23,426.82 10,577.40 84.37
2012-13 23,426.82 80,306.14 48,676.02 23,308.98 71,985.00 31,747.96 31,630.12 60.61
2013-14 31,747.96 89,410.45 66,521.43 9,008.54 75,529.97 45,628.44 22,889.02 74.40
2014-15 45,628.44 1,05,016.10 61,995.35 30,000.00 91,995.35 58,649.19 43,020.75 59.03
2015-16 58,649.19 1,03,383.00 66,366.60 45,633.40 1,12,000.00 50,032.19 37,016.40 64.19

As depicted in the Table 1.4, food subsidy released by the GoI to FCI was short of what
was claimed throughout the period from 2011-12 to 2015-16. The gap of subsidy released

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by the GoI against subsidy claimed by FCI widened from ` 10,577.40 crore during
2011-12 to ` 37,016.40 crore during 2015-16.

1.1.7 Activity wise expenditure of FCI

For carrying out its operations, FCI requires a considerable amount of funds. The details
of activity-wise expenditure incurred are given in the Table below:
Table 1.5: Activity-wise expenditure of FCI during 2011-12 to 2015-16
(` in crore)
Cost 2011-12 2012-13 2013-14 2014-15 2015-16
Procurement 87,889.00 1,01,923.27 1,03,947.79 1,06,804.12 1,16,508.53
Milling charges 730.00 584.21 539.24 512.79 483.73
Freight 4,910.00 7,071.86 7,931.34 8,939.87 8,046.81
Administrative and 11,826.00 14,107.65 15,605.71 17,977.81 17,447.88
other expenses7
including interest
Total 1,05,355.00 1,23,686.99 1,28,024.08 1,34,234.59 1,42,486.95
As depicted in Table above, total expenditure showed an increasing trend during the
period 2011-12 to 2015-16. This was mainly due to increase in procurement cost
registering an increase of ` 28,619.53 crore i.e. 33 per cent over five years period. The
major factor contributing to this increase in procurement cost was MSP which increased
by 24 per cent from 2011-12 to 2015-16, in the case of wheat. Administrative and other
expenses also increased by 52 per cent in 2014-15 as compared to 2011-12 but later fell
by three per cent in 2015-16 due to decrease in handling expenses.
FCI meets its requirements of fund through sanctions/releases of equity as well as ways
and means advances and quarterly release of subsidy by the Ministry. However, these
being not sufficient to meet the entire working capital requirement, FCI arranges funds
through Cash Credit (Cash credit facility is provided by a consortium of 63 banks, led by
the State Bank of India. This CC facility is secured by guarantee of the GoI, bearing
interest rates ranging between 10.01 per cent and 12 per cent), short term loans from
banks and issue of bonds. The sources of funds during the period from 2011-12 to 2015-
16 and related matters and audit findings thereon are brought out in Chapter II of this
Report.

1.2 Follow-up on previous performance audits

A Performance Audit on “Procurement and Milling of Paddy for the Central Pool” was
conducted in 2014-15 which was placed in the Parliament on 8 December 2015. In this
Report of the Comptroller and Auditor General of India (No. 31 of 2015) 17
recommendations were made. Out of this, 15 were agreed to by the Ministry. As per
further information received from the Ministry it has started action on 11
recommendations. In case of four recommendations no action has yet been initiated.

7
Administrative and other expenses include office rent, power, fuel & electricity, employee
remuneration & benefits, storage cost, handling expenses, other expenses, depreciation, interest and
expenses pertaining to prior years (net).

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Another Performance Audit on “Storage Management and Movement of Food Grains”

was conducted in 2012-13 which was placed in the Parliament on 7 May 2013. In this
Report of the Comptroller and Auditor General of India (No. 7 of 2013) 12
recommendations were made. Out of this nine were agreed to and two were partially
agreed to by the Ministry. Action is yet to be taken by the Ministry. On the basis of this
Report Committee on Public Undertakings had also given 26 recommendations on which
the Ministry had furnished its replies in September 2013 and March 2015; action on 18
recommendations was initiated and on eight recommendations action is yet to be taken.

1.3 Audit of annual accounts of FCI

Comptroller and Auditor General of India is the sole auditor of FCI and audit of the
Financial Statements of FCI is conducted under Section 34 (2) of Food Corporation Act,
1964. Based on audit observations during audit of annual accounts for the year 2015-16
the Management carried out corrections to the accounts to the extent of ` 1,072 crore as
Inter-Head Adjustment and ` 1,976.67 crore as Intra-Head Adjustment.
Significant deficiencies noticed during the audit of financial statements of FCI for the
year 2015-16 are listed below:

(i) Long Term borrowings were overstated due to inclusion of ` 39.12 crore as
trade payable for other finances. As the amount was held by FCI on behalf of
employees under contributory welfare scheme, this should have been depicted
below “Other long term liabilities”. This resulted in overstatement of Long term
borrowings and understatement of “Other long term liabilities” by ` 39.12 crore.
(ii) The trade payables were overstated due to inclusion of ` 55.69 crore being
recoverable from contractors on account of Income tax, Cess and other taxes,
State and Central tax collection/Non-value added tax (VAT) States Output tax,
Tax Deducted at Source (TDS) of VAT on purchases, Service tax on
transportation and others. These statutory dues should have been depicted under
the head “Other Current liabilities” and cannot be mingled with trade payables.
Hence, this resulted in overstatement of Trade payables and understatement of
Other Current liabilities by ` 55.69 crore each.
(iii) The trade payables were overstated due to inclusion of ` 46.67 crore being
Contributory Provident Fund (CPF) part/final payments, interest paid on CPF
final payment, liability for contribution to EPS, liability for contribution to
employees’ CPF. These liabilities on account of employees’ dues should have
been depicted under “Other Current liabilities-Liability for Employees” Statutory
dues. Hence, this resulted in overstatement of “Trade payable” and
understatement of “Other Current liabilities” by ` 46.67 crore each.
(iv) The trade payables were overstated due to inclusion of ` 1,078.10 crore being
deposits payable which were not in the nature of trade payables. These deposits
payable relate to other contractual obligations which were no longer to be
included in the trade payables. This should have been shown under the head
“Other Current Liability”. This resulted in understatement of “Other Current
Liability” with corresponding overstatement of trade payables by ` 1,078.10
crore.

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 Report No. 18 of 2017

(v) Long term Loans and Advances were overstated by ` 228.92 crore due to
inclusion of doubtful claims, which resulted in understatement of consumer
subsidy on food grains reimbursable by GoI, by ` 228.92 crore.
(vi) Deposits and Other Receivables were overstated due to inclusion of ` 276.56
crore being recoverable from Haryana Sales Tax Authorities on account of excess
of input tax paid over output tax payable in Haryana region which is not
refundable under Section 20 of the Haryana Value Added Tax Act, 2003. Besides,
the chances of its adjustment against future liabilities of FCI are also remote in the
present price mechanism for PDS in which procurement cost is high and sale is at
subsidized rates. This resulted in overstatement of “Deposits receivables” and
understatement of “Expenditure” by ` 276.56 crore.
(vii) Stores and Spares – Gunnies were overstated due to inclusion of ` 85.56 crore in
respect of gunny bills received (29 April 2016) from Director General of Supplies
and Disposals (DGS&D) upto March 2016. Due to non-issuance of debit inter
office general Accounts to the Area Offices, this head was overstated and
expenditure was understated by ` 85.56 crore.
(viii) Revenue subsidy on food grains was overstated by ` 265.09 crore being
unregularised transit shortages (Net of gains) as on 31 March 2016 pertaining to
the year 2015-16. Subsidy is not reimbursable on the unregularised shortages.
This resulted in over statement of “Subsidy on food grains” as well as “Trade
Receivables” by ` 265.09 crore each.
(ix) Miscellaneous income included an amount of ` 433.15 crore on account of
liabilities written back as they had become time barred. As FCI had not framed
any accounting policy in this regard, as such these should have been disclosed as
exceptional item as per Accounting Standard 5. This resulted in overstatement of
“Other Income” and understatement of “Exceptional Item” by ` 433.15 crore.
(x) Employees Remuneration and Benefits were understated due to non inclusion
of ` 125.52 crore being short Productivity Linked Incentive provision for the year
2014-15 and 2015-16. This resulted in understatement of ‘Employees
Remuneration’ and benefits as well as “Current liabilities” by ` 125.52 crore.
(xi) Based on directions of the GoI, FCI provided for liability towards gratuity and
leave encashment on cash basis and the understatement of liability on this account
to the extent of ` 2,960.52 crore was disclosed in Notes to Account. The
disclosure for departure from Accounting Standard 15 was deficient to the extent
that it did not disclose the liability for leave encashment and for terminal benefits
based on actuarial valuation.
(xii) The disclosure regarding Productivity Linked Incentive (PLI) was deficient to the
extent that it did not disclose that approval for extending PLI benefit beyond the
overall maximum ceiling of 50 per cent was yet to be obtained from Department
of Public Enterprises.
(xiii) An amount of ` 2,452.96 crore was receivable from the Ministry of Rural
Development, Government of India on account of food grains issued under
Sampoorn Gramin Rozgar Yojna, which was closed on 31 March 2008.

Compliance Audit Report on Food Corporation of India 9

Report No. 18 of 2017

Internal Control System

Internal Control System was not adequate and commensurate with the size and nature of
business of the Corporation and it needs to be strengthened in the area of compilation/
preparation/ finalization of accounts. Important findings, based on test check are as
under:
(i) Non-reconciliation of gunnies amounting to ` 7.45 crore and ` 9.08 crore
unloaded at stations under the jurisdiction of the District offices at Rohtak and
Karnal respectively pertaining to the period from 2009-10 to 2013-14.
(ii) Non-reconciliation of the figures of sundry debtors for issue of food
grains under Mid Day Meal (MDM) Scheme as appearing in the records of
Commercial Section of FCI (` 7.27 crore) and as per trial balance
(` 4.89 crore).
(iii) Inventory includes Goods in Transit of ` 845.17 crore which were inter-unit
transfers. However, there does not exist a sound mechanism to keep a strict
watch and control over these goods in transit, as these inter unit stock in
transit continue to appear in the depot inventory.

1.4 Areas covered in this report

The report is not a complete chronicle of the work of FCI but it does throw light on three
significant aspects of its functioning viz., Debt Management, Labour Management &
Incentive Payments, and Implementation of Private Entrepreneurs Guarantee (PEG)
Scheme in Punjab as detailed in Chapters II, III and IV respectively and also contains five
individual observations (including two cases of fraudulent payments amounting to
` 72.28 crore) in Chapter V, totaling ` 2,772.98 crore. The observations of audit are based
on test checks and highlight serious issues on which corrective actions, as given in the
Recommendations, is required to be taken by FCI. Reply of the Management has been
received for Debt Management, Labour Management and Incentive Payments and the
five individual observations (February 2017). The replies of the Management have
suitably been incorporated in the report.

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 Report No. 18 of 2017

Chapter-II
Debt Management

2.1 Introduction

FCI procures food grains directly from farmers at MSP8 and also from various State
Government Agencies (SGAs). The MSP is fixed by the GoI and sales are realized at
Central Issue Price (CIP)9. The difference between the economic cost (acquisition cost
including incidental expenses, administrative overheads, handlings, shortages etc.) and
sales realization at CIP is reimbursed to FCI as food subsidy.

FCI meets its requirement of funds mainly through subsidy, equity and ways and means
advances10 received from the Ministry. However, this is not sufficient to meet FCI’s huge
working capital requirement and FCI arranges funds through cash credit, short term loans
from banks through open tender, and issue of bonds carrying interest.

The audit covered the areas of funds provision by the GoI from time to time and debt
management by FCI during a five year period from 2011-12 to 2015-16. The examination
of records at the Ministry and FCI Headquarters at New Delhi, and Zonal (North) Office
at Noida was supplemented with field audit in Delhi, Rajasthan and Uttar Pradesh
Regional Offices of FCI.

Audit findings

2.2 Sources of funds

As quarterly release of subsidy by the GoI is not adequate to meet daily requirements of
funds particularly during procurement seasons, therefore, FCI has to explore alternative
sources to fund its operations. The major source of funds during the past five years were
as given in the following Table 2.1:

8
Minimum Support Price is the minimum price declared for various agricultural produce by GoI for
procurement from farmers, thereby preventing distress sale.
9
Central Issue Price is fixed by GoI for wheat and rice below the economic cost for issue to States and
Union Territories for distribution.
10
Ways and means advance is a working capital loan given to FCI by the GoI to meet working capital
requirement. Normally it is sanctioned and recovered/adjusted during the same financial year. It
carries an interest rate equivalent to 364 days average treasury-bill rate.

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Report No. 18 of 2017

Table 2.1: Sources of funds

(` in crore)
Particulars 2011-12 2012-13 2013-14 2014-15 2015-16
Equity Capital 2,649.67 2,672.95 2,675.95 2,762.79 2,830
subscribed by the GoI
(as on 31st March)
Ways and means 10,000 10,000 10,000 10,000 20,000
advance by the Ministry (10,000 in April
(in April) 2015 and
10,000 in
January 2016)
Cash Credit (CC) availed 44,099.55 49,770.99 51,281.31 46,427.10 50,603.03
from banks as on 31st
March
Long term bonds (as on 3,915 8,914.50 16,914.50 16,121** 13,000**
31st March)
Unsecured short term 13,500 13,080 16,250 28,805 26,375
loan availed as on 31st
March
Total 74,164.22 84,438.44 97,121.76 1,04,115.89 1,12,808.03
*Source: Annual Report of FCI **Bonds pertain to previous years, no fresh bond issued during the year.

As can be seen from above, equity capital increased from ` 2,649.67 crore to ` 2,830
crore during 2011-12 to 2015-16 and ways and means advance by the Ministry has
increased to ` 20,000 crore in 2015-16.

FCI also raised short term loans (STLs) through open tender as and when there was
additional requirement and interest on these STLs ranged between 9.20 per cent and
10.75 per cent. The short term loan availed by FCI increased from ` 13,500 crore in
2011-12 to ` 26,375 crore in 2015-16. In addition, during 2012-13 and 2013-14 long
term bonds worth ` 5,000 crore and ` 8,000 crore were issued by FCI at an interest rates
of 8.62 per cent to 9.95 per cent respectively and as on 31 March 2016 the long term
bonds were to the tune of ` 13,000 crore.

Chart 2.1: Sources of Funds

2% The percentage contribution
of various sources towards
23% 18%
funds requirement of FCI in
Equity Capital
2015-16 is depicted in the
Pie-chart 2.1 on the left. The
Ways and Means
chart indicates that major
Cash Credit
portion (80 per cent) of the
12% funds was raised by FCI
Long Term Bonds through interest bearing
external financial
Unsecured Short 45% instruments like Cash credit,
Term Loans Short term loans etc.

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 Report No. 18 of 2017

Even though the cash credit was costlier than STLs, FCI could not avail STLs because
of imposition of a condition by the consortium of banks to first exhaust the CC limit
and only then utilize the STLs. Moreover, bonds which were a cheaper source of
financing, were not issued by FCI after 2013-14.

The Management stated (May 2016) that from its point of view, the conditions imposed
by the consortium on drawal of STL were stringent and have been contested by FCI. The
banks, however, contend that the Cash Credit facility extended to FCI is pre-emptive in
nature i.e. banks have to keep funds ready for use by FCI and stated that FCI’s
requirement of funds was necessitated principally on account of insufficiency of Cash
Credit, so it is logical and optimal for FCI to raise STL only after exhausting the Cash
Credit.

On the matter of issue of bonds, FCI stated that it requires Government guarantee for the
same and that mobilization of funds through issue of bonds depends on the rating of the
entity and/or rating of the instrument. Given its mandate, FCI does not generate any
surplus/profit and getting a good rating for FCI as an entity would be difficult. However,
rating of the bond instrument is possible on the basis of Government guarantee, therefore,
FCI has requested the Ministry on several occasions for providing guarantee to issue
bonds.

Audit observed that FCI had also requested the Ministry to provide adequate funds
through issue of Government securities and other sources. However, neither any reply
was received from the Ministry nor the request of FCI was agreed to by the Ministry11 in
response.

Thus, due to restrictions imposed by consortium of banks for utilizing STL and lack of
permission by GoI to raise bonds, FCI had to resort to costlier source of financing
through cash credit at interest ranging between 10.01 per cent and 12 per cent thereby
resulting in extra burden on government exchequer in the form of increased food subsidy.

2.3 Delayed release of subsidy

FCI requires a considerable amount of working capital to carry out its activities. During
2011-12 to 2015-16 the main activities of food grains procurement, distribution and other
administrative costs amounted to ` 1,05,355 crore, ` 1,23,687 crore, ` 1,28,024 crore,
` 1,34,235 crore and ` 1,42,487 crore respectively.
The primary source of funds for FCI is the food subsidy released by GoI on account of
the consumer subsidy (wheat, rice), subsidy on coarse grain and carrying cost of buffer
stocks (buffer stock held by FCI and reimbursement of carryover charges to State
Government/Agencies). However, the subsidy released every year by the GoI was lower
than the subsidy claimed by FCI. The Chart 2.2 depicts the increasing subsidy gap, as
follows:

11
In 10 correspondences the Ministry did not reply and in one case did not agree.

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Report No. 18 of 2017

Chart 2.2: Year-wise subsidy claimed/received from GoI

(` in crore)

150000

120000
1,05,016.10 1,03,383 subsidy
89,410.45 claimed
90000 80,306.14
67,693.90

60000
66,521.43 61,995.35 66,366.60
57,116.50 subsidy
48,676.02 received
30000

0
2011-12 2012-13 2013-14 2014-15 2015-16

As can be seen from the above Chart, during the period 2011-12 to 2015-16 there was
always a substantial gap between the subsidy claimed by FCI and subsidy received from
GoI due to which FCI had to borrow from other sources resulting in heavy interest
burden on the exchequer, which is discussed in succeeding paragraphs.

Every year the provisional quarterly bills of subsidy by FCI, are submitted to the GoI
based on the approved Budget Estimate12. As per GoI’s instructions, the Ministry is to
release 95 per cent of the estimated food subsidy to FCI during the relevant financial year
and balance five per cent is to be released after submission of accounts of FCI to the
Parliament. However, the GoI had released only 67 per cent of subsidy on an average
over the last five years due to which FCI had to resort to other costlier means of finance
viz. CC, Short term loans etc. Though FCI, from time to time, requested for additional
funds from the Ministry but the request was either kept pending with no reply or only part
amount was received. FCI had also requested the Ministry (17 June 2016) to permit it to
raise funds from financial institutes like National Bank for Agriculture and Rural
Development (NABARD), however, the response from the Ministry was still awaited
(February 2017).

