ASIAN CASE RESEARCH JOURNAL, VOL.
8, ISSUE 1, 57–78 (2004)
ACRJ
This case was prepared by
Dr M. M. Monippally of
the Indian Institute of Man-
agement, Ahmedabad, as a
basis for classroom discussion
rather than to illustrate either
effective or ineffective han-
dling of an administrative or
business situation.
Please address all corre-
spondence to: Dr M.
M. Monippally, Professor,
Communications Area, In-
dian Institute of Man-
agement, Ahmedabad 380
015, India. E-mail:
mpally@iimahd.ernet.in
© 2004 by World Scientific Publishing Co.
Downsizing at Pennar
Industries Limited*
PART I
In July 2000, Nrupender Rao, Executive Chairman and
Managing Director of Pennar Industries Ltd (Pennar), was
looking for a strategy to halve the company’s wage bill to
about Rs 4.5 million a month. The company, battered by un-
precedented foreign as well as domestic competition, had no
money to offer a generous severance package to the scores of
employees who would be required to leave. Harsh methods
of personnel reduction, however, were out of the question.
He had made it clear to Rama Rao, General Manager-Person-
nel, that the Pennar values of caring for people should not
be sacrificed at any cost. “I can live with a 2 crore [Rs 20
million] loss,” he said, “but I can’t let our workers be thrown
on the streets.” He considered himself a ‘Theory Y’ manager
and ‘a people’s man’; the employees had come to trust him
to protect their interests. He wanted the parting to be pain-
less for everyone including himself.
BIRTH AND GROWTH OF PENNAR
Pennar was born in November 1997 as a result of a merger of
Nagarjuna Steels Limited (Nagarjuna Steels) with Pennar
*The author is grateful to Mr Nrupender Rao, Executive Chairman, and Mr T Rama
Rao, General Manager-Personnel, Pennar Industries Limited, Hyderabad, South
India, for readily providing information and facilitating meetings with the
company’s employees and union leaders. Financial support for this research came
from the Indian Institute of Management, Ahmedabad.
58 ACRJ

Steels Limited (PSL), both located near Hyderabad, South

India, and both manufacturing cold rolled steel strips (CRSS)
and packaging materials.
PSL had been promoted by Nrupender Rao, an engi-
neering graduate of the Indian Institute of Technology,
Kharagpur, and Purdue University, USA. Set up in Isnapur
(40 km from Hyderabad), PSL started commercial production
in 1988– 89. It achieved full capacity utilization in the second
year, made a profit, and declared dividends. It had an annual
production capacity of 36,000 tons of CRSS in Drawing, Deep
Drawing, and Extra Deep Drawing qualities. By 1995, the ca-
pacity was raised to 60,000 tons a year. There was a steady
increase in production and sales from 1990 up to 1996.
Nrupender Rao had ambitious diversification plans.
During the 1990s, he built up the Pennar Group consisting
mainly of PSL (the flagship), Pennar Securities Limited,
Pennar Aluminium Company Limited, Pennar Profiles
Limited, Pennar Chemicals Limited, and Pennar Infotech
Limited.
Nagarjuna Steels had been set up in Patancheru (about
15 km from Isnapur) in the mid-seventies. By 1995, the plant
had a production capacity of 72,000 tons of CRSS and 30,000
tons of cold rolled formed profiles. Nrupender Rao had
worked there for several years before moving out (with the
blessings of the founder-chairman) to set up PSL.
Both companies had high levels of worker welfare ori-
entation. At Nagarjuna Steels, the average worker-cost to the
company in 1998 was about Rs 11,000 per month while at
PSL it was Rs 8,000 per month. Before the merger, Nagarjuna
Steels had 4861 workers as against 175 at PSL.
The suggestion for the merger came in the mid-nine-
ties from Nagarjuna Steels as part of a larger strategic deal.
Nrupender Rao accepted the offer mainly because he and his
top managers reckoned that the merger would make Pennar
one of the top ten producers of CRSS in India. They hoped
that with economies of scale they would be able to compete

1There is a slight discrepancy in the number of workers and staff quoted at different
places in this study; this is because a few employees left due to natural attrition.
There was also limited hiring for specific jobs.
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 59

better with big domestic producers such as Bhushan Steel &

Strips Ltd (Bhushan) as well as importers of cheap steel.
Nrupender Rao had planned forward integration of
CRSS into higher-margin, value-added products such as
automobile components, compressor shells, pre-engineered
building systems, space frames, highway safety systems
(guard rails) and prefabricated shelters. The margin on
these items was 60 to 80 per cent more than on the plain
vanilla CRSS. The merger was expected to facilitate forward
integration.
The staff 2 and workers of Nagarjuna Steels had no ap-
prehensions about the merger with Nrupender Rao’s com-
pany because he had hired the majority of them in the late
70s and had been their General Manager for about ten years.
Among them, he had a reputation for being kind and caring.
At the time of the merger, the Nagarjuna Steels man-
agement and unions had been engaged for over a year in
an inconclusive wage negotiation. Immediately after the
merger, the Pennar management told the unions that a hand-
some wage increase was possible only if they helped bring
down the number of workers. (Upon merger, Pennar had 650
unionized workers, and 630 staff comprising 418 non-union-
ized workers/office staff, 110 Assistant Managers and
Deputy Managers, and 102 Managers and above.) They
agreed, says Rama Rao, “because they trusted Nrupender
Rao and because he promised a liberal voluntary retirement
scheme for the workers found surplus.” (See Appendix 1 for
a brief explanation of the terms “layoff,” “retrenchment,”
and “voluntary retirement scheme” as used in India.) A com-
mittee consisting of union and management representatives
identified 126 surplus positions. Similarly, the Departmental
Heads identified 98 staff positions that could be eliminated.
The entire process of reassessing manpower requirement
passed off without opposition from any quarter.
In July 1998, a voluntary retirement scheme (VRS) was
announced. It was meant for permanent employees who had