The amount of subsidy claimed/received and interest incurred on financing by FCI during
the period 2011-12 to 2015-16 is depicted in the following Table 2.2:

12
Approved by the Board of Directors (BOD) of FCI except for first quarter bill (which is submitted
before the start of the financial year)

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 Report No. 18 of 2017

Table 2.2: Amount financed and interest accrued

(` in crore)

Year Outstanding Subsidy Total subsidy received Amount Interest

subsidy claimed Against For the Total financed* incurred
pertaining during the earlier year
to previous year years
years
(1) (2) (3) (4) (5) (6)=(4)+(5) (7) (8)
2011-12 15,668.87 67,693.90 2,819.45 57,116.50 59,935.95 71,514.55 5,227.16
2012-13 23,426.82 80,306.14 23,308.98 48,676.02 71,985.00 81,765.49 6,392.07
2013-14 31,747.96 89,410.45 9,008.54 66,521.43 75,529.97 94,445.81 7,190.72
2014-15 45,628.44 1,05,016.10 30,000.00 61,995.35 91,995.35 1,01,353.10 8,244.30
2015-16 58,649.19 1,03,383.00 45,633.40 66,366.60 1,12,000.00 1,09,978.03 8,647.56
Total 35,701.81
*Excluding equity

As can be seen from the Table 2.2 above, the outstanding subsidy pertaining to previous
years increased from ` 15,668.87 crore in 2011-12 to ` 58,649.19 crore in 2015-16. This
was on account of short release of subsidy by the GoI in each of the years necessitating
FCI to raise funds through interest bearing loans, bonds etc. The short release of subsidy
resulted in extra interest burden of ` 35,701.81 crore on FCI and an increase in food
subsidy by an equal amount. Further examination of records in the Department of Food
and Public Distribution, revealed that though the Ministry did duly incorporate FCI’s
demand for subsidy in its budgetary requirements sent to the Ministry of Finance (MoF)
but the budget allocation by the MoF was consistently low with the gap ranging between
` 7,348 crore to ` 34,471 crore during the period 2012-13 to 2015-16.

FCI stated (June 2016) that release of lump-sum advance subsidy was largely dependent
on many factors such as revenue collection of the Government, cash liquidity position,
budgetary provision by the Ministry of Finance and other financial commitments etc.

FCI’s reply indicates that short allocation of funds by the MoF towards food subsidy is
due to competing financial priorities of GoI. This compels FCI to seek financing from
external sources (towards working capital) thus increasing the interest burden, which gets
added to the existing subsidy claims thereby increasing the claimable subsidy which is
again followed by further short receipt of subsidy from the Ministry. This vicious cycle
eventually leads to an increase in the overall food subsidy burden of the GoI which at
least to the extent of interest paid for external financing was avoidable if timely subsidy
claims were released by the Ministry.

2.4 Non recovery/ Delay in recovery of dues in respect of food grains supplied to
various Ministries/Central Public Sector Enterprises (CPSEs)

As per instructions of the Ministry (20 November 2001), FCI issues food grains to
various State Governments under welfare schemes of various Ministries. FCI submits
bills to the Ministries from time to time as per the respective scheme. Payments are made
on submission of original bills and certificate from the concerned authorities.

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Report No. 18 of 2017

However, Audit observed that ` 2,897.17 crore was outstanding from various
Ministries/Departments which compelled FCI to seek external financing and incur an
avoidable interest burden of ` 1,617.48 crore as detailed below:

Table 2.3: Interest burden on outstanding dues from various Ministries/CPSEs as

on March 2016
Name of Details Amount Pending Avoidable
Ministry/ ` in
(` since interest
Department crore) (` in crore)
Ministry of Dues pertaining to food grains 2,452.96 2008-09 1,298.35
Rural issued during the period 2000-01
Development to 2007-08 under welfare
(MoRD) schemes (Sampoorn Gramin
Rozgar Yojna) to State
governments authenticated from
designated officers of State
Governments.
Ministry of Non-settlement of bills of Mid 326.35 2010-11 139.59
Human Day Meal scheme by various
Resources State Governments and non-
Development submission of bills by Area
(HRD) Managers within the time frame
stipulated in the guidelines and
non-reconciliation of outstanding
amount of FCI and State
governments’ records (North East
region).
Ministry of Outstanding against export of 48.32 More 68.94
External wheat issued to World Food than 10
Affairs Programme for supply of biscuits years
(MEA) to Afghanistan during 2004 to
2012 from MEA.
Central Dues from MMTC13, STC14 and 69.54 Since 110.60
Public Sector PEC15 for exports proceeds on 1991
Enterprises account of disputed claims for
(CPSEs) settlement.
Total 2,897.17 1,617.48

The Management stated (June and November 2016) that persuasion was going on with
the Ministry of Rural Development vigorously through the Administrative Ministry and
that in respect of dues from Ministry of HRD, due to regular persuasion with the Ministry
of HRD and concerned SGAs, the dues under MDM scheme came down to ` 291.34 crore
as on September 2016. Moreover, in case of North East Frontier (NEF) zone, RO Assam

13
Metals and Minerals Trading Corporation of India.
14
The State Trading Corporation of India Limited.
15
The Project & Equipment Corporation of India Ltd.

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 Report No. 18 of 2017

had reconciled the figures of outstanding dues. It further stated (December 2016) that the
matter regarding dues from the Ministry of External Affairs was being pursued
vigorously and the amount of ` 47.99 crore was receivable as on November 2016.
Regarding dues from MMTC, STC and PEC it stated that claims were being pursued
vigorously with these three Central PSUs.

However, it was noticed by Audit that although the dues from the Ministry of Human
Resource Development (MoHRD) had come down only by ` 35.01 crore, a huge
outstanding amount of ` 291.34 crore since 2010-11 was still pending which needs to be
recovered. In case of dues from MoRD, the outstanding amount had remained the same
since 2008-09. MEA had informed FCI that relevant record bills were not traceable and
had requested FCI to produce duplicate bills and the issue remained unresolved
(February 2017).

Thus, due to short receipt of its dues from Central ministries and Central PSUs, FCI had
to arrange funds from other sources (Cash Credit/STL) and accordingly made an
avoidable payment of interest of ` 1617.48 crore for the period 2011-12 to 2015-16 with
an increase in the subsidy burden by an equivalent amount.

2.5 Non recovery in respect of food grains supplied to various State

Governments
Audit observed that ` 47.54 crore was pending for food grains supplied to various State
Governments as detailed below:

Table 2.4: Pending claims from State Governments

State Amount Pending
` in crore)
(`
Maharashtra 10.00
Bihar 18.44 (since 1979-80)
Kerala 4.53 (since 1981-82)
Assam 14.57 (since 1967 onwards)
Total 47.54

The Management stated (November 2016) that the matter was being pursued regularly
with the Bihar region and that these claims were not reflected in the books of accounts of
FCI on the ground of being too old. It further stated that in case of Maharashtra, an
amount of ` 1.38 crore against various parties for non-lifting of Under Relaxed
Specifications (URS) rice was subjudice and for the rest of the amount, matter was being
pursued for early realization. Regarding Kerala it stated that an amount of ` 1.44 crore
was received from the State of Kerala as final settlement. Regarding Assam, the
Management stated (February 2016) that the outstanding amount of ` 14.57 crore was
not disclosed in the books of accounts, adjusted or written off as bad debts.

The reply furnished by the Management indicates that full amount to be recovered from
the State Governments of Assam and Bihar were not shown as recoverable. Hence, it is
not clear how FCI proposes to write off such unaccounted amounts, a fact which is a pre-
requisite for claiming subsidy from the Ministry. Moreover, amount-wise, party-wise and

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Report No. 18 of 2017

year-wise details could not be furnished by FCI. In absence of requisite information, the
claims of FCI remain unverifiable.

Due to non/short receipt of its dues from various State Governments, FCI had to arrange
funds from other sources (Cash Credit/STL) and made an avoidable payment of interest
of ` 25.16 crore during the period 2011-12 to 2015-16.

2.6 Delay in regularisation of storage and transit losses

As per the instructions of FCI (31 May 2004), the storage and transit losses pending upto
the period 1999-2000 were required to be brought to zero level and the current losses
were to be regularized in the following month and were not to be allowed to accumulate
in any case. Moreover, the concerned zones/regions were given a time frame of three
months to regularize the cases of storage and transit losses prior to 1990-91, as losses to
the tune of ` 35.67 crore were pending regularisaton prior to 1990-91 under different
zones/regions. However, Audit noticed that an amount of ` 24.01 crore (storage loss -
` 14.77 crore and transit loss - ` 9.24 crore for the period prior to 1990-91) remained
unregularised as on April 2016 which could not be claimed as subsidy. Moreover, full
details of unregularised storage and transit shortages were not being maintained
separately by FCI to take a meaningful action to regularize the same.

The Management stated (June 2016) that cases of regularization were processed
expeditiously and that these cases were very old and lacked essential information such as
percentage of loss, name of centres where losses occurred, hence, it would take some
time to clear the pendency.

The reply confirms the fact that FCI records do not contain even requisite details of these
old cases and, thus, the feasibility of regularization of these cases remains uncertain.

2.7 Loss of interest on idle funds

The Board of Directors (BOD) of FCI approved (August 2009) a proposal to raise
`10,000 crore through STLs, in addition to the CC facility. The CC facility consortium
was requested to give its approval on this proposal. On the request of FCI, a meeting of
Standing Committee of CC facility consortium was held on 3 March 2011, wherein FCI
was permitted to raise STL on unsecured basis. The committee agreed that debit would
be raised by FCI branches in the main account and the amount in excess of ` 34,495 crore
(the then CC ceiling) would be swept from STL account at the end of each day. In the
meeting (3 March 2011), SBI clarified that as the FCI’s requirement of funds was
necessitated principally on account of insufficiency of CC limit, it was logical and
optimal for FCI to raise STLs only after first exhausting the CC limit. The conditions of
raising STLs inter alia included that the tenure of the proposed STLs should be based on
cash flows and FCI was to raise the amount in tranches based on its cash flows.

The BOD approved (March 2011) proposal for raising STLs of ` 3,800 crore. The bids
were invited on 4 March 2011 and STLs of ` 3,800 crore were availed from seven

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 Report No. 18 of 2017

banks16. Similarly, FCI availed (September 2011) STLs of ` 2,975 crore from four
banks17. The amounts of these STLs were deposited (17 March to 23 March 2011 and
2 to 9 September 2011) in a separate current account opened with SBI, Industrial Finance
Branch, New Delhi for onward sweeping to the CC account against excess utilization of
funds beyond the CC ceiling. Audit observed that though the STLs of ` 3,800 crore were
received by FCI from 17 March 2011 to 31 March 2011, the same were swept to CC
account belatedly between 21 March 2011 and 7 April 2011. In respect of STLs of
` 2,975 crore availed during September 2011, an amount of ` 575 crore was received on
2 September 2011 whereas its sweeping to CC account was carried out on 5 September
2011. Keeping STLs amount idle led to avoidable amount of interest to the tune of
` 11.27 crore (` 10.78 crore + ` 0.49 crore).

The Management replied (July 2013) that the utilization pattern of the CC account for
future dates immediately after resumption of payments was not predictable with 100 per
cent accuracy and minor variation of two to three per cent was bound to happen with any
projection and the loss of interest on idle funds was approved by the BOD of FCI
respectively in April 2011 and September 2011. The Management further replied
(July 2014 and November 2016) that it availed STLs in March 2011 due to precarious
fund position.

The reply of the Management is not tenable as there exists a specialized Funds Division,
entrusted with the responsibility of estimation of funds requirements, however, there was
no evidence to show that there was a foolproof system of daily transmission of funds
utilization from field offices to FCI Headquarters in order to accurately project the
aggregate funds requirement. As a result, the STLs were availed much before the actual
requirement of funds. Further, as per the terms and conditions there was an enabling
provision that the loan had to be used within seven days from the date of acceptance of
the offer by FCI. Considering this margin of seven days, the money received from the
STLs should have been optimally planned for disbursement.

2.8 Excess payment of interest on cash credit

FCI instructed (March 2015 and January 2016) all its Zonal Executive Directors (EDs), in
respect of transfer of day end balance, to nominate an official of Assistant General
Manager level as Nodal officer to monitor the bank statements of all Unit offices under
their region on daily basis. Also, instructions were issued by FCI headquarters to monitor
day-to-day end operations of bank accounts within their zone as well as to check
calculation of interest charged by the bank and report instances where the day end
balances particularly credit balance in the bank account of field offices were not
transferred to the Zonal cash credit account or the Central CC account, which led to loss
of interest to FCI.

Test check of bank statements of cash credit accounts of District Office, Jaipur (April
2011 to March 2016), Nellore (2014-15 and 2015-16) and Zonal Office (East) (January to

16
Federal Bank, IDBI, Union Bank of India, Indian Bank, Punjab & Sind Bank, Vijaya Bank and
Central Bank of India
17
Federal Bank, HDFC, Corporation Bank and Dena Bank

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Report No. 18 of 2017

March 2016) revealed that credit balances were not transferred to zonal/central CC
account on all dates. Similar deficiencies were noticed in other zonal/regional/district
offices also. Non-compliance of the instructions in respect of day to day transfer of end
balance to ZCC/central CC account led to avoidable interest burden of ` 29 lakh on FCI.

2.9 Non-compliance of the instructions of the Ministry of Consumer Affairs,

Food and Public Distribution

With a view to avoid interest burden by way of release of food subsidy, on monthly basis
instead of quarterly basis the Ministry issued (August, 2004) instructions to FCI to
conduct an efficiency analysis on interest payment to SBI and to carry out analytical
study of the monthly CC limit of the FCI comparing with it subsidy released by the GoI.

However, it was noticed in audit that neither any efficiency analysis was conducted nor
any analytical study done of the monthly CC limit used by FCI of the subsidy released by
the GoI.

The Management stated (June 2016) that the Ministry was fully aware of interest savings
that would accrue to FCI if advance was released quarterly and FCI was apprising the
Ministry of its level of fund utilization on a daily basis.

The reply is not acceptable as instructions of the Ministry in respect of conducting

efficiency analysis and analytical study have not been adhered to by FCI which if
implemented could have quantifiably determined if there would have been any savings in
terms of interest payable by FCI had it received the subsidy on a monthly basis from the
Ministry. This indicates a lackadaisical approach by FCI to approach the issue of
mounting subsidy burden.

2.10 Inadequacy in Risk Management Policy of FCI

In a meeting of Board of Directors (BOD) held on 26 September 2013, the “Risk

Management Policy” of FCI was approved which stated that FCI shall identify the
possible risks associated with its business and commit itself to put in place a Risk
Management Framework to address the risks involved on an ongoing basis to ensure
achievements of the business objective without any interruptions. The Risk Management
Policy of FCI was to educate and sensitise the working level personnel on the
requirement and listing of the risks and the mitigating measures in place at their
respective areas of operations.

Audit noticed instances where there was shortage of funds even after availing STLs/ cash
credit facility due to short provision of subsidy by GoI. This resulted in restrictions on
release of payment for the then ongoing procurements and taking over of the stock.
However, no details were available to depict as to what specific measures the Corporation
undertakes to mitigate the risks especially of lack of liquidity affecting the procurement
payments. Moreover, there was no information that FCI has taken steps to sensitise the
working level personnel regarding the listing of risk and mitigating measures in place in
this area of operation. The policy was not sufficiently detailed to address the complex
financial needs of the FCI.

20 Compliance Audit Report on Food Corporation of India

 Report No. 18 of 2017

The Management accepted the observation and replied that there had been occasions in
the past where FCI was constrained to defer payment to its service provider’s viz. SGAs
and millers due to shortage of funds and even after exhausting the cash credit limit and
STL source, there was no other mitigating measure to deal with such situation of
deferring payment to its service providers.

The Management should, based on a quantified risk analysis, consider suitable

alternatives to tide over situations like non-payments for procurement because of sudden
shortage of funds to guard against the risk of having an adverse effect on the supply chain
of Targeted Public Distribution System (TPDS).

2.11 Conclusion

The main reason for indebtedness of FCI was delayed/insufficient release of subsidy by
the Ministry. This compelled FCI to secure external financing by incurring heavy interest
burden. The short/delayed release of subsidy created a vicious cycle whereby funds taken
on interest for working capital further increase the claimable subsidy eventually leading
to avoidable increase in the overall food subsidy burden of GoI. Further, there was
pendency in recovery of long outstanding dues from some Central Ministries/Central
PSUs and State Governments. Moreover, the risk management policy of FCI also did not
sufficiently address the complex financial needs of the Corporation.

2.12 Recommendations
We recommend,
(i) The Ministry of Finance may make full allocation on time to the Ministry of
Consumer affairs, Food and Public Distribution, Department of Food and Public
Distribution towards the food subsidy component to be given to FCI.
(ii) FCI may approach the consortium through the Ministry of Consumer Affairs,
Food and Public Distribution for allowing it to utilise short term loan before
exhausting the cash credit limit.
(iii) FCI may approach the Ministry of Consumer Affairs, Food and Public
Distribution again to obtain guarantee for issue of bonds so as to have access to
cheaper source of finance.

Compliance Audit Report on Food Corporation of India 21

 Report No. 18 of 2017

Chapter-III
Labour Management and Incentive Payments

3.1 Introduction

The storage and handling operations in FCI owned/hired food storage depots (FSDs) are
carried out manually through handling labour. The work includes loading in rail
wagons/trucks, unloading from rail wagons/trucks, stacking and de-stacking of bags at
FSDs, shifting of bags within the FSDs, re-bagging/filling bags with loose grains and
standardisation etc. FCI deploys labour for handling food grains under the following four
systems:
(i) Departmental labour system: These workers get a regular pay scale besides
overtime, incentive and other benefits e.g. Contributory Provident Fund (CPF),
Gratuity etc.
(ii) Direct payment labour system (DPS): These workers are paid uniform piece
rate with minimum guaranteed wages even on the days when there is no work.
They are regular employee of FCI and get benefit of CPF, Gratuity and Over
Time Allowances (OTA).
(iii) No work no pay system (NWNP): These workers are entitled for piece rate
earning or daily minimum wages, whichever is higher only for the days where
they are engaged for work. They also get benefit of CPF, Gratuity, OTA etc.
(iv) Contract labour system: Under this system private handling and transport
contractors are awarded depot wise contracts for handling of food grains.
The handling operation through departmental labour is the costliest as this category of
labour besides earnings wages and other benefits under regular pay scale also earns high
amount of incentive18. Departmental labour were deployed in only 145 depots (136
owned and 9 hired depots), DPS in 206 depots, NWNP in 94 depots and Contract labour
system in remaining depots. Though the departmental labour were deployed in only 9.37
per cent of the total owned/hired FSDs the handling cost through departmental labour
was 48 per cent of the total handling cost in FCI. The total handling expenses incurred
during 2013-14 was ` 3,977 crore (Departmental labour ` 1,899 crore, DPS ` 825 crore,
NWNP ` 39 crore and contract labour ` 1,214 crore).

Considering the impact of incentive payments and high handling cost of departmental
labour, FCI in the past conducted various studies through Bureau of Industrial Cost and
Pricing (BICP-1989-90), Mckinsey & Co. (2003), Delhi Productivity Council (2002),
Saxena Committee (2005), Indian Institute of Management, Ahmedabad, Price
Waterhouse Coopers (2013) and M/s Deloitte Touche Tohmatsu India Pvt. Limited
(M/s Deloitte) (2014). Moreover the Parliamentary Standing Committee on Food,

18
Per Metric Tonne handling cost: Departmental labour ` 654.00; DPS ` 214.00; NWNP ` 85.00

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Report No. 18 of 2017

Consumer Affairs and Public Distribution also gave a set of recommendations in April
2005 on this subject.
Audit was carried out on a test check basis in six highest handling cost FSDs and four
lowest handling cost FSDs out of 18 FSDs (nine each in West Bengal and Assam Region)
manned by departmental labour to assess the actions taken by FCI for deployment of its
departmental labour in FSDs for minimisation of handling cost and idle wages. The
findings in these two Regions were also supplemented by audit findings in twelve top
most handling cost FSDs and eight lowest handling cost FSDs out of 62 FSDs19 under
Haryana, Delhi, Madhya Pradesh and Andhra Pradesh Regional Offices of FCI. The audit
covered a period of three years from 2012-13 to 2014-15.

Audit findings

3.2 Labour management

3.2.1 Unproductive wages due to non-rationalisation of surplus labour

FCI Headquarters directed (November 2007) all its Regional Offices to assess the
requirement of departmental labour, based on the average annual turnover of the
preceding three years and treat the same as sanctioned strength of concerned FSD. This
was to make adjustment of short/surplus labour by making inter-depot, inter-district,
inter-region and inter-zone transfers in the FSDs which were functioning with
departmental labour. It was also directed to ensure compliance of the norm of four
ancillary labours20 per 5,000 MT covered capacity in the FSDs. The Zonal and Regional
Offices of FCI were empowered to make the adjustment of the short/excess labour by
making inter-depot and inter-region transfers.

However, Audit observed that this order was not complied with in a number of FSDs in
various States and no adjustment of surplus departmental labour/DPS from the surplus
FSDs to the deficit FSDs situated in other regions was done. This led to unproductive
wages payment of ` 137.99 crore due to non- adjustment of surplus labour during
2012-13 to 2015-16.

Moreover, Audit also noticed that no action was taken to rationalise the surplus ancillary
labour to optimize them to the norm of four ancillary labour per 5,000 MT covered
capacity inspite of repeated instructions from FCI Headquarters and Zonal Offices to its
Regional Offices. The inaction of the Management to rationalise the surplus ancillary
labour also resulted in unproductive expenditure of ` 33.26 crore during 2012-13 to
2015-16.

19
62 FSDs includes 18 FSDs in Haryana Region manned by Departmental labour; 6 FSDs in Delhi
Region (4 manned by departmental labour and 2 manned by DPS labour); 11 FSDs in Madhya
Pradesh Region (6 manned by departmental labour and 5 manned by DPS labour) and 27 FSDs in
Andhra Pradesh Region (1 manned by departmental labour and 26 manned by DPS labour.
20
Ancillary labour has to perform miscellaneous work of unskilled nature in food storage depot
including cleaning of godowns/wagon/truck, collection of scattered food grains etc.

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 Report No. 18 of 2017

In November 2015, the Nagpur bench of Hon’ble High Court of Bombay directed FCI to
transfer the surplus departmental labour to the other FSDs having shortage of labour to
reduce the handling cost. After seven months of issue of directives by the Hon’ble Court,
FCI directed (July 2016) all its regional offices for rationalisation of labour strength
through inter-depot, inter-District, inter-region, inter-zone transfers of labour. However,
no concrete follow up action was taken so far on this aspect (February 2017).

The Management stated (November 2016) that labour strength of a depot does not reflect
requirement of the labour in proportion to the peak work load.

The reply is not acceptable as Audit worked out surplus labour with reference to
directives issued by FCI in November 2007 about how to calculate sanctioned strength
and to make adjustment of short/surplus labour. FCI took no follow up action for
implementation of the directive of November 2007 and it only issued order for
rationalisation, belatedly on the directions of the Hon’ble Court on which no concrete
action was taken in the depots.

3.2.2 Injudicious deployment of departmental labour

An operational efficiency study conducted by M/s Price Waterhouse Coopers

recommended deployment of contract labour for handling operations in FCI as it found
that among all the labour systems prevailing in FCI, contract labour system was the most
economical.

It was mandatory to deploy only regular handling workers (viz. departmental labour, DPS
labour and NWNP workers) in certain depots called as the notified FSDs. Keeping in
view the cost economics, it was prudent for the Management to deploy contract labour at
least at the non-notified FSDs and railway sidings owned by railways so as to reduce the
handling cost.

However, Audit observed that FCI continued to deploy departmental labour at hired
FSDs21 (three FSDs in Bihar Region, two FSDs in Assam Region and one Central
Warehousing Corporation depot at Basti in Uttar Pradesh) and four railway sidings two
each in West Bengal and Madhya Pradesh region. The excess expenditure due to this
deployment from 2012-13 to 2015-16 (upto December 2015) was ` 50.98 crore.

Since, there was an overall shortage of departmental labour in Assam Region, it was
prudent for the management to transfer the departmental labour to the FSDs where there
were shortages, vacate the de-notified FSDs operated by DPS labour, engage contract
labour in the vacated FSDs and transfer the DPS labour to the notified hired FSDs for
getting the benefits of work done at much lower rates. However, no such optimization of
labour deployment was found in these FSDs/railway sidings.

21
Name of Hired FSDs and Railway sidings with departmental labour: (Bihar-Forbesganj, Munger
and Raghopur); (Assam-SWC Bongaigaon and Sibsagar Private); (Uttar Pradesh- CWC
Basti);(West Bengal- Railway Siding Habra and Suri); (Madhya Pradesh-Railhead Gwalior and
Satna).

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Report No. 18 of 2017

Thus, injudicious deployment of departmental labour resulted in avoidable expenditure of

` 50.98 crore.

The Management while explaining (November 2016) in detail recent steps taken in the
depots/Railway sidings to curtail the handling cost by making rationalization and
restoration of contract system stated that they apprehended law and order problems in
thrusting a unilateral decision on workers who were working under the recognized
labour system.

The Management has expressed its inability to implement a practice which is in interest
on the FCI as well as the GoI, on the ground of probable law and order problems. This
aspect needs to be addressed proactively/legally by involvement of the Ministry, FCI and
Labour, otherwise it will result in recurring avoidable expenditure over the years.

3.2.3 Non- pooling of the surplus departmental labour

M/s Deloitte, engaged (2014) by FCI for conducting comprehensive study on labour
induction and other related issues, recommended (September 2014) pooling of
departmental labour in fewer notified FSDs and to operate the vacated non-notified FSD
with contract labour. M/s Deloitte estimated that this exercise would result in a saving of
` 606 crore. The recommendation was accepted (April 2015) by the Board of Directors
(BOD) of FCI.

However, during test check Audit observed that the accepted recommendation of M/s
Deloitte was not followed in Assam, West Bengal and Bihar regions. It led to excess
expenditure of `15.42 crore over a period of five months during August 2015 to
December 2015.

Thus, non-implementation of accepted recommendation regarding pooling of surplus

labour led to excess expenditure of ` 15.42 crore in Assam, West Bengal and Bihar
Region of FCI during August 2015 to December 2015.

The Management stated (November 2016) that pooling/rationalization of labour strength

consequent upon exemption granted by the Ministry of Labour & Employment under
Section 31 of the Contract Labour (Regulation and Abolition) Act in respect of 226
notified depots will prove that prior to issuance of the said notification it was not feasible
to deploy contract labour in the depots vacated after pooling of the departmental labour
system.

The reply is not acceptable as non-pooling observed in audit was not related to de-
notification of notified depots but to already de-notified depots which could be vacated
by transferring the departmental labour engaged in these depots to notified/other
departmental labour manned depots.

3.2.4 Proxy labour

Though FCI officially does not acknowledge the existence of proxy labour at its depots,
the Parliamentary Standing Committee on Food, Consumers Affairs and Public
Distribution had indicated in its report (25 August 2004) about existence of proxy labour

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 Report No. 18 of 2017

in FCI. In reply to the query raised by the Standing Committee, the then Managing
Director of FCI also accepted that it was not possible for a handling labour to handle 600-
700 bags of food grains in a day (as is often the case in FCI records). The High Level
Committee on FCI recommended (January 2015) for fixing a maximum limit on the
incentive per person that would not allow him to work for more than, say, 1.25 times the
work agreed with him.

It was noticed in audit that there was an overall increase in the productivity of the gangs
even though the overall volume of work increased and the numbers of departmental
labours decreased over the time. This was indicative of existence of proxy labour in the
depots. Some related important observations are as follows:

• It was observed from the test check of the output slips of FSDs under West Bengal,
Assam, Madhya Pradesh, Haryana, Delhi and Andhra Pradesh regions for the
selected months that there were instances where the records depicted that handling
labour carried much more than 600 bags per day of food grains in a day and high
expenditure was incurred by the respective area office towards incentive and over
time. For instance, on 30 October 2014, Gang No. 15 consisting of six handling
labour working in New Guwahati depot handled 998 bags of food grains per labour
(less than two minutes per bag) and earned a total daily incentive of ` 1,23,186 (on
an average ` 20,531 per labour).
• It was also noticed that some of handling labours at Mayapuri, Ghevra and Narela
depots of North region were suffering from chronic diseases like paralysis, chronic
heart and kidney disease yet they earned incentive and overtime to the extent of
` 90,836 to ` 3,05,311 during the period from January, 2016 to March, 2016.
Instances of handling as many as 1,350 bags (Area Office Nagaon), 1550 bags
(FSD Srirampur) and 1,776 bags (FSD Gwalior) per day per labour were found in
audit.
• In case of FSD Dimapur, Audit noticed abnormally high incentive being paid to
labourers. Under Area Office, Dimapur in Nagaland and Manipur Region there are
five FSDs. The handling work at FSD Dimapur, FCI is done through departmental
labour and in all other four FSDs, handling work is done through contract labour.
After comparing the handling cost of departmental labour and contract labour
Audit observed that handling cost of work done through departmental labour was
abnormally higher than the similar work done by contract labour. Audit
examination revealed that in October 2015, 61 labour earned more than ` two lakh
as monthly incentive and the earnings of monthly incentive in respect of two
labourers were more than ` three lakh. It was also seen that Gang No. 5 which
consisted of seven labourers handled 8,093 bags (average handling per labour was
1,156 bags) on 06 October 2015.

Audit analysis revealed that the labour strength at FSD Dimapur came down from 116 to
97 (from 2013-14 to 2015-16) but the excess bags handled went up from 62.90 lakh to
66.06 lakh (with an abnormal high of 88.16 lakh in 2014-15). The details are given in
following Table 3.1:

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 Report No. 18 of 2017

Table 3.1: Labour Strength and bags handled in FSD Dimapur

Year Actual Requirement Shortfall No. of No. of bags to be Actual no. of Excess bags Incentive
no. of of labour as working handled as per bags handled handled earned for
depart- per norms of days norm of 105 bags handling
mental FCI Hqrs. per day per excess bags
labour labour over norms
` in lakh)
(`
(1) (2) (3) (4)=(3)-(2) (5) (6)=(2)x(5)x105 (7) (8)=(7)-(6) (9)
2013-14 116 322 206 296 36,05,280 98,94,884 62,89,605 1,234.55
2014-15 112 322 210 290 34,10,400 1,22,26,805 88,16,405 1,830.63
2015-16 97 322 225 240 24,44,400 90,50,643 66,06,243 1,337.71
(upto
Dec’15)

The above anomalies are strong indicators of possibility of engagement of proxy labour, a
fact on which even the Parliamentary Standing Committee had expressed serious
concern.

The Management stated (November 2016) that various preventive measures were taken
to prevent proxy labour.

The fact remains that the rate of bags handled per labours remains abnormally high
leading to the exorbitant incentive being paid to some labourers and FCI is yet to tackle
the presence of proxy labour in its depots.

3.2.5 Irregular payment of wages during depot closure

Cost of handling operations by departmental labour was much higher than that of contract
labour. Considering this, RO, FCI, Kolkata floated a tender (August 2013) for handling
and transportation work at railway siding Srirampur. Consequently, the FCI Workers’
Union served notice of strike to FCI Management and there was no rake movement
during the period August 2013 to April 2015 at railway siding Srirampur. There was
almost zero transaction in the depot during the period January 2014 to April 2015 and the
capacity utilization of the depot was also nil. During the prolonged period of 16 months
the departmental labour at FSD, Srirampur were kept idle (except on only 20 occasions
during January 2014 to April 2015 when labour of Srirampur depot were deputed to FSD
Chinsura for unloading of rakes). No action was taken by the Management to gainfully
utilize the departmental labour posted at FSD, Srirampur by transferring them within
Area Office/Region/Zone. Non-utilisation of the departmental labour of Srirampur depot
during the period January 2014 to April 2015 resulted in payment of idle wages
amounting to ` 5.90 crore.

The Management stated (November 2016) that during January 2014 to April 2015 no
operations were carried out due to FCI workers union filing industrial dispute case
before Regional Labour Commissioner, Kolkata. Reply is untenable as the Management
failed to gainfully utilize the service of the labour by transferring to other depots during
the strike period but still paid wages for all such days.

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3.2.6 Booking of departmental labour without adequate work

Departmental labour in FCI are eligible to get Minimum Guaranteed Wages (MGWs) for
21 days in addition to four or five weekly offs in a month and attendance allowance for
the rest of the days in that month in case they report on duty but are not booked within
two hours of reporting due to non-availability of work in depot. Hence, the gangs were to
be booked judiciously, only when there was adequate work e.g. rake loading, unloading
etc., otherwise a higher basic pay, Dearness Allowance (DA) and CPF payment had to be
paid for every extra day of booking over and above the 25-26 days of booking.

From test check of output slips selected on random basis in area offices of West Bengal,
Assam and Bihar, Audit observed that there were number of instances when there was
either no work or very little work, but gangs22 of departmental labour (including ancillary
labour) were booked for work. Though the depot managers should have done proper
analysis regarding requirement of booking labour based on receipt and issue operations
but it was not done and they booked the gangs on days without any work/adequate work.

The avoidable payment of idle wages from such overbooking of departmental labour
without any work/adequate work, during 2012-13 to 2015-16, worked out to ` 3.40 crore.

The Management while accepting (November 2016) the facts stated that placement of
rakes was not in FCI’s control and Railway was placing rakes as per its convenience. The
reply of the Management is indication of the fact that by better co-ordination with
Railways and efficient manpower planning, idle wages could be reduced.

3.2.7 Non optimization of short/broken gangs by merger into full strength gangs

The handling labour is required to load, unload food grains bags on or from railway
wagons, trucks and other vehicle with stacking/unstacking of the same in the depots.
Sardar and Mandal do not perform handling work but they get incentive based on the
overall work done by the handling labourers in a gang. Thus, if the number of handling
labour reduces in the gang, the percentage of incentive payout to non-performing member
would rise as illustrated below in the Table 3.2:
Table 3.2: Gangs with Sardar and Mandal
Gang Composition* Non- Performing Performing Minimum Share of Excess
Performing Labour Labour in share of incentive of Incentive due
Labour standard incentive of non-performing to non-
composition non- labour in a standard
of gang performing standard gang composition
labour to total (per cent) i.e. 1 (per cent)
labour (S)+1(M)+12
(per cent) (H/L)
1 (S)+1(M)+12(H/L) 2 12 12 14.29 14.29 0.00
1 (S)+1(M)+11(H/L) 2 11 12 15.38 14.29 1.10
1 (S)+1(M)+5(H/L) 2 5 12 28.57 14.29 14.29
*S= Sardar, M=Mandal and H/L=Handling Labour

22
A Standard Gang consists of 1 Sardar, 1 Mandal and 12 Handling labour

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Report No. 18 of 2017

Strength of most of the labour gangs in the FSDs reduced considerably over the years due
to voluntary retirement/superannuation/death of workers and no fresh recruitment was
made. This resulted in short/broken gangs and had adverse impact on efficiency and
productivity of labour. Hence, a need was felt by both the Management and the workmen
for merger of gangs. Accordingly, both sides signed a Memorandum of Settlement
(November 2007) regarding merger of short/broken gangs for making these gangs as full
strength gangs.

Audit observed that short/broken gangs were not merged in 23 FSDs in four regions23,
after retirements/death of the gang labour. Operations of gangs with reduced strength led
to payment of higher incentives and overtime wages as payment of incentive and OTA
has direct dependency on the average number of bag handled by handling labour per day
as illustrated in the Table 3.2 with reduction in number of each handling labour in a gang,
the share of incentive to non-performing labour i.e. Sardar and Mandal increases as
compared to their share in a standard gang. It results in incurring of excess incentive to
sardar and/or mandal. Thus, non-merger of the short/broken gangs by the area offices
under the jurisdiction of West Bengal, Assam, Bihar and Haryana regions resulted in
avoidable payment of ` 3.25 crore during the period selected for audit.

The Management stated (November 2016) that initially the gangs were not
merged/reconstituted due to pendency of Court cases. The matter was finally decided in
August 2013 and immediately after that action was taken.

The reply is not acceptable as there were numerous cases of non-merger even after
August 2013 leading to avoidable payments.

3.2.8 Non-implementation of biometrics and Closed Circuit Television (CCTV)

etc.

Audit observed that there were multiple instances where FCI could not implement
efficiency improving technology such as Biometrics, CCTV, Portable bag handling
system in its depots because of labour resistance as discussed below:

(i) Non-implementation of Bio-Metric Attendance System

The Parliamentary Standing Committee on Food, Consumer Affairs and Public

Distribution in its report (2005-06) noted that the suggestions24 of the Committee (2004-
05 Report) to prevent proxy labour in the FCI, were not taken seriously. The Committee

23
4 regions includes: (West Bengal: FSD Srirampur, Chinsurah, OJM and Kalyani); (Assam: FSD
Ramnagar); (Haryana: BG Kurukshetra); (Bihar: FSD Phulwarisharif, Mokama, Brahmpura,
Narayanpur Anant, Chanpatia, Forbesganj, Katihar, Belouri, Bhagalpur, Munger, Katarihills,
Darbhanga, Jainagar, Saharsa, Raghopur, Madhepura, Chapra).
24
i) Requiring each and every worker to put one’s signature and thumb impression as a token of
attendance; ii) introduction of mechanical gate entry devices, punching card system with thumb
impression; iii) payment of wages to all workers through cheque as per the provision of Income Tax
Act; and iv) signing of daily work output slips by each labour at the end of the day and
countersigned by Mandal/ Sardar/Shed Incharge, would go a long way in curbing incidence of
proxy labour.

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 Report No. 18 of 2017

was of the view that by not taking any meaningful action to curb proxy labour, FCI was
trying to institutionalize the system. The Committee, therefore, recommended that the
system of proxy labour must be abolished by regulating the attendance system in order to
prevent further drainage from the exchequer.

FCI attempted to regulate the attendance system through biometric attendance system at
the depots. In order to regulate the attendance system, the East and North East zones of
FCI purchased (during March 2006 to July 2009) 150 Bio-metric finger printing
attendance devices at a total cost of ` 49.20 lakh and installed the same in the FSDs
situated under their control. However, even after ten years the Management could not
make the system operational because of the resistance by the labourers. Similarly, test
check revealed that the Bio-Metric attendance systems could not be implemented even in
the FSDs under Area Offices at Mayapuri and Shaktinagar under Delhi region. Audit also
noticed non implementation of the bio metric system in eight FSDs in Madhya Pradesh
and Andhra Pradesh regions due to reasons such as non-functioning of Bio-metric
devices, non-delivery of devices, non-linkage with 2G connectivity etc.

The Management stated (November 2016) that installation of Biometric Attendance

System was completed in FCI Hqrs and in second phase Biometric Attendance System
would be implemented in all Zonal Offices, Regional Offices, District Offices and Depots.

The reply of Management affirms that it could not fully implement Bio Metric
Attendance System in the depots even after ten years of suggestions made by the
Parliamentary Standing Committee.

(ii) Non-implementation of CCTV

In order to augment security surveillance systems in all the FCI owned FSDs, as per
directives of the Ministry, FCI decided (August 2015) to implement surveillance through
CCTV cameras. It was observed that even CCTV cameras installed on pilot basis in three
FSD viz, Miryalguda [District Office (DO) Nalgonda], Hanuman Junction (DO
Vijayawada) and Cherlapally (DO Tarnaka) under Andhra Pradesh region at a cost of
` 1.19 crore were not in working condition since August 2015. Moreover FCI has not
done any impact analysis of the effect of CCTV implementation in the depots.

The Management stated (November 2016) that CCTV cameras were installed in 65
depots (58 in 2013-14 and 7 in 2014-15) and actions were taken to install CCTV cameras
in 482 depots (tenders for 457 depots were issued in 2016-17) and approval of competent
authority was given for 25 depots.

The reply indicates that CCTV cameras were installed in a small number of depots and
FCI is now in the process of installing same in other depots. Reply regarding impact
analysis in depots, where CCTV Cameras were installed was still awaited (February
2017).

(iii) Portable Bag Handling System

Portable Bag Handling System is a Mechanised Conveyer System used for unloading and
stacking of bags from wagon/truck with added benefit of time and cost saving. Portable

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Report No. 18 of 2017

bag handling system (Mechanised system) purchased at Ramnagar (March 2014), Ranchi
(August 2014), Phulwarisarif (May 2014) and Charrah (May 2014) FSDs under Assam,
Jharkhand, Bihar and West Bengal regions respectively at a cost of ` 78.85 lakh were not
put to use at the FSDs on the grounds of labour resentment against the mechanised
system. Audit further observed that two Portable handling systems procured
(June/September 2014) by the Andhra Pradesh region at a total cost of ` 15.76 lakh for
two FSDs were not put to use due to procurement of the same without ascertaining
suitability and technical aspect of the systems for handling operations. This resulted in
infructuous expenditure of ` 94.61 lakh and no benefit of modernization accrued in these
depots.

The Management stated (November 2016) that portable bag handling system was not in
operation due to various constraints like too bulky structure to move smoothly inside the
godowns due to insufficient space.

The reply of the Management indicates that no feasibility study was undertaken before
making investment on portable bag handling system which led to infructuous expenditure
on their installation.

3.3 Irregular benefits extended to labour in violation of existing laws/rules

3.3.1 Irregular/excess contribution in Contributory Provident Fund

The Hon’ble Supreme Court laid down the following basic principles of defining "basic
wages" under sec. 2 (b) of the Employee Provident Fund (EPF) Act in the two
judgements25:

(a) Where the wage is universally, necessarily and ordinarily paid to all across the board
such emoluments are basic wages.

(b) Where the payment is available to be specially paid to those who avail of the
opportunity is not basic wages. By way of example it was held that overtime allowance,
though it is generally in force in all concerns is not earned by all employees of a concern.
It is also earned in accordance with the terms of the contract of employment but because
it may not be earned by all employees of a concern, it is excluded from basic wages.

(c) Conversely, any payment by way of a special incentive or work is not basic wages.

(d) Incentive wages paid in respect of extra work done is to be excluded from the basic
wage as they have a direct nexus and linkage with the amount of extra output. It is to be
noted that any amount of contribution cannot be based on different contingencies and
uncertainties. The test is one of universality.

The FCI (Contributory Provident Fund) Regulations, 1967 for departmental worker
engaged in the service of FCI also did not include incentive/OTA under ‘Pay’. However,
in a complete disregard to Hon’ble Supreme Court Judgements and ‘FCI (Contributory

25
‘Bridge & Roof's Co. Ltd. Vs. Union of India case’ (11/09/1962) and TI Cycles of India, Ambattur
Vs. M.K. Gurumani and Others’ (2001 (7) SCC 204).

32 Compliance Audit Report on Food Corporation of India

 Report No. 18 of 2017

Provident Fund) Regulations, 1967’, a Memorandum of Settlement (MoS) dated 24 May

1984 was signed between the Management and FCI Workers Union. As per the terms of
settlement, Management decided to treat incentive earned by the departmental workers as
‘earning’ for the purpose of CPF contribution. As provisions of any regulation, circular or
a settlement (issued or settled by an Organization or Institution) cannot override Judicial
Pronouncement of the Apex Court, the MoS signed by FCI Management was in violation
of the provisions of law and judicial pronouncement.

Audit observed during test check that in West Bengal, Assam, Delhi, Haryana, Madhya
Pradesh, Andhra Pradesh and Jharkhand26 regions incentive earnings of the departmental
labour were included in “wages/earning” for the purpose of CPF calculation and FCI
made an excess contribution of ` 218.76 crore as employer’s contribution during April
2012 to March 2016 in violation of the Hon’ble Supreme Court’s Judgment.

The Management stated (November 2016) that extension of better benefits than the
statutory provisions was legally valid.

The reply is not acceptable as better benefits were given only to a selected group solely
on the basis of MoS in violation of the Hon’ble Supreme Court’s judgment on this issue.
Moreover, FCI could not provide any evidence regarding its action being legally valid
given the fact that MoS cannot supersede judgment of the Hon’ble Supreme Court.

3.3.2 Unjustified inclusion of incentives while calculating gratuity

As per the Payment of Gratuity Act 1972, gratuity is payable to an employee on

termination of employment and rendering continuous service for not less than five years.
Wages constitutes all emoluments earned by employee including Dearness Allowance but
does not include any bonus, commission, house rent allowance (HRA), overtime wages
and any other allowance. Moreover, as per the Payment of Gratuity Act applicable to
employees of FCI, only basic pay and dearness allowance thereon was treated as wage
for computation of gratuity.

However, Audit observed that incentive was included as an element of wage in case of
Departmental labour for calculation of gratuity and this inclusion of incentive in the
calculation of gratuity payable to departmental labour resulted in extra expenditure of
` 10.99 crore in Delhi, Haryana, Madhya Pradesh and Andhra Pradesh during 2012-13 to
2015-16.

The Management stated (November 2016) that benefit extended through bilateral
settlement over and above statutory requirement was legally valid and was not matter of
adjudication.

The reply is not acceptable as better benefits were given only to a selected group in
violation of Gratuity Act, 1972. Moreover, FCI could not provide any evidence to its
claim of its action being legally valid given the fact that an MoS cannot supersede
provisions of an act of Parliament.

26
Period from May 2014 to November 2015 only in case of Jharkhand region.

Compliance Audit Report on Food Corporation of India 33

Report No. 18 of 2017

3.3.3 Unjustified inclusion of HRA element for the computation of incentive and
OTA

As per the incentive scheme framed (May 1999) for the departmental labour working in
FCI godowns/depots, various incentives such as handling, height and lead were payable.
These incentives were payable at full wages for the actual number of bags handled,
stacked or carried, as the case may be, in respective slabs of output above norm/datum.
The Hon’ble Supreme Court of India in its judgment dated 20 July 1990 in Writ Petition
222 of 1984 held that there should be parity in wages and fringe benefits of department
labour across the country on the basis of arbitration award by Justice K. K. Mitra. Audit
observed that FCI unjustifiably included HRA component in the wages for the purpose of
calculation of incentive and OTA. This was completely unwarranted as the HRA element
was not to be considered for the purpose of computation of the Performance linked
incentive, Leave encashment and Gratuity payable to the departmental labour on
superannuation.

Audit noticed in selected FSDs under West Bengal, Assam, Delhi, Haryana, Madhya
Pradesh and Bihar regions and ANZ Vizag that FCI made unjustified payment of
` 118.84 crore during 2012-13 to 2015-16 by including HRA for computation of
incentive and OTA.

The Management stated (November 2016) that the Departmental as well as DPS workers
were being paid OTA as per the MOU reached with labour Union in furtherance to the
provisions of Shop and Establishment Act irrespective of the fact whether the
establishment of FCI was given exemption by the respective State Government from the
OTA provisions of the said Act.

The Management reply is not tenable as it could not furnish any records on legal validity
of the action other than the settlement with labour union. Thus, allowing different rate of
HRA (10, 20 and 30 per cent) in different location for computing incentive resulted in
different payment of incentive for same work, which also defeats the concept of equal
pay for equal work and is contrary to the ibid judgement of the Hon’ble Supreme Court.

3.3.4 Non-consideration of Mandal as handling labour

As per Circular issued (May 2002) by FCI on the duties of Sardars27 and Mandals28,
when there is no weighment work in the depot, the Mandal has to work as part of gang
and perform duties of handling labour. With introduction of weighment of bags through
electronic weighbridges in the FSD there was no need of the Mandal during weighment
and as per description of duties prescribed by FCI, the Mandal had to work as a handling
labour. Further, M/s Deloitte also recommended for review of the role of Mandal in
view of introduction of weighbridges in the FSD and the same was approved by the
Board of Directors of FCI in the meeting held on 8 April 2015.

27
Sardar is a leader who exercises adequate control over gang and coordinates and supervises the
various steps of operations.
28
Mandal has duty to weigh the food grains bags and in absence of weighment he has to work as a
part of the gang.

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However, it was observed that Mandals working in the FSDs equipped with electronic
weighbridges were not considered as handling labourers in line with the duties defined in
the letter issued in May 2002. It was noticed in Area offices, Patna and FSDs under
Assam, West Bengal, Haryana, Delhi, Madhya Pradesh regions and Dimapur that FCI
paid ` 58.82 crore during 2012-13 to 2015-16 to such Mandals, who should have been
considered as handling labour for the purpose of calculation of incentive earnings per
labour. Thus, non-consideration of the Mandal as handling labour in line with duties of
Mandal, defined by the Management resulted in unjustified payment of incentive to
Mandals.

The Management stated (November 2016) that duty of Mandal is supervisory in nature
and in absence of manual weighment, the Mandal works as a part of the gang and
performs duties of handling labour which does not mean that he has to give output as
required by the handling workers of the gang.

The Management reply is not acceptable as the FCI circular (13 May 2002) on the duties
of Sardars and Mandals, clearly stated that when there was no weighment work in the
depot, the Mandal had to work as part of gang and perform duties of handling labour.
Thus, by not insisting on the specified work output by the Mandal in depots where there
was no manual weighment resulted in undue extra payment of ` 58.82 crore.

3.3.5 Unjustified payment of ‘A’ area rates to DPS labours working in ‘B’ and ‘C’
areas

In exercise of the powers conferred by the GoI, Ministry of Labour & Employment
(MoL&E) periodically revises the rates of variable dearness allowance on the basis of
increase in the average Consumer Price Index (CPI). Accordingly the minimum
guaranteed wages are also revised every six months. The rates revised are based on the
areas viz., area ‘A’, ‘B’, ‘C’29, notified by the GoI.

As per Memorandum of Settlement (August 2012) between the Management and

workmen represented by FCI Workers Union over revision of wages to DPS workers, it
was agreed that Minimum Daily Wages of ‘A’ area as notified by GoI shall be paid to the
labours as base throughout the country irrespective of the category of station of posting.

Audit observed that consequent upon extending the ‘A’ area rates across the country, the
increase in daily wages to DPS labours in Madhya Pradesh and Andhra Pradesh regions
ranged between ` 44 to ` 56 for FSD at ‘B’ area and ` 85 to ` 110 for FSD at ‘C’ area.
An amount of `59.22 crore was paid to the workers on account of this increase from
April 2012 to March 2016. Since the rates as decided by the GoI are based on the average
CPI and revised every six months, extending ‘A’ area rates uniformly across the country
was not justified. The decision of extending ‘A’ area rates uniformly across the country

29
Area ‘A’ and Area ‘B’ comprise all the places as specified in the annexure, to Notification of
Government of India in the Ministry of Labour and Employment No. S.O. 131(E) dated 13th January
2009, as such areas and includes all places within a distance of fifteen kilometres from the periphery
of a Municipal Corporation or Municipality or Cantonment Board or Notified Area Committee of a
particular place. Area ‘C’ shall comprise of all the other place not mentioned in Areas ‘A’ and ‘B’ of
the annexure and to which the Minimum wages Act 1948 (11 of 1948) extends.

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Report No. 18 of 2017

also defeated the very purpose of GoI decision to notify the areas as ‘A’, ‘B’, ‘C’ and the
payment of ` 59.22 crore was completely unjustified.

The Management stated (November 2016) that FCI Workers Union vehemently opposed
applicability of different minimum daily wages in respect of DPS labour employed in ‘A’,
‘B’ and ‘C’ Areas and resorted to agitation in the form of go slow/refusal to work/direct
action w.e.f. 22 March 2011, demanding application of rates of minimum daily wages
notified by GoI in respect of ‘A’ areas uniformly across the country. It also stated that the
Labour Unions by dint of their very strong bargaining power, took dual benefit of higher
central government minimum wages as compared to FCI minimum wages when the FCI
came under the purview of Minimum Wages Act and uniform applicability of ‘A’ areas
rate throughout the country.

Evidently, FCI due to strong bargaining power of labour union failed to enforce the
requisite revised rates of variable DA notified by the GoI.

3.3.6 Unjustified payment of Productivity Linked Incentive (PLI) to labours

Consequent upon the approval of GoI for implementation of the new PLI Scheme in FCI
from 2010-11 onwards, it was decided by FCI (August 2015) to release the PLI for the
year 2010-11 to 2013-14 at the revised rate of 15 per cent of the Basic Pay plus Industrial
Dearness Allowance (IDA) or Central Dearness Allowance (CDA), as the case may be. It
was to be given to all the eligible employees below Board level and Departmental/Direct
Payment System labourers.

Audit noticed that there was an already prevailing scheme of incentive for departmental
labours in FCI whereby the departmental labours were paid incentives for the quantum of
work done over and above the fixed norms30. Therefore, the departmental labour should
not have been paid PLI as this would entail payment of incentive for the same activities
on which incentive had already been availed by them during the year.

Audit noticed that in West Bengal, Assam, Madhya Pradesh and Andhra Pradesh regions,
inadmissible PLI amounting to ` 27.77 crore was paid in addition to payment of
incentive to departmental and DPS labour during 2012-13 to 2015-16.

The Management stated (November 2016) that incentive wages is different from PLI.

The Management’s reply does not address the fact of giving two different benefits to the
departmental workers for the same work.

3.3.7 Irregular retrospective payment towards arrears relating to OTA and HRA

The wage structure of the departmental workers in FCI was revised after obtaining
approval from BOD in its meeting held on 05 May 2014. The said wage revision was
made applicable w.e.f. 01 January 2012. Though the BOD did not give any approval for

30
The incentive is payable if the work exceeds the general norms of output which was 105 bags for
handling, 10 bags height for stacking and 66 feet in case of lead distance.

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 Report No. 18 of 2017

payment of arrears of OTA and incentive in the instruction issued on 16 May 2014,
however, on the ground that in the past such arrear payment was made, some of the
regions made payments towards arrears of incentive and OTA without specific approval
of FCI. Later the BOD gave post facto approval for making payment of arrear of
incentives and OTA w.e.f. 01 January 2012. Audit noticed in two Area Offices under
Delhi Regional Office that ` 2.17 crore was paid to the departmental labour on account of
arrears of OTA. Moreover, no justification for payment of arrears to departmental
labourers, except on basis of past practices, was found on records.

Similarly, as per the circular on wage revision, the departmental workers, not provided
with accommodation, were to be paid HRA at the rate of 10 to 30 per cent at par with
FCI/Central Government Employees. Audit observed that at JJP depot under West
Bengal region, HRA arrears of ` 5.71 crore for the period of 01 January 2012 to 31 May
2014 was paid to 582 labourers in August 2014. The payment was not in order as HRA
was to be paid prospectively to Central Government employees and Central Public Sector
Enterprises employees as per implementation of Central Pay Commission
recommendations and Department of Public Enterprises guidelines respectively. Thus,
unwarranted benefit of ` 7.88 crore by way of OTA and HRA arrear was given to the
departmental labour.

The Management stated (November 2016) that there was no agreement with any Labour
Union on the basis of which the payment of arrears of OTA and incentive wages for the
intervening period was excluded in the past. In view of the conventions and precedence,
BOD with its judicious mind approved the payment of arrears to the departmental
workers upon their wage revision w.e.f. 01 January 2012.

The reply of management is not acceptable as continuation of allowing benefits only on

the ground that the same were given in the past cannot be accepted as a valid ground for
extending undue financial benefit to a select group of employees.

3.3.8 Excess incentive payment due to non-implementation of 135 bag handling

norms for incentive payment

Consequent upon finalization of bipartite settlement on wage revision between FCI

Management and FCI Worker’s Union, revision was made (May 1999) to the piece rate
incentive scheme in respect of departmental labour and a new scheme was introduced
with effect from 01 April 1998. This incentive scheme, inter-alia, included norms for
unification of output of 70 and 105 bags in respect of handling bags above 66 kg and
bags below 66 kg respectively.

Subsequent to an International Labour Organization (ILO) recommendation to reduce the

size of food grains bags to 50 kg each, FCI implemented the 50 kg bag norm. Therefore,
a need was felt to have separate handling norms for handling 50 kg bags by the
departmental labour. For this purpose, a study was entrusted to Delhi Productivity
Council (DPC) to suggest incentive wages scheme for the departmental labour, which
suggested (2002) a norm of 155 bags per labour per shift which was not accepted by
labour unions. To explore the possibility of implementation of findings of the DPC,
Saxena Committee was constituted. Based on the findings of the Saxena Committee, the
Incentive Wages Scheme was framed by FCI adopting the norm of 135 bags per worker

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Report No. 18 of 2017

per day, which was circulated (December 2005) to the field units and was to be made
effective from 01 December 2005. However, it also could not be implemented as labour
unions raised industrial dispute.

Audit noticed that though the weight of a bag got reduced from 66 kg to 50 kg but the
number of bags beyond which incentive was to be paid remained unchanged at 105 bags
per worker per day. Thus, even though the overall workload was reduced because of
handling of lesser weighing bags the incentive was continued to be paid at the pre-revised
norm. To ascertain the impact of this on the incentive amount, an exercise was made by
Audit to calculate the incentive amount on 135 bags norm basis. Based on three months’
daily handling work done in three FSDs under Assam region and one depot under West
Bengal region, it was observed that the labourers earned 8.40 per cent higher incentive
due to continuation of the earlier norms. Considering the variance in earnings found from
analysis, the extra incentive payment was worked out to ` 53.85 crore in Assam and West
Bengal region during 2012-13 to 2015-16.

The Management stated (November 2016) that incentive scheme circulated on

15 December 2005 had to be kept in abeyance due to operation of Section 33 of
Industrial Dispute Act. Hon’ble Tribunal had passed the award in ID case no. 195/2011
in favour of FCI and the same has been implemented. Recovery of excess incentive wages
paid during the intervening period is in progress as per the age profile of the workers
concerned.

However, the status of recovery of excess incentive payment on the basis of 135 bags
norm was still awaited (February 2017) and thus remains unverifiable.

3.4 Irregularities leading to undue/excess payments to labour

The following suspected excess payments of incentives, wages and OTA to departmental
labour were noticed in the selected FSDs under West Bengal, Assam, Delhi, Haryana,
Madhya Pradesh, Andhra Pradesh, Bihar and Nagaland and Manipur regions:

3.4.1 Improbable stack formation depicted in records leading to higher incentives.

The formation of a standard stack of food grains is done in such a manner that at the
bottom there are seven rows of bags. Each row is created by placing 12 units of two bags
of grains perpendicular to each other. The maximum height of the stack allowed is 24
layers.

Scrutiny of 254 booking cum output slips issued at FSD Dimapur for October 2015 for
11 gangs revealed that these slips indicated that on 20 October 2015 the Gangs No. 9 and
10 were building the same stack (D/5, Shed II) on the same day.

However these obvious anomalies were not detected by shed/depot in-charge at FSD
Dimapur and inadmissible incentive was paid accordingly for building the above
improbable stack formation.

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 Report No. 18 of 2017

The Management stated (November 2016) that stack formation in FSD Dimapur was
raised beyond 24 layers due to space constraint. Further in actual operation not all the
available stacks are for receipt only but also under issue operation.

The Management reply is not related to the objection as it has not furnished reply to the
observation regarding building the same stack (D/5) on the same day by two different
gangs.

3.4.2 Incorrect certification of Refilling/Standardisation work

As per clause 13, Part-II of Model Tender Form for the handling contracts, refilling work
includes filling gunnies with loose grains to a prescribed weight, stitching and stacking
inside the godown. Similarly, as per the incentive scheme framed (May 1999) by FCI for
the departmental labour working in its godowns/FSD, standardisation work includes
carrying the standardised bags to weighing scales and stacking upto a prescribed height
or loading into wagons/trucks. Since rebagging/refilling work was categorised under
standardisation for the purpose of handling norms for incentive, hence refilling/rebagging
work includes filling gunnies with loose grains including weighment, stitching and
stacking inside the godown.

Audit observed from output slips for the months of January 2013, February 2014 and
April 2014 to March 2015 in respect of New Guwahati depot that it treated
refilling/rebagging, and weighment/stacking of the refilled bags as two separate activities
instead of treating the entire activity as one in line with the incentive scheme. It also paid
incentive, taking these as two separate activities.

Similarly, it was also observed from the output slips of FSD, Hojai and Assam State
Warehousing Corporation, Haibergaon under Area Office Naogaon for the
period of three years ending 2014-15 that depot incharge incorrectly certified
standardisation/refilling/rebagging, weighment and stacking of the standardised/refilled
bags of paddy as three separate activities instead of treating the entire activity as one
activity in line with the incentive scheme.

Even though no separate incentive (except height incentive) was payable for the stacking
of the refilled bags, but, Area Office Guwahati and Area Office Nagaon incorrectly
allowed such handling incentive of ` 4.25 crore for the above mentioned period.

3.4.3 Excess certification of refilling work

Total number of bags recorded in the booking cum output slips should tally with the
number of bags as reflected in monthly stock account and other records maintained by the
depot/Area Office. Audit cross verified the booking cum output slips with the monthly
stock account maintained by Area Office/FSDs under Assam region for the period during
2012-13 to 2014-15 and observed that the number of bags depicted against the refilling
work, as certified by the depot/shed in-charges in the booking cum output slips did not
tally with the monthly stock account for gunny bags. There was a difference of 38.23
lakh bags between the two sets of records. Further analysis revealed that this was due to
excess certification at FSD, New Guwahati, Hojai, Nagaon and Durgapur. This, excess
certification of refilling works by the depot/shed in-charges under Assam and West

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Report No. 18 of 2017

Bengal region resulted in excess payment of incentive amounting to ` 7.63 crore for work
which was not performed. No action for recovery of ` 7.63 crore was initiated
(January 2017).

Besides, on the basis of another audit observation about excess payment of ` 3.30 crore
in New Guwahati depot, CMD of FCI advised the General Manager (GM) of Assam
Region/Executive Director of North East Zone to take immediate action and recover the
excess payment of incentive amounting to ` 3.30 crore from the departmental labour. The
Assam region started the recovery process in August 2016 i.e. after 17 months; recoveries
were still to be made (January 2017).

The Management stated (November 2016) that at the time of unloading of rakes or during
issue/dispatch operation many bags were generally received in cut, torn and loose
condition which were being used after minor repairing and by refilling the loose grains
for which no separate gunnies were issued from gunny account. These were very common
in depot operations as such the refilled bags reflected in labour output slip may not be
tallied with gunny account.

The reply of Management is not acceptable as it does not explain as to why such high
quantity of 38.23 lakh bags would be required for refilling and the GM of Assam has
accepted the irregularities and ordered for recovery of excess payment on this account.

3.4.4 Wrong certification of lead distance

FCI directed (January 2014) for taking steps to ensure accurate recording of the lead
distance travelled by the labourers for the purpose of calculation of the incentive wages
since mis-application of lead clause would escalate handling cost. Proper depot layout,
sound stack plan, mention of stack number in output slips, verification of position of
stack as mentioned in output slips with the depot layout, mapping of depot layout in
Financial Accounting Package (FAP) for automatic incentive calculation is an important
internal control tool to check misapplication of lead incentive.

Test check of records revealed wrong certification of lead distances by FSD

Jhinjhirapool, West Bengal region and FSD New Guwahati, Assam region which resulted
in excess payment of lead incentive of ` 23.82 lakh for the selected period. FCI Area
Office Port Depot under West Bengal Region issued a circular dated 11 November 2003
which stated maximum lead of 148 feet whereas Audit found cases of allowing 166 feet
or more in many cases which resulted in allowing 100 percentage (beyond 165 feet) of
wages considered for lead incentive in place of allowing 50 percentage (132-165 feet) of
wages considered for lead incentive. Similar instances were also observed in FSD
Guwahati.

The Management stated (November 2016) that some lead has to be allowed to the
departmental labour to expedite the handling operation.

The reply is not tenable as inadmissible excess lead distance was being allowed as a
result of which excess incentive was being paid to the labourers.

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 Report No. 18 of 2017

3.4.5 Payment of excess wages/overtime wages/incentive

• As per the FCI Headquarters circular dated 11 June 1991 and letter dated 30 April
1996 on Minimum Guaranteed Wages (MGW), if there was no work in the depot,
the maximum allowable wages would be 25/26 days of MGW and attendance
allowance for the rest of the days of the month. However, it was observed that
though there was no transaction in the FSD Srirampur for a prolonged period of
16 months during January 2014 to April 2015 (except 20 days in 16 months when
labour were sent to FSD, Chinsura for unloading of rakes), the labourers were
booked for almost all days of the month (ranging from 26 to 31 days). Despite
knowing the fact that there was labour problem in FSD Srirampur, the Area
Office, Hooghly allowed wages to them beyond MGW days (i.e. 25/26 days).
Thus, booking of departmental labour without requirement resulted in excess
payment of ` 37.98 lakh during the above mentioned period.
• Audit noticed from output slips of Mokama (October 2014) and Chinsurah
(March 2015) under Bihar and West Bengal regions that departmental labour
were allowed overtime hours without requirement resulting in OTA payment of
` 5.65 lakh. Similarly, over-booking of labour during overtime and unjustified
recording of time on work slips without sufficient requirement resulted in excess
payment of OTA to the tune of ` 17.90 lakh during May 2014 in FSD Rohtak
under Haryana region.
• Attendance summary reports and earning reports generated through FAP for the
month of May 2013 relating to FSD, Chinsurah revealed that departmental labour
of all the gangs were present and drew wages for 31 days. However, the output
slips for the same month indicated that the departmental labour were not present
on all the days of the month. This shows that the shed in-charges of FSD,
Chinsurah prepared misleading output slips by marking absent the departmental
labour to facilitate more incentive on account of increase in per capita output.
Manipulation of the output slips by the shed in-charges of FSD, Chinsurah
resulted in excess payment of handling incentive amounting to ` 5.41 lakh for the
month of May 2013.

The Management in respect of Area Office Hoogly stated (November 2016) that these
issues require report from Area Office Hooghly which was sought. In respect of Mokama
depot under Bihar Region, the Management stated that necessary recovery for the excess
overtime hours without any requirement on the several occasions was made. In respect of
Haryana region, management stated that no incident of excess OTA payments was
noticed.

The Management reply in respect of Haryana region was not acceptable as the records
clearly indicate excess OTA was allowed to the Department Labours.

3.4.6 Incorrect entry of data on attendance in FAP

If a departmental labour was booked on a non-paid holiday, it was to be entered in the

FAP as ‘B’ i.e. booked on non-paid holiday, otherwise it was to be entered as ‘D’ i.e.
Attendance day. Further, if ‘H’ (i.e. holiday) or ‘W’ (on work) was entered in Financial
Accounting Package, departmental labour would get full wages for those days.

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Report No. 18 of 2017

Audit cross verified the attendance sheets and booking-cum-output slips certified by the
depot incharges of Hojai, Itachali, Senchowa and ASWC, Haibergaon under Assam
region with entries made in the FAP for the period of three years ending 2014-15 and
found that though the departmental labour were entitled for only attendance allowance on
21 occasions, area office, Nagaon while processing payment through FAP marked the
labours as on ‘work’ (W) or on ‘holiday’ (H) resulting in payment of full wages for that
days. Due to making wrong entries of attendance in FAP by the area office, Nagaon, the
departmental labour though not booked during non-paid holidays were paid wages
instead of attendance allowance which resulted in excess payment of wages of
` 14.73 lakh.

The Management stated (November 2016) that all the district offices under Assam region
were instructed to tally attendance and output slips with FAP figures. Further, recovery
had also been ordered on the basis of audit observation.

The Management had accepted the comment. However, the recovery details were
awaited (February 2017).

3.4.7 Unwarranted deployment on holidays

To minimise the handling costs, departmental labour were to be engaged on holidays only
when there was adequate work (such as loading/unloading of rakes) to justify their
deployment. Depot manager deployed the departmental labour on holidays without
sufficient requirement in district office at Kurukshetra, Karnal and FSD Rohtak under
Haryana region and Mokama depot under Bihar region. This unwarranted deployment of
departmental labour on holidays resulted in avoidable payment of OTA of ` 72 lakh.

The Management stated (November 2016) that labourers always demand prior written
intimation for probable rake placement on holidays.

As Audit observation pertains to non-railway work on Sunday and holidays the

management reply is not acceptable.

3.5 Lack of proper controls in the maintenance of booking-cum-output slips

Booking-cum-output slip is a vital document, since incentive as well as overtime wages

are being paid to the departmental labour solely on the basis of particulars recorded in the
booking-cum-output slip. Therefore, it is essential to accurately record all the particulars
required to be mentioned in the booking-cum-output slip for correct computation of the
incentive and overtime wages. However, the following serious deficiencies were noticed
in booking-cum-output slips in respect of selected FSDs.

3.5.1 Shed and stack number not being mentioned on the output slips

As per rule, the layout of the stacks along with the stack number is to be mentioned on
the booking-cum-output slips. However, it was observed that out of 2,212 output slips
selected for review in respect of New Guwahati depot, no stack number was mentioned in
147 output slips. Similarly, no stack number/layout was mentioned in any of the output
slips of FSD, Chinsurah (427 output slips) and FSD Srirampur (476 output slips) under

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West Bengal region. In respect of four FSDs for a selected month under Haryana region,
it was observed that stack number was not mentioned in 276 output slip out of 325 slips
while shed number was not mentioned in any of the output slips. In respect of output slips
selected for review in FSD Mayapuri under Delhi region and five selected depots in
Andhra Pradesh region, no stack number was mentioned in output slips. Moreover,
number of mismatch between the total number of bags recorded in output slip and records
maintained in District Office/Depot (Movement Division) were observed in Bihar and
West Bengal Region and Nagaland and Manipur Regions.

In absence of Stack number on the booking-cum-output slip the identity of the bags
cannot be ascertained and thus, the principle of First-In-First-Out cannot be followed
while issuing the stock, increasing the risk of older grain lying for a longer time in
storage leading to deterioration. Moreover, lead distance based incentive payment also
cannot be verified in such cases.

The Management stated (November 2016) that the details of food grains available in
FSD was maintained in stack ledger and shed ledger.

The Management reply is not acceptable as shed and stack number should be invariably
mentioned on the output slips, to capture documentation of work done to make accurate
payments.

3.5.2 Acceptance of unsigned output slips for processing of incentive

As per the recommendations of the Standing Committee on Food, Consumer Affairs and
Public Distribution (25 August 2004) for the prevention of proxy labour and letter issued
(March 2015) by the FCI, daily output slips were to be mandatorily signed by each labour
at the end of day and the same was also to be countersigned by the Sardar/ Mandal/shed
in-charge. However, it was observed from the test check of the output slips at selected
FSD31 that none of the output slips was signed by the sardar/mandal/labour.

In absence of relevant signatures the work done by labour remained uncertified. However
the slips were being used to process payment, increasing the risk of extra/undue payment
to labour.

The Management stated (November 2016) that signing of output slips by Sardar, Mandal
and Labours could not be implemented on account of resistance from the Union as well
as operational difficulties.

The Management has thus accepted that it could not take required administrative action
for prevention of proxy labour due to resistance by union a fact that indicates urgent need
for corrective action in this area.

31
Selected FSDs- West Bengal-5 , Bihar-1, Assam-5, Andhra Pradesh-5, Madhya Pradesh-5,
Haryana-5, Nagaland-1 and Delhi-5. Total-32.

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3.5.3 Internal audit of Booking-cum-output slips and related payments

As per instructions issued by FCI, audit of booking-cum-output slips and related

payments such as incentive, overtime wages etc. thereof was to be conducted every three
months. The objective of the direction was to find out irregularities/malpractices in the
payment of incentives and overtime wages. However, it was observed that no such
separate audits were conducted to ensure that there were no irregularities/malpractices in
the payment of incentives and overtime wages.

The Management stated (November 2016) that there was full-fledged internal audit and
physical verification section in FCI which conducts audit of all the operations of FCI
including the booking slips of labour and other related documents on regular basis.

The reply is not tenable as FCI could not provide any evidence to substantiate the above
observations. Moreover, during audit of field offices, the Management could not furnish
any audit report of output slips.

3.5.4 Opening balance of bags not mentioned on output slips:

Opening balance of bags and layout of the stack should be invariably mentioned on the
output slips in case the depot intends to accommodate further receipt in the existing stack,
so as to ensure whether height of stack as mentioned on the booking-cum-output slip was
correct. However, test check of output slips in the selected FSDs revealed that the
opening balance of bags and layout of the stacks was not mentioned.

As the stack details were not mentioned on the output slip it creates a risk of labours
adding bags to an already existing stack (below 24 layers) rather than creating a new
stack for storage of freshly arrived bags, a practice which entitles them to higher height
incentive.

The Management stated (November 2016) that day to day building up of a particular
stack together with opening balance as well as closing balance of a particular stack was
maintained in the stack ledger in the particular shed.

The reply is not acceptable as FCI has not provided any documentary evidence to
substantiate its reply.

3.5.5 Mandatory details about ancillary labour not being mentioned on output
slips

As per recommendations of the Standing Committee on Food, Consumer Affairs and

Public Distribution (25 August 2004) and letter issued (March 2015) by the FCI, absence
and presence of ancillary labour was to be mandatorily marked in booking-cum-output
slips. However, it was observed that attendance of ancillary labour was not recorded on
any of the output slips. In absence of marking for attendance in the output slips the
physical presence of the ancillary labour could not be verified and there was no evidence
to verify whether they actually worked on those days in the respective depots.

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The Management stated (November 2016) that physical presence of the ancillary labour
in the depots was being ensured by the Manager (Depot/Shed In-charges) by way of their
attendance in the morning and regular checks during the working hours.

The reply is not acceptable as FCI failed to provide any documentary evidence to
substantiate its reply, and the audit observation is based on FCI’s records.

3.5.6 Physical proof of attendance not being maintained

As per the recommendations of the Standing Committee on Food, Consumer Affairs and
Public Distribution (25 August 2004) departmental labour should give attendance by
putting signature or thumb impression in the attendance register. However, it was
observed that signatures/thumb impressions of the labour were not obtained, as required.
Moreover, it was also noticed that out of 325 output slips reviewed under Haryana region,
only in 158 booking-cum-output slips time had been found recorded. Further the
mandatory gang output records and consolidated figures of output were also not being
mentioned on the output slips. In absence of recording of time on output slips, the
correctness of time based incentive/OT payments could not be vouched safe in audit.

The Management stated (November 2016) that attendance of labourers were being
ensured by the concerned depot in-charges by way of their entries in the attendance
registers.

The reply is not acceptable as FCI failed to provide any documentary evidence to
substantiate its reply. Moreover, records clearly indicated a position which is contrary to
FCI’s reply.

As is evident from the above observations it is clear that there were major lapses in
maintaining the mandatory details on the output slips such as shed and stack number,
signature of the labours, details of labour, opening balance of bags, etc. These
deficiencies have significant impact on overall expenditure related to incentive, OTA, etc.
on the handling operations as the output slip is the only original record of the quantum of
work performed by the labourers. As the output slips form the very basis on which the
payment to labour is calculated, the deficiencies raise a serious doubt on the correctness
of the incentive/OTA payment made to the labour.

3.6 Conclusion

The labour management practices in FCI depots were found to be deficient with poor
administrative controls resulting in payment of idle wages, inadmissible incentive
payments in violation of rules. FCI has not been able to tackle the problem of proxy
labours in its depots. Moreover, FCI paid huge inadmissible incentives to departmental
labour in violation of CPF Act, Gratuity Act and Judgment/directives of the Courts.
Further, deficient controls in preparation of primary records related to work done by
labour created an unacceptable risk of excess overtime/incentive payment.

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Report No. 18 of 2017

3.7 Recommendations
We recommend,
(i) Pooling of departmental labour in fewer FSDs and conduct handling operation of
the vacated FSDs through contract labour.
(ii) Incentive norm and methodology followed for working out incentive and other
statutory dues e.g. CPF, Gratuity should be compliant with extant acts/rules and
judicial directives/judgments.
(iii) Action for elimination of proxy labour by:
a) Ensuring proper documentation of prescribed details in the Booking cum
Output slips.
b) Expediting installation of Biometric Attendance System and CCTV
installations.
c) Incorporating automated red flag indicators in Financial Accounting Package
for suspected abnormally high claims towards incentives and OTA.

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Chapter-IV
Implementation of Private Entrepreneur Guarantee
Scheme for Construction of Godowns in Punjab

4.1 Introduction

GoI introduced the Private Entrepreneur Guarantee (PEG) scheme for augmenting the
food storage capacity through private participation in the XI five year plan (2007-12).
The scheme was finalised in consultation with Central Warehousing Corporation (CWC)
and the State Warehousing Corporations (SWCs). The storage capacity envisaged to be
created by private participation was to be hired by FCI with guarantee ranging for period
of seven and ten years, through CWC/SWCs at the rates finalized by High Level
Committee (HLC) through a tendering process by nodal agency32.

A capacity of 49.99 Lakh Metric Tonne (LMT) was to be constructed in Punjab region
under the PEG scheme. PUNGRAIN33 was nominated as nodal agency by the State
Government for creation of storage capacity under the scheme through Private
Entrepreneur (PEs). The godowns under the scheme were to be constructed within a
period of one to two years34 after finalisation of agreement for construction of respective
godowns.

The audit was conducted with a view to assess effectiveness of the scheme and whether
the scheme was implemented as per applicable provisions.

Audit covered four selected districts of FCI, i.e. Faridkot, Sangrur, Moga and Kapurthala,
which constituted 17.11 LMT (39 per cent) of the total 43.49 LMT capacity constructed
in Punjab as on 31 March 2016. Audit was conducted from 18 April 2016 to 15 July 2016
at Regional Office FCI, Punjab and selected four District Offices covering the period of
five years from 2011-12 to 2015-16. A total of 26 out of 77 godowns (34 per cent) in
selected districts were covered in audit.

Audit findings

4.2 Achievement of Objectives

4.2.1 Delay of five to seven years in augmentation of storage capacity

As against the approved capacity of 49.99 LMT, a capacity of only 45.29 LMT
(192 godowns) was sanctioned and awarded for construction of godowns in Punjab
during the period 2009-10 to 2015-16 as detailed in the following Table 4.1:

32
Implementing Agency to get godowns constructed from private entrepreneurs.
33
Punjab State Grains Procurement Corporation Limited.
34
One year in case of godown without railway sidings and two years for godowns with railway sidings.

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Table 4.1: Awarded capacity for construction of godowns during 2009-10 to 2015-16
under PEG Scheme
Awarded Capacity
Year No. of godowns
(in LMT)
2009-10 0.56 4
2010-11 0.94 6
2011-12 40.26 165
2012-13 0 0
2013-14 1.26 7
2014-15 2.27 10
2015-16 0 0
Total 45.29 192

As depicted in the Table 4.1, the bulk of contracts for capacity creation were awarded in
2011-12, after a gap of three years from inception of the scheme.

Capacity of 43.49 LMT (185 godowns) had been taken over till 31 March 2016. The
remaining capacity 1.80 LMT (seven godowns) was in various stages viz. under
construction, completed and yet to be taken over (31 March 2016). The storage capacity
constructed and taken over during 2010-11 to 2015-16 is depicted in the Chart 4.1:

Chart 4.1: Storage capacity constructed and taken over

Capacity taken over (in LMT)

18.79 20.37
20

15

10

5
1.49 1.94 0.90
0
2010-11 and 2011-12
2011-12 2012-13 2013-14 2014-15 2015-16

It may be seen that the pace of implementation of scheme was negligible in XI plan and it
improved during 2012-13 and 2013-14, resulting in godowns being taken over after a
delay of two to seven years since the introduction of the scheme. The delay in
construction of godowns under the scheme was primarily attributable to delays in award
of contract for construction of godowns to PEs. Audit observed that the reasons for delay
in award of contracts were frequent changes regarding storage capacity required, changes
in guarantee period first from five to seven years and then to ten years due to poor PE
response and delay in identification of district-wise storage needs. These factors led to
delays in implementation ranging from five to seven years.

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4.2.2 Continued storage of central pool wheat stock at Covered and Plinth
(CAP)35/Kacha Plinth due to delays in storage capacity creation

The PEG Scheme 2008 was launched to enhance covered storage capacities as the
CAP/Kacha storage is prone to damage and deterioration of stock and is not an optimum
storage method. However, as on 31 March 2016 in Punjab, 53.56 LMT of wheat stock
was lying in CAP/Kacha Plinth/Mandi with SGAs/FCI and 4.72 LMT of wheat valuing
` 700.30 crore got deteriorated which was declared as non-issuable to TPDS (March
2016) as it was stored in open areas.
Delays in implementation of the PEG scheme resulted in huge stock of wheat being kept
in CAP/Kacha plinth by State Agencies/FCI. Such stock increased from 103.36 LMT in
2011-12 to 132.68 LMT in 2012-13; it was only from 2013-14 onwards that it started
decreasing after taking over of the godowns under the scheme. The total covered storage
capacity increased from 73.84 LMT (2011-12) to 102.29 LMT (2015-16). The FCI hired
storage capacity was at a peak at 52.48 LMT in 2012-13 which decreased in 2015-16 to
39.26 LMT due to dehiring of existing godowns by FCI.
Audit noticed in the two selected districts at Sangrur and Faridkot that capacity of only
12.94 LMT was taken over under PEG Scheme even though the central pool wheat stock
with FCI/State Agencies lying in open/kacha plinth was much higher at 14.40 LMT
valuing ` 2,413.04 crore36 at the end of RMS (Rabi Marketing Season) 2015 (30 June
2015). Moreover, despite huge quantities of wheat lying unprotected in CAP/kacha plinth
a capacity of six LMT was dehired by FCI during the period September 2012 to March
2016 in these districts. Thus, in both these districts, a significant quantity was lying in
CAP/kacha plinths, exposed to the vagaries of weather.
Audit found that while on one hand FCI was taking over the storage capacity under PEG
scheme but at the same time it de-hired its existing hired capacity of PSWC37 even
though large quantity of central pool wheat stock was being stacked in CAP/Kacha plinth
rendering it vulnerable to deterioration due to conditions such as rains, rodent, birds etc.

4.3 Implementation of Scheme

4.3.1 Award of contracts to ineligible private entrepreneurs

Clause 17 of PEG Scheme 2008 provided clear specifications for construction of
godowns and these specifications were to be part of tender document. The clause K of
Schedule I of Model Tender Form (MTF) for godowns hired under 10 year guarantee
scheme prescribed the requirement of land for construction of conventional type storage
godown as:
a) First 5,000 MT Capacity = 2.0 acres;
b) Further 1.7 acres additional land will be required for every increase of 5,000
MT capacity.

35
Covered and Plinth refers to the outdoor stacks of bagged grain, which is covered with some
waterproof material.
36
Calculated on the basis of acquisition cost of wheat (` 16,757.20 per MT) in the Punjab for the year
2014-15.
37
Punjab State Warehousing Corporation.

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Audit noticed in four selected districts that out of capacity of 17.11 LMT constructed
under PEG Scheme, 1.35 LMT (7 godowns) hired under seven and ten years guarantee
scheme were constructed by PEs on plots which were short of area ranging between 0.17
acre to 0.83 acre than the specified area. Construction of godowns on undersized plot of
land is a major deviation which not only affects the operational activities and quality of
storage of food grains but is also in violation of the minimum laid down requirement of
land, which was a prerequisite for qualifying in technical evaluation of bids. Moreover,
these cases were not even put up to the HLC by FCI for appropriate penal action for
deviating from the conditions of MTF. As these bidders did not fulfil the prerequisite
conditions laid down in MTF, the award of contracts for construction of these godowns to
ineligible bidders was irregular. As the FCI paid an amount of ` 21.04 crore as rent to
these PEs during the period 2012-13 to 2015-16 undue benefit was passed on to the PEs
who were ab initio ineligible for the award of contract.

4.3.2 Construction of godown in contravention of conditions laid down in PEG

Scheme and MTF

Clause 11.1 of PEG Scheme 2008 and clause 23 of MTF provided that all godowns of
25,000 MTs or above capacity will preferably be Railway siding godowns. Audit noticed
that 18 godowns of more than 25,000 MT each (with an aggregate capacity of 10.68
LMT) were taken over even though they were not constructed at railway sidings.
Takeover of godowns without railway siding resulted in two additional labour operations
viz. unloading and stacking in godown and further destacking and loading into trucks for
onwards movement towards railhead. Hiring of godowns (above 25,000 MT) at sites
without railway siding would cause recurring financial burden on FCI due to additional
loading and unloading operation till conclusion of the contract. The financial implication
of extra handling cost was ` 9.77 crore during 2012-13 to 2015-16.

4.3.3 Extra expenditure due to incorrect measurement of distance of godowns

from railheads

In terms of PEG Scheme, PEs were to specify the distance of the godown from the
railhead which constituted an important factor for evaluating the financial bid and award
of contract by HLC. As per records, the godowns were taken over by FCI after inspection
by a committee of officers of FCI. However, it was noticed in Audit that in 74 per cent
cases the actual distance of the godowns from the railhead was different from what was
specified by PEs in the bid documents. Out of 154 godowns taken over under PEG
scheme, excess distance ranged from + 0.1 km to +7.1 km in respect of 114 godowns.
The committee which performed the physical inspection before taking over the godowns
did not diligently measure the actual distance. Due to wrong measurement of distance by
PUNGRAIN and FCI at the initial stage, FCI had to pay more for the transportation for
the excess distance and incurred excess expenditure of ` 8.36 crore38 as given in the
following Table 4.2:

38
Calculated at the rate of seven paisa per quintal per km, as per normalizing factor stipulated in the
MTF.

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Table 4.2: Statement showing payment of transportation for the excess distance
(` in crore)
Name of scheme Total Godown having Range of distance Excess payment
godowns distance variation variance (km)39 due to distance
variation
1 2 3 4 5
10 years guarantee 97 69 0.1 to 7.1 5.26
7 years guarantee 57 45 0.5 to 3.9 3.10
Total 154 114 0.1 to 7.1 8.36

Later (October 2015/January 2016) the variation in distance from godown to railhead was
reassessed by the Regional office committee and financial impact due to change in the
distance was worked out in respect of those godowns where distance was beyond eight
km and deduction in rent was imposed for that part of distance. Though recovery of
` three crore in respect of 46 godowns (which were beyond eight km) was imposed for
the period 2012-13 to 2015-16, but no recovery was imposed in respect of those cases
where other discrepancies were noted and the overall distance was within eight km. The
remaining amount of ` 5.36 crore was still recoverable from the PEs.

4.3.4 Deficient clause for payment of Service Tax

As per Modal Tender Form (MTF) for inviting tender under PEG (Private Entrepreneurs
Guarantee) scheme, the rate for storage charges/rent was inclusive of the element of
service tax. However, the MTF did not specify either the procedure for ensuring payment
of service tax by PEs to the authorities concerned or requirement of production of
documentary evidence to FCI. Audit further noticed that the agreement executed between
FCI and PUNGRAIN, did not include the clause that rent was inclusive of service tax.

During scrutiny of records in three district offices of Faridkot, Moga and Sangrur it was
noticed that capacity of 2,63,900 MT under the seven year guarantee scheme was taken
over by FCI through PUNGRAIN. Godown rent ranging from ` 124.17 lakh per month
to ` 127.71 lakh per month (inclusive of service tax) was paid to PUNGRAIN during the
period August 2012 to March 2016. However, the godown rent was released to
PUNGRAIN without obtaining any supporting documents for payment of service tax of
` six crore by the PEs to the concerned taxation authority.

Regional Office, FCI, Punjab stated (October 2016) that the rent was paid to private
investors by FCI through PUNGRAIN inclusive of service tax and it was for
PUNGRAIN to ensure that such deposit was made by the private entrepreneur to the
concerned tax authorities. The Management also referred the issue of service tax to
PUNGRAIN (July 2016) to ensure that service tax obligation was met by the
entrepreneur. Reply/action taken by PUNGRAIN was awaited (December 2016).

Not insisting on proof of payment for service tax before release of full payment was an
obvious control weakness.

39
Calculations based on actual difference in cases of each godown.

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4.3.5 Avoidable payment of supervision charges to PUNGRAIN in contravention

of scheme
According to terms of PEG scheme, godowns hired by PUNGRAIN for FCI from PEs
were of two kind viz. lease only and lease with services. There were three components of
charges payables under the scheme as under:
Component A – Rental for godowns;
Component B – Preservation, Maintenance and Security (PMS); and
Component C –Supervision Charges.
For Lease with Services godowns the charges for component ‘A’ and ‘B’ were to be paid
via PUNGRAIN to the PEs whereas the supervision charges were retained by
PUNGRAIN. For the Lease only godowns, only component ‘A’ was payable through
PUNGRAIN to PEs while component ‘B’ and ‘C’ were retained by PUNGRAIN. While
the PMS charges were fixed in October 2010 at the rate of ` 1.60 per quintal per month,
the supervision charges were to be calculated at the rate of 15 per cent of the amount of
rent being paid to the PEs.
Audit observed that FCI paid supervision charges to PUNGRAIN at 15 per cent of the
composite rate (Rent plus PMS). This was apparently based on the decision of the BOD
in January 2010. However, this decision of BOD was contradictory to the extant
provision contained in the scheme approved by GoI whereby 15 per cent was to be
calculated only on the rent amount. No reasons for such deviation were found on records.
Audit observed in selected four DOs at Faridkot, Kapurthala, Moga and Sangrur that for
6.12 LMT capacity on Lease and Services basis under PEG Scheme, FCI released
payment to PUNGRAIN on account of supervision charges based on incorrect
calculations resulting in extra expenditure to the tune of ` 3.30 crore.

4.3.6 Non-exclusion of service tax from godown rent for payment of supervision
charges
The MTF for inviting tender under PEG scheme for construction of godown for FCI
under seven years guarantee scheme stipulated that rate for storage charges/rent will be
inclusive of the element of service tax in financial bid. Further, clause 1 of agreement of
guarantee between FCI and PUNGRAIN stipulated that FCI will make such payment of
storage charges to PUNGRAIN on the basis of payment made by them to PEs for renting
of godowns and expenses on food grains, preservation, security (pre-determined by FCI)
along with 15 per cent supervision charges on godown rent. Clause 5.4 of agreement of
guarantee between FCI and PUNGRAIN also stipulated that all the terms and conditions
laid down in the scheme for construction of godown for FCI-Storage requirement through
PEs shall be part of this guarantee.
Audit observed that the rate quoted by the PEs were inclusive of service tax.
Accordingly, the supervision charges at the rate of 15 per cent were payable to
PUNGRAIN which were to be worked out by reducing the element of service tax from
the godown rent.

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However, it was noticed in audit that three district offices40of FCI paid supervision
charges to PUNGRAIN at the rate of 15 per cent of godown rent without reducing the
service tax element. An inadmissible payment of ` 90.06 lakh on account of supervision
charges had been made to PUNGRAIN in respect of 21 godowns in Faridkot, Moga and
Sangrur District Offices during August 2012 to March 2016.

4.4 Operational Issues

4.4.1 Avoidable expenditure on storage charges and carry over charges

FCI as well as State Government Agencies (SGAs) procure wheat from mandis for
Central Pool. As per the standing instructions issued by the GoI, the SGAs are required to
deliver wheat to central pool immediately after its procurement unless FCI is unable to
accept it for reasons which are to be conveyed in writing. Carry over charges (storage
charges and interest) beyond 30 June each year shall be payable to SGAs only on that
quantity which FCI refuses to accept before 30 June each year.
Audit observed in four selected DOs that 714740 MT of wheat was short delivered by
SGAs up to the cut off date of 30 June during the respective wheat procurement seasons
2013-14 to 2015-16.
Audit observed that due to shortfall in direct delivery of wheat, capacity of owned/hired
godowns remained unutilised from July to October (up to next procurement season).
However rent was paid for such godowns and FCI incurred storage charges of ` 14.29
crore (at the rate ` 67.60 per MT per month on hired space) for four months in respect of
hired capacity which remained unutilized due to short delivery of wheat by SGAs to FCI.
Audit also observed that though the quantity of 7.15 LMT was short delivered by SGAs,
FCI still paid avoidable storage and interest charges to the tune of ` 54.33 crore in respect
of this stock beyond 30 June which was kept with the SGAs.

4.4.2 Non recovery of abnormal storage loss at economic cost

As per para 9.2 of PEG Scheme, the responsibility of maintenance of godowns would lie
with the CWC/SWC to whom supervision charges will be payable. Clause 4 of the
Agreement between PUNGRAIN and FCI in respect of godowns hired under PEG
scheme provided that if the storage loss is beyond the permissible limit as per FCI norms,
PUNGRAIN shall be responsible for the same and recoveries for such unjustified losses
shall be affected from it by FCI. In addition, it was also stipulated that PUNGRAIN shall
be fully responsible for any loss caused to the stock of FCI while in its custody on
account of pilferage, theft or misappropriation for which recoveries will be made from it
at economic costs41 of the relevant year in which such misappropriation/theft took place.
Test check of 153 cases of abnormal storage loss42of FCI Punjab Region, revealed
storage loss of 1,824.84 MT rice valuing ` 45.79 crore in PEG godowns during 2013-14
to 2015-16, out of which abnormal/unjustified storage losses of 538.66 MTs (29.52 per

40
Faridkot, Moga and Sangrur.
41
Cost of grain plus Procurement Incidentals = Acquisition Cost; and Acquisition cost plus
Distribution Cost =Economic Cost.
42
Loss in weight beyond the prescribed norms of storage loss fixed by Government of India.

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Report No. 18 of 2017

cent) of rice worth ` 16.96 crore were observed. However, recovery of only ` 13.55 crore
at standard rate43on account of abnormal storage loss in rice from defaulting agencies was
made resulting in short recovery of abnormal storage loss amounting to ` 3.41 crore.
Audit noticed that FCI made recovery on the basis of standard cost as against the required
economic cost. As the standard rate only included procurement cost plus incidental
expenses while economic cost also included other important elements such as
administrative overheads, storage charges, handling charges etc., the amount of abnormal
shortage was short recovered to the extent of ` 3.41 crore due to incorrect application of
standard rate of recovery instead of economic rate.

4.4.3 Improper planning in taking over of godown

Clause 31 of the PEG scheme provided that FCI will have freedom to choose a date of
taking over the godown within six months of the completion of the godown and the
guarantee period will start from the date of taking over the godown. Audit noticed that
District Office, FCI, Ferozepur took over the capacity of 2.91 LMT on guarantee basis
under PEG Scheme at the end/after close of RMS 2012-13. As the PEG godowns were
not being utilized on account of takeover of godown at the end of the season, FCI shifted
1,79,715 MT of stock from SGAs godown to PEG godowns to utilize the PEG godowns
and DO, FCI Ferozepur incurred an expenditure of ` 1.65 crore towards transportation of
food grains. This was completely unnecessary as the grains were stored in SGAs godown
for which FCI was already paying rental.
Similarly, SSB Warehousing Complex godown of 36,307 MT capacity was taken over by
DO, FCI, Kapurthala on guarantee basis on 25 June 2015 i.e. almost at the end of RMS
2015-16. Utilization of godown from July 2015 to December 2015 remained very low
between 13 per cent and 46 per cent. During this period FCI paid ` 85.62 lakh towards
rent, PMS and supervision charges. Audit observed that as per Clause 31 of PEG
Scheme, takeover of godown could have been postponed till the end of December 2015.
Thus taking over of godown at the end of RMS 2015-16 resulted in suboptimal utilization
of godown and avoidable expenditure of ` 85.62 lakh towards rent, PMS and supervision
charges.
RO, FCI, Punjab stated (October 2016) that as per Clause 31 of the MTF, PUNGRAIN,
after satisfying itself that the godown had been completed as per specification and terms
and conditions of the contract, will take over the godown within one month of completion
of the godown in all respects and the guarantee period will start from the date of taking
over of the godown. Since, the work of construction of this godown was awarded on
2 June 2014 and the godown was completed on 25 May 2015, therefore the godown was
taken over within one month from the date of its completion as per the provisions of
MTF.
Reply of the Management is not acceptable, as Clause 31 of PEG Scheme clearly
stipulates that FCI will have freedom to choose the date of taking over of godown within
six months of completion of godown, a provision which was not availed which led to

43
Average Acquisition Cost.

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excess expenditure of ` 85.62 lakh towards rent, PMS and supervision charges from
July 2015 to December 2015.

4.4.4 Non recovery for short supply of wooden crates in godowns

Preservation arrangement in godowns include stacking of stock on wooden crates, as
wooden crates keep the stock five inches high from the floor and provide constant
circulation of air under the bags. Further, in case of any leakage in the godown, it protects
the lower layer of the stacks from damage which otherwise could become unfit for human
consumption. As per specification laid down in MTF, 2,880 wooden crates were required
in a godown having capacity of 10,000 MT.
Audit noticed that a godown constructed by M/s MK Stores, Malerkotla having capacity
of 42,650 MTs in Sangrur District was taken over on 29 January 2013. As per
specification laid down in MTF, 12,284 wooden crates were to be provided by the
PUNGRAIN against which only 2,300 wooden crates were provided thereby resulting in
short supply of 9,984 wooden crates. Similarly, capacity of 2.41 LMT in 12 godowns was
taken over in DO Faridkot under PEG Scheme and the godowns were taken over with
shortfall of wooden crates required under the provisions of MTF. Based on the rate of
recovery of ` 0.37 per quintal per month approved by BOD in case of non-provision of
wooden crates, the amount on account of short supply of wooden crates for the period
February 2013 to May 2016 worked out to ` 55.48 lakh which needed to be recovered
from PUNGRAIN.
The observations were issued to the Ministry in September 2016; reply was awaited
(February 2017).

4.5 Conclusion
The implementation of the PEG scheme was negligible in the initial years and even after
seven years, full capacity had not been taken over. The operation of the scheme also
suffered from various lacunae such as payment of service tax to private parties without
ensuring its remittance to Government, variation in distance from godown to railheads,
award of contracts to ineligible bidders and improper utilisation of owned/hired storage
space.

4.6 Recommendations
We recommend that,
(i) The remaining storage capacity may be expeditiously taken over while complying
with the provisions, specially related to plot size of godown and distance from
railhead.
(ii) FCI should implement appropriate controls to ensure that all statutory taxes/dues
are paid by the PEs before payment is released for those services.
(iii) The storage requirement needs to be reviewed from time to time to have a realistic
assessment based on stock position lying in CAP/Open and Kacha plinths.
(iv) FCI should recover the excess payment made under this scheme from
PUNGRAIN/ PEs.

Compliance Audit Report on Food Corporation of India 55

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Chapter-V
Compliance Audit Paragraphs

Audit is conducted in accordance with the principles and practices enunciated in the
auditing standards issued by the C&AG. The audit process starts with the assessment of
risk of the Ministry/Department as a whole and each unit based on expenditure incurred,
criticality/complexity of activities, level of delegated financial powers, assessment of
internal controls and concerns of stakeholders. Previous audit findings are also
considered in this exercise. Based on this risk assessment, the frequency and extent of
audit are decided. An annual audit plan is formulated to conduct audit on the basis of
such risk assessment.

After completion of audit of each unit, Inspection Reports containing audit findings are
issued to the head of the unit. The units are requested to furnish replies to the audit
findings within one month of receipt of the Inspection Report. Whenever replies are
received, audit findings are either settled or further action for compliance is advised. The
important audit observations arising out of these Inspection Reports are issued separately
as draft paras to the heads of the Administrative Ministries/ Departments for their
comments and processed for inclusion in the Audit Reports.

FCI has 216 auditable units out of which 81 units were planned and audited during the
year 2015-16. The Management recovered an amount of ` 32.18 crore (107.82 per cent)
during 2015-16 at the instance of Audit as detailed below:

Table 5.1: Recoveries by FCI at the instance of Audit

Objection in brief and period to which it pertains ` in lakh)
Status of Recovery (`
Pointed out by Amount
Audit Recovered
Excess payment of wages on account of non-adoption of 50.24 38.36
attendance allowance system.
Irregular payment of Incentive due to payment of 70.30 11.74
Incentive to the junior departmental labour based on the
basic pay of the senior departmental labour.
Non-recovery of cost of food grains due to down 97.26 90.82
gradation of stock.
Non recovery of weighment charges. 22.98 20.18
Excess payment of transportation charges on custom 14.88 1.24
milled rice to State agencies.
Non-recovery of depreciated cost of gunnies from the rice 5.68 1.10
millers.
Falsification of records with unrealistic stack plan 1.30 1.30
resulted in excess payment of earnings to Direct Payment
System labour at Doharia.

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Objection in brief and period to which it pertains ` in lakh)

Status of Recovery (`
Pointed out by Amount
Audit Recovered
Irregular payment of interest free advance to contractor. 1.72 1.74
Excess payment on transportation of rice. 3.52 3.52
Excess payment to State Government and Agencies for 103.00 103.00
cost of gunny in Wheat of RMS 2015-16.
Loss due to allowance of new rate of gunny of KMS 12.36 12.36
2014-15 for gunny used pertaining to old season.
Irregular payment of VAT on gunny depreciation. 6.86 6.86
Excess payment to State Government and agencies on 313.00 296.00
account of cost of gunny and gunny depreciation in
CMR.
Non recovery of stacking and weighment charges on 1.23 1.23
replacement of BRL rice due to delay in replacement of
substandard rice by State Agencies/Millers.
Excess payment to State Agencies on account of storage 76.00 180.27
gains on wheat procured under central pool during RMS
2007-09 to 2009-10.
Excess payment to State Agencies on account of payment 9.42 15.85
of inadmissible incidentals on direct delivery of wheat.
Excess payment of storage charges paid to Punjab State 806.26 806.26
Warehousing Corporation.
Excess payment due to non-recovery on account of once 266.08 266.08
used gunny bags used in procurement of wheat by State
agencies during RMS 2012-13 to 2014-15.
Excess payment on CMR delivered under relaxed 242.08 251.77
specifications by State Agencies of KMS 2005-06 and
2006-07.
Loss due to arbitrariness in making recoveries in respect 67.00 419.16
of short direct delivery of wheat RMS 2010-11.
Non recovery of ` 241.90 lakh due to revision of final 241.90 266.11
rates of RMS 2007-08.
Short recovery due to wrong payment of storage charges 381.41 381.41
on revision of final rates of RMS 2005-06 and 2006-07.
Excess payment due to non-recovery of value cut on 9.24 10.81
relaxation in specification on CMR KMS 2006-07 and
2008-09.
Excess payment towards handling charges to M/s 181.25 31.15
Krishnapatnam Port Company Ltd. on export of wheat.
The objection pertains to May and June 2013.
Total 2,984.97 3,218.32

Significant compliance audit observations are as follows:

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5.1 Fraudulent payment of ` 71.75 crore to a Handling Contractor

Undue payment of ` 23.02 crore was made to a handling contractor for fictitious
work during 2014-15 due to non-adherence to the provisions of standing
instructions/manual regarding payment to handling contractors. Internal Audit
and Vigilance teams deputed subsequently reported fraudulent payment totaling
` 71.75 crore to the same contractor and loss of interest of ` 13.39 crore on these
fraudulent payments.

As per guidelines and manual of FCI the following controls/checks are required to
be adhered to:
• Budget demand in any individual head more than or equal to 120 per cent of
last three years average actual expenditure in that head as per accounts,
requires justification;
• Expenditure would be monitored by controlling offices through monthly as
well as quarterly returns;
• Contracts awarded would have been audited by the Zonal audit team within
three months of award of contract;
• A Monthly Stock Account (MSA) Statement would be prepared by each Food
Storage Depots (FSDs) (opening stock, closing stock, receipt and issue in
terms of number of bags and quantity) for every operation done in a FSD
under a handling contract;
• Contractor would be required to submit work slips containing date of
operation, name of godown/shed, particulars of operation performed and
number of bags/quantity handled information in support of the bills for work
done;
• Payment should be authorized after cross checking the accuracy of work slips
issued; and
• Area Manager should organize occasional surprise checks at various
operational points for finding out whether fictitious work slips have been
issued.

Audit found that at District Office (DO) Banderdewa in Arunachal Pradesh non-
observance of the aforesaid instructions and lack of monitoring led to fraudulent
payment to a contractor. The details are as under:
• DO Banderdewa, has operational activities in 1244 FSDs having total capacity
of 23,200 MT. During the test check of records it was observed that for
handling food grains in 11 FSDs, eleven contracts (during December 2012 to

44
FSD Pasighat, Daporijo, Ziro, Kharsang, Deomali, Tezu, Roing, Anini, Seppa, Tawang,
Bhalukpong and Banderdewa.

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August 2015) were awarded to four45 contractors. The handling cost of DO

Banderdewa during the period from 2010-11 to 2012-13 was ` 1.75 crore,
` 3.85 crore and ` 4.65 crore for the respective years. However, Audit found
that the handling cost from 2013-14 showed exponential growth in 2014-15
and stood at ` 22.10 crore and ` 26.30 crore respectively, which were much
higher than the previous three years period (from 2010-11 to 2012-13). As,
this increase was not attributed to any increase in storage capacities of these
FSDs it necessitated further examination by Audit.
• During 2014-15, ` 25.69 crore was paid to four contractors for handling food
grains of 1,87,807 MT in respect of ten46 FSDs. Audit observed that out of this
` 25.69 crore, while three47 contractors were paid ` 1.26 crore for handling
88,541 MT food grains in four FSDs, one contractor namely M/s Sehee Donyi
Enterprise (M/s SDE) was paid a huge sum of ` 24.43 crore for handling
99,266 MT in six FSDs. The payment to M/s SDE comes to ` 2,461 per MT, as
compared to ` 142 per MT to the other contractors, which was without any
basis and was an indicator of fraud. Based on the differential rate of ` 2,319
per MT (` ` 2,461 per MT – ` 142 per MT) fraudulent excess payment of
approximately ` 23.02 crore48 was made to M/s SDE.
• Further examination of records (four available bills) of M/s SDE during the
period December 2014 and January 2015 revealed huge variations between
bags handled as per MSA and work slips certified by depot-in-charge as given
in the following Table 5.2:

Table 5.2: Variations between work slips issued and MSA for receipt and issue49
(Figures pertain to no. of bags)
Depots where Receipts Issues
M/s SDE was
As per work As per Variation As per work As per Variation
handling
slips MSA slips MSA
contractor
certified by certified by
the depot the depot
Incharge Incharge
(1) (2) (3) (4)=(2-3) (5) (6) (7)=(5-6)
Kharsang 2,25,425 0 2,25,425 1,37,255 17,172 1,20,083
Deomali 2,40,845 18,935 2,21,910 1,71,487 17,062 1,54,425
Roing 1,84,495 9,489 1,75,006 1,02,465 7,800 94,665
Tezu 2,66,995 17,384 2,49,611 2,07,686 25,042 1,82,644
Total 9,17,760 45,808 8,71,952 6,18,893 67,076 5,51,817

45
M/s Sehee Donyi Enterprise (six contracts), M/s B.B. Enterprise (three contracts), M/s Meena
Traders (one contract), and M/s PNP Enterprises (one contract).
46
Record of FSD, Bhalukpong was not made available to Audit despite multiple correspondences with
FCI.
47
M/s P.N.P. Enterprises, M/s Meena Traders and M/s B.B. Enterprises.
48
Excess payment: 99,266 MT x ` 2,319 per MT = ` 23.02 crore;
` 2461 per MT – ` 142 per MT = ` 2,319 per MT.
49
Work slips only for four depots were made available by the DO Banderdewa.

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From the Table 5.2, it can be seen that there was huge variation between
receipt/issue number of bags between the work slips issued and MSA. Audit also
found that 6,18,893 bags were depicted as issued in the bills submitted for claiming
handling charges which exceeded even the total annual allotment of 1,89,726 bags50
for the entire year 2014-15. These exorbitant bills were passed for payment, without
cross-checking and verification by DO resulting in undue payment to contractor for
fictitious work.
• Audit analysis also revealed that the records exhibited unrealistically high
utilisation of godowns at Deomali, Roing and Tezu ranging from 336 per cent to
915 per cent of godown capacity (only in 13 days) which was practically not
possible. Audit found that these bills were prepared by the contractor based on
the certification done by the depot-in-charge who had certified the exorbitant
quantity handled as correct without any cross checking.

• It was also observed that not only payments were made on fictitious bills but
majority of the payments were made as advance to M/s SDE for six handling
contracts. As there was no provision for interest free advances; these were
shown accounted as “handling expenditure” instead of as “advance to
contractor” thus concealing the nature of payment.

• Audit also found that, while submitting the revised budget for 2014-15 and
original budget for 2015-16 proposals for contract labour handling expenses,
DO Banderdewa depicted deflated figures of ` 1.02 crore and ` 1.22 crore for
2013-14 and 2014-15 in the budget head, even though the actual expenditure
incurred was much higher at ` 22.10 crore and ` 26.30 crore, respectively.
Moreover, the cash credit limit of DO Banderdewa was increased from ` 0.20
crore to ` 0.70 crore in a phased manner by Zonal Office without assessing the
actual requirement which inter alia facilitated DO officers in making high value
fraudulent payments. Further, monthly and quarterly expenditure statements
and records related to review of contracts by FCI were not found available.

These frauds by delinquent officials and M/s SDE could not be prevented at an early
stage as Headquarters/Zonal/Regional office of FCI failed to review regularly the
actual expenditure to budget proposals submitted by DO Banderdewa. Moreover,
implementation of internal controls like monitoring of monthly or quarterly
returns, MSA, review of contracts by FCI etc. were found lacking. Further, increase
in cash credit limit without assessing the actual requirement was unjustified, and
thus, controlling office’s failure to exercise regular checks before making payment
and relaxation in application of internal controls led to fraud of such a magnitude.

50
Excess bags issued in comparison to allotment 6,18,893 - 1,89,726 = 4,29,167.

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After fraudulent payment was pointed out by Audit in February 2016, FCI deputed
its internal audit team and ZO vigilance team. However, the FCI team was not able
to get access to all the documents/information due to missing voucher files and non-
maintenance of vital records/registers at DO and FSDs. These teams however, found
(May 2016) fraudulent payments totaling ` 71.75 crore (upto 2015-16) made to M/s
SDE (including ` 23.02 crore pointed out by Audit) and loss of interest of ` 13.39
crore on these payments resulting in loss of ` 85.14 crore to FCI. The Management
in its reply (August 2016) while confirming excess payment of ` 71.75 crore
inter-alia indicated about the suspension and initiation of disciplinary proceedings
against the Area Manager, Manager (Accounts), Manager (General) and two other
officials, reduction in Cash Credit limit, engagement of Chartered Accountants/Cost
and Management Accountants firms for physical verification and initiation of
investigation through CBI, Guwahati.

The Management, though, had initiated disciplinary action against the delinquent
officials of DO, Banderdewa, yet the recovery of loss of ` 85.14 crore is still pending
(February 2017).

The matter was reported to the Ministry in December 2016, reply was awaited
(February 2017).

5.2 Fraudulent payments of ` 52.62 lakh to Contractors

Fraudulent excess payment of ` 14.73 lakh and ` 37.89 lakh were made to the
transport contractors on account of payment on higher rate and for bills for
longer distance than actual for transportation of food grains.

As per prescribed procedure, each bill received in area office of FCI needs to be
scrutinized by an officer of the level of Assistant Manager (Depot). The bill is then
sent to the District Manager who cross checks it to ensure that the calculations of
each item of operation have been correctly shown in the bill. Thereafter, the bills are
passed for payment by certifying that the rates charged in the bill are reasonable,
legitimate and in accordance with the sanction. However, during audit of Area
Office Banderdewa, FCI, it was observed that the procedures were not complied
with leading to fraudulent excess payment of ` 52.62 lakh in the following cases:

(A) Area Office, Banderdewa, FCI appointed (October 2014) M/s Sehee Donyi
Enterprises (M/s SDE), Itanagar (Contractor) as Road Transport Contractor (RTC)
on spot quotation basis, to transport food grains /allied material etc. from the
Railhead (RH) Harmutty to Food Storage Depot (FSD), Pasighat at the rate of
` 14.78 per Metric Ton (MT) per kilometre (km). The appointment was purely on
temporary basis till RTC was appointed on ad hoc or regular basis.

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Later in December 2014, Regional Office, Itanagar invited tenders for appointment
of RTC on ad hoc basis. In this exercise, the existing contractor (M/s SDE) became
the successful bidder and was appointed (6 May 2015) as RTC on ad hoc basis for
the above mentioned route at the rate of ` 9.86 per MT per km for a period of six
months with right of extension for another three months.

Audit observed (December 2015) that earlier spot contract (temporary basis) was
not terminated before awarding the contract on ad hoc basis to the same contractor
(6 May 2015). Though, as per appointment letter the date of commencement of the
new (ad hoc) contract period was to be reckoned from the date of joining of the
Contractor, it was noticed that joining report of the Contractor was tampered with
at the Area Office by overwriting and changing the date of joining from 11 May
2015 to 11 June 2015. Moreover, the Contractor preferred his claim at higher rate
i.e. at ` 14.78 per MT per km for the work done between 16 May 2015 and 30 May
2015 and the Area Office also paid the bills at the earlier rate of ` 14.78 per MT per
km instead of restricting the payment at ` 9.86 per MT per km i.e. the rate for new
ad hoc contract. This resulted in excess payment of ` 14.73 lakh as a direct result of
tampering of the joining report date.

(B) In another instance, FCI appointed (October 2014/May 2015) M/s SDE and
M/s T. K. Agency for transportation of food grains /allied materials etc. from RH
Harmutty to FSD at Pasighat, Daporijo, Dhemaji and North Lakhimpur. As no
electronic weighbridge was available at that point of time at RH Harmutty,
contractors were allowed to transport the food grains from RH Harmutty to the
designated depots via weighbridge at FSD, Banderdewa. The distance from RH
Harmutty to FSD Banderdewa was nine km and the contractor had to undertake to
and fro journey of 18 km to weigh the food grains on a weighbridge at FSD
Banderdewa.

In order to reduce the transportation cost for extra distance, the Area Office, hired
(March 2015) a private electronic weighbridge near RH Harmutty for weighment
purpose. Hence, the extra journey of 18 km was not required to be performed by the
contractors for weighment of food grains after March 2015.

Audit scrutiny of transportation bills of M/s SDE and M/s T K Agency revealed that
though the contractors claimed transportation charges for actual distance/more
than actual distance in various bills from RH Harmutty to FSD at Pasighat (215
km), Daporijo (356 km), Dhemaji (92 km) and North Lakhimpur (27 km) for food
grains transported during March 2015 to October 2015, the Area Office while
passing the bills inexplicably increased the distance reckoned for the
payment/allowed the excess distance claimed by nine km over and above the actual
distance. This resulted in fraudulent excess payment amounting to ` 36.42 lakh to
M/s SDE and ` 1.47 lakh to M/s T. K. Agency.

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Both the above cases occurred as proper controls regarding checking the bills for
accuracy and compliance with rules were poor at Area Office Banderdewa.
Moreover, Audit observed that the very same officials who were involved in the
process of hiring of nearby weighbridge at RH Harmutty actually passed the bills by
increasing the distance as if the contractor had made trips to the weighbridge at
FSD Banderdewa. This act has clearly benefitted the contractor without any
justification.

On the basis of above mentioned audit findings, the matter was investigated
(March/April 2016) by a Committee formed by FCI, Zonal Office, Guwahati and it
found that the facts and figures mentioned in the audit findings were correct. The
Committee after investigation recommended for recovery of ` 51.15 lakh (` ` 14.73
lakh plus ` 36.42 lakh) from M/s SDE and ` 1.47 lakh from M/s T. K. Agency and
also recommended for stringent administrative action against Area Manager and
other officials, who were involved in the act with mala-fide intentions. However,
neither any recovery was made nor any administrative action was taken against the
officials involved.

The Management accepted (September 2016) the audit observations. However, the
amount was yet to be recovered.

The matter was reported to the Ministry in October 2016, reply was awaited
(February 2017).

5.3 Excess payment of ` 24.96 crore to Uttar Pradesh Government and its
Agencies

Excess Payment of ` 24.96 crore was made to the Uttar Pradesh Government and
its Agencies on account of cost of gunny and gunny depreciation for procurement
of paddy and delivery of rice during KMS 2014-15. FCI recovered ` 2.96 crore
after Audit pointed out the excess payment and recovery of the balance
` 22.00 crore was yet to be made.

The GoI, fixes the rates to be reimbursed by FCI to State Governments and its Agencies
for the Custom Milled Rice (CMR) delivered for each marketing season. During Kharif
Marketing Season (KMS) 2014-15 the rates for a gunny bag and gunny depreciation per
bag were ` 86.46 and ` 33.99 respectively.

On request of the Government of Uttar Pradesh, the GoI vide its letter dated 06 January
2015 permitted use of unutilized (leftover) gunny bags and High Density Polyethylene
(HDPE) / Polypropylene bags which were purchased by the State Government for Rabi
Marketing Season (RMS) 2012-13, KMS 2012-13 and RMS 2013-14 for procurement of
paddy and delivery of rice for KMS 2014-15.

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Audit observed in Regional Office, FCI Lucknow that the State Government did not
indent for supply of any gunny bag for KMS 2014-15, as sufficient unutilized gunny bags
of earlier crop years were available with it. The total procurement of rice for KMS 2014-
15 was done in unutilized gunny bags of earlier years for which the requisite permission
was also granted by the GoI. It was, however, noticed that the State Government and its
Agencies’ claims were paid by FCI at gunny cost and gunny depreciation at the rates
applicable for KMS 2014-15, even though the gunny bags in which Custom Milled Rice
(for KMS 2014-15) was delivered pertained to earlier years. This resulted in excess
payment to the extent of ` 24.96 crore. On being pointed out by Audit, recovery of only
` 2.96 crore was affected by Area Office, FCI Faizabad. However, recovery of
` 22.00 crore was yet to be made from State Government and its Agencies.

The matter was reported to the Ministry in October 2016; their reply was awaited
(February 2017).

5.4 Sale of wheat to bulk consumers below cost under open market sale scheme
in Punjab

FCI sold wheat to bulk consumers at a rate below cost under open market
sale scheme during 2013-14 leading to non-recovery of cost to the tune of
` 38.99 crore.

The GoI allocates wheat for tender sale through Food Corporation of India (FCI) to bulk
consumers and small private traders in domestic market under Open Market Sales
Scheme (OMSS) at predetermined prices. The Reserve price for sale of wheat under
OMSS is fixed by the Cabinet Committee of Economic Affairs (CCEA) after considering
the suggestions of the concerned Departments/ Ministries and on the basis of the draft
note submitted by the Ministry. FCI undertakes sale of wheat and rice under OMSS
strictly as per the allocation and guidelines prescribed by the GoI.

Based on the directions of the Ministry (August 2012), a High Level Committee of FCI,
communicated (September 2012) rates for tender sale to bulk consumers/private traders
from FCI godowns under OMSS in Punjab region. Further, the Ministry, allocated
(July 2013) 85 LMT of wheat for tender sale to bulk consumers and 10 LMT of wheat for
sale to small private traders from FCI godown in Punjab and Haryana for the period up to
March 2014. The wheat was sold at a reserve price at ` 1,500 per quintal.

The Ministry stated (November 2016) that reserve price of ` 1,500 per quintal was
arrived at after taking into account, inter alia, the following:
(i) The economic cost of wheat for 2013-14 of ` 2,010.22 per quintal was not
considered for fixing of reserve price on the ground that it would be inflationary.

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(ii) The MSP of wheat of ` 1,350 per quintal of RMS 2013-14 was not considered as it
would be too low.
(iii) Further, private players had bought wheat at the rate of ` 1,500 per quintal even
with bonus declared in Madhya Pradesh and Rajasthan.

Audit noticed that the fixation of reserve price for sale of wheat in open market was made
on the basis of market price prevailing in only two States i.e. Madhya Pradesh and
Rajasthan though the market price of wheat in the domestic market (September 2012)
was more than ` 1,500 per quintal in most of the States except some places at Uttar
Pradesh, Haryana and Bihar. Thus, not only was the sample size restricted to only two
States, the reasons for choosing these two particular States were not elaborated.

Audit further found that in response to Inter Ministerial consultation, the Department of
Expenditure had suggested to fix the reserve price of wheat for open market at MSP plus
statutory taxes; which was approximately ` 1,550 per quintal. Regarding the proposal of
fixing the reserve price on the basis of MSP plus statutory taxes, the records indicated
that there was no specific rejection / acceptance of the proposal. Incidentally the element
of statutory taxes was included in the reserve price in the previous two schemes for sale
of wheat in open market. However, it was only in 2013-14, that the reserve price was
fixed without including the State-wise statutory taxes; for such exclusion, no sound
justification was found on record.

Department of Expenditure had also suggested that in order to meet the objective of
containing inflationary conditions, the price may be fixed just below the market price and
proposed for a committee to be nominated to fix the reserve price on the basis of
prevailing market prices. However, the suggestion of nomination of a committee to fix
the reserve price of wheat for sale of wheat in open market was rejected by the Ministry
on the ground that there were substantial price variation within the State as well as across
different States.

Audit noticed that sample size to determine market price of wheat was restricted to the
market price prevailing in only two States. This decision is to be seen especially in light
of the fact that to counter the suggestion of Department of Expenditure, the Ministry in its
own internal note dated 20 September 2013 stated that there was substantial variation in
price of wheat between States and across different States. Thus, dependence of the
Ministry on data of only two States to fix Reserve price lacked justification. The Ministry
should have considered market price of at least the major wheat procuring States to arrive
at the reserve price.

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Thus, non-consideration of the Department of Expenditure’s suggestions by the Ministry

eventually led to non-recovery of cost (MSP plus Statutory taxes) incurred by FCI from
sale of wheat in open market to the extent of ` 38.99 crore51.

5.5 Excess payment of ` 25.01 crore of output Value Added Tax

Food Corporation of India could not adjust input Value Added Tax while
making payment of output Value Added Tax due to improper
collection/maintenance of input Value Added Tax documents and made an
avoidable payment of ` 25.01 crore. Non refund/adjustment of this avoidable
payment also led to consequential loss of interest amounting to ` 13.02 crore on
credit being availed by FCI.

Food Corporation of India (FCI) pays Value Added Tax (VAT) on purchase / sale of food
grains in Uttar Pradesh (UP) as per provisions of UP VAT Act, 2008. As per the
provisions of the Act, credit of the full amount of input tax will be allowed when the
purchased goods are resold. FCI had also issued instructions (July 2005) that the input tax
is to be adjusted against the output tax realized on sales made out of stocks purchased
within the State.

In UP, the formalities dealing with payment of VAT remained decentralized up to June
2011, i.e., there was separate Taxpayer Identification Number (TIN) for each District
Office (DO) of FCI. However, with effect from 1 July 2011, FCI decided to change this
system and switched over to centralized mode, which warranted the DOs of FCI in UP to
surrender their TIN and transfer the value of stock held by them to the TIN number of
Regional office (RO), Lucknow, UP. The transfer of value of stock was treated as sale,
thus, attracting the incidence of output VAT. This output VAT in respect of food stocks
of UP, however, was to be fully adjusted with the payment already made by FCI on
account of input VAT, with no further outgo on account of the former.

Scrutiny of records revealed that the food stock as on 30 June 2011 in respect of seven
DOs52 of UP was transferred to TIN of RO, Lucknow attracting an amount of
` 50.66 crore on account of output VAT. The input VAT against output VAT, however,
could only be claimed by FCI only to the extent of ` 25.65 crore due to improper/non

51
`467 per MT X 8.35 LMT=`3899.45 Lakh.
` 467 per MT=10 X (1550 per quintal - ` 1503.30 per quintal (average sales realization)).
52
Agra, Bulandshahar, Faizabad, Hapur, Moradabad, Saharanpur and Varanasi.

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Report No. 18 of 2017

maintenance of input VAT document53 containing details of the purchaser, description,

quantity and value of goods, amount of value added tax paid etc. Consequently, FCI had
to make an avoidable payment of ` 25.01 crore on account of output VAT as the whole
amount of input VAT could not be adjusted from output VAT.

While accepting the audit observations, the Management stated (January 2015) that short
availability of input VAT at the time of centralization was introduced due to i) Non-
consideration of opening Input Tax Credit (ITC) of ` 31.84 crore available at RO level at
the time of decentralization in 2008; ii) ITC utilized on sale of Ex-UP stock in some of the
DOs during decentralized period and iii) Non filing of proper VAT return due to non
availability of tax invoices in some of the DOs. To overcome the above issues, the
decision of recentralization of VAT mechanism at RO level was taken by FCI (1 July
2011) and remedial action is being taken to get disallowed ITC through filing revised
returns etc. to the concerned authorities.

The reply of the Management is not acceptable as transfer of value of the stock held by
the DOs at the time of centralization in July 2011 was treated as sale and attracted
incidence of output tax which should have been adjusted with the input tax on the value
of the same quantity of food grains at that point of time. Further, non-consideration of
opening ITC during decentralization in 2008 or utilization of ITC on sale of ex-UP stock
by DOs during decentralization has no bearing on non-adjustment of VAT at the time of
re-centralization in July 2011. The Management’s reply that proper VAT returns were not
filed due to non availability of tax invoices in some of the DOs indicates non-availability
of proper documentation which resulted in non-adjustment of output VAT of
` 25.01 crore against the input VAT.

Thus in the absence of proper maintenance of important VAT adjustment related

documents for claiming of the credit (benefits) of Input VAT, FCI not only made
an avoidable payment of ` 25.01 crore to the VAT authorities of Uttar Pradesh but also

suffered consequential loss of interest of ` 13.02 crore54 on an equivalent amount of

credit being availed by FCI for its day to day functioning (March 2016). Moreover, FCI
has not yet been successful in getting the refund of the avoidable amount of ` 25.01 crore
of output tax paid, even after a lapse of five years.

53
Form VAT – XVIII (Tax Invoice).
54
Calculated on the due amount of ` 25.01 crore for the period from July 2011 to March 2016 at rate
of interest for cash credit limit availed by FCI.

68 Compliance Audit Report on Food Corporation of India

 Report No. 18 of 2017

The matter was reported to the Ministry in October 2016, reply was awaited
(February 2017).

Compliance Audit Report on Food Corporation of India 69

 Report No. 18 of 2017

List of Abbreviations

Sl. Term used in Report Description

No.
A
1. ASWC Assam State Warehousing Corporation
B
2. BOD Board of Directors
C
3. C&AG Comptroller and Auditor General of India
4. CAP Covered and Plinth
5. CC Cash Credit
6. CCEA Cabinet Committee of Economic Affairs
7. CCTV Closed Circuit Television
8. CDA Central Dearness Allowance
9. CIP Central Issue Price
10. CMD Chairman & Managing Director
11. CMR Custom Milled Rice
12. CPF Contributory Provident Fund
13. CPI Consumer Price Index
14. CPSEs Central Public Sector Enterprises
D
15. DA Dearness Allowance
16. DCP Decentralised Procurement
17. DGS&D Director General of Supplies and Disposals
18. DO District Office
19. DPC Delhi Productivity Council
20. DPS Direct Payment Labour System
E
21. ED Executive Director
22. EPF Employee Provident Fund
F
23. FAP Financial Accounting Package
24. FCI Food Corporation of India
25. FSD Food Storage Depot
G
26. GM General Manager
27. GoI Government of India
H
28. HDPE High Density Polyethylene
29. HLC High Level Committee
30. HRA House Rent Allowance
I
31. IDA Industrial Dearness Allowance
32. ILO Industrial Labour Organization
33. ITC Input Tax Credit

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Report No. 18 of 2017

K
34. km Kilometre
35. KMS Kharif Marketing Season
L
36. LMT Lakh Metric Tonne
M
37. MEA Ministry of External Affairs
38. MGWs Minimum Guaranteed Wages
39. MOCAF&PD Ministry of Consumer Affairs, Food and
Public Distribution
40. MoF Ministry of Finance
41. MoHRD Ministry of Human Resources Development
42. MoL&E Ministry of Labour & Employment
43. MoRD Ministry of Rural Development
44. MoS Memorandum of Settlement
45. MOU Memorandum of Understanding
46. MSA Monthly Stock Statement
47. MSP Minimum Support Price
48. MT Metric Tonne
49. MTF Model Tender Form
N
50. NABARD National Bank for Agriculture and Rural
Development
51. NEF North East Frontier
52. NFSA National Food Security Act
53. NWNP No Work No Pay
O
54. OMSS Open Market Sale Scheme
55. OTA Over Time Allowance
56. OWS Other Welfare Schemes
P
57. PDS Public Distribution System
58. PE Private Entrepreneurs
59. PEG Private Entrepreneurs Guarantee Scheme
60. PLI Productivity Linked Incentive
61. PMS Preservation, Maintenance and Security
62. PSU Public Sector Undertaking
63. PSWC Punjab State Warehousing Corporation
64. PUNGRAIN Punjab State Grains Procurement Corporation
Ltd
R
65. RH Railhead
66. RMS Rabi Marketing Season
67. RO Regional Office
68. RTC Road Transport Contractor
S
69. SBI State Bank of India
70. SDE M/s Sehee Donyi Enterprises

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 Report No. 18 of 2017

71. SGA State Government & Agencies

72. SGAs State Government Agencies
73. STLs Short Term Loans
74. SWC State Warehousing Corporation
T
75. TDS Tax Deducted at Source
76. TIN Taxpayer Identification Number
77. TPDS Targeted Public Distribution System
U
78. UP Uttar Pradesh
79. URS Under Relaxed Specifications
V
80. VAT Value Added Tax
Z
81. ZCC Zonal Cash Credit
82. ZO Zonal Office

Compliance Audit Report on Food Corporation of India 73