2‘Staff’ stands for all non-unionized employees. They include managers, supervi-

sors, clerks, and also other employees who are essentially workers but who are hired
in the staff category and so are not allowed to join any workers’ union. Many work-
ers get bigger pay cheques than the lowest levels of staff.
60 ACRJ

worked for at least 15 years. The terms of the VRS were so

generous (gratuity plus six times the statutory minimum re-
trenchment compensation) that the workers who accepted it
got an average of almost Rs 250,000 in compensation besides
about Rs 60,000 towards gratuity. Many more workers than
the company wanted to let go applied; but the company al-
lowed only the redundant workers to leave. The redundant
staff, not entitled to any retrenchment benefits, also were
offered the same VRS compensation package.
Meanwhile, a quality initiative, with the full support of
the unions, was launched in an effort to make production
more cost effective. Multi-skill, multi-task groups of workers
were made largely responsible for the quality of production
and routine maintenance. This, according to Rama Rao,
reduced the need for high levels of supervisory staff.
While redesigning jobs, roles, and work methods in or-
der to reduce costs, the management discovered that catering
and housekeeping could be outsourced at great savings. That
led to the second VRS, specifically for the 70 employees in
those two sections. The terms were the same as the first VRS
but the compensation package including gratuity was worth
just about Rs 85,000 per worker because these workers were
younger, had worked for less than seven years, and were
drawing much lower salaries — an average of Rs 3,500 per
month. Many of them were initially reluctant to leave; they
wanted to be absorbed in the main workforce. Rama Rao got
them to leave en masse partly by offering an additional incen-
tive of Rs 10,000 per worker, and partly by threatening to re-
trench those who did not leave on their own. They knew
very well that if there was retrenchment, they would be sent
out first with even lower compensation because they had the
shortest periods of service with Pennar.
Together, the two personnel reduction schemes cost
Pennar about Rs 55 million; but they brought down the wage
bill from Rs 16 million to under Rs 10 million a month.
In 1999, Pennar acquired the facilities of Tube Invest-
ments of India Ltd at Tarapur (near Mumbai) and in Chennai
(formerly Madras). This added 14,000-ton capacity for pro-
ducing value-added cold rolled formed profiles for the auto-
mobile sector. The acquisition brought into the Pennar fold
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 61

another 55 workmen and 23 staff. But the operations at these

plants were independent of those at Hyderabad and did not
affect Pennar’s operations or headcount in Hyderabad.

DREAMS TURNED SOUR

While Pennar appeared to be making the right moves, get-

ting ISO 9002 certification, signing tie-ups with technology
leaders, and launching high-margin formed products (selling
price about Rs 50,000 a ton), the market was slipping from
under its feet. More than two-thirds of its production contin-
ued to be CRSS (selling price about Rs 22,000 a ton), whose
prices kept falling in a market that was by now choked with
cheap steel strips from Russia, Ukraine, and Korea. To shore
up sales, Pennar lowered prices and offered its customers
easier credit terms. This led to heavy losses. To make matters
worse, the steel major, Tata Iron & Steel Company, entered
the low-end CRSS market with the installation of a giant in-
tegrated mill. Their prices were 6–8% lower than Pennar’s
and they allowed sixty days’ credit. Bhushan, the other major
rival, priced their products marginally higher (2%) than
Pennar but allowed customers 120 days’ credit.
Coupled with the glut in the steel market, there was a
fall in domestic demand. Recession hit the auto and white
goods industries — the major end-users of Pennar’s prod-
ucts. Very few major government, public sector, or private
sector projects were coming up in spite of the plans for mas-
sive infrastructure development announced by the Govern-
ment. Many small steel mills and cold rolling mills closed
down.
Sensing the gloomy outlook for the steel business,
banks and lending institutions reduced their exposure to it or
avoided it altogether. This made it difficult for Pennar to get
working capital and offer recession-hit customers the long
credit periods that they were looking for. The Pennar
Group’s own finance company (Pennar Securities Limited)
folded up in 1998–99. It not only made access to funds diffi-
cult, but also, in Nrupender Rao’s words, “created a negative
environment for Pennar”.
62 ACRJ

By March 2000, Pennar’s financial position deterio-

rated further. On a turnover of Rs 2,397 million, it made a
small loss of Rs 0.12 million (see Exhibit 1). The coming
months saw the turnover fall while losses mounted. By the
end of June 2000, it was clear that most of the receivables
stated in the earlier annual reports would have to be written
off, and that the losses would cross Rs 100 million in Decem-
ber. There was not enough work to keep the workers and
staff engaged. The salary bill, Rs 9 million a month, was
heavy too.

Exhibit 1: Pennar Industries Limited: Summary of Profit and Loss Account (1997–2000)

(In Rupees million; figures rounded.)

1996–97 1997–98 1998–99 1999–2000

INCOME (A)
Sales 1147.99 3170.99 2716.35 2365.78
Other Income 16.22 21.62 20.20 31.91
TOTAL (A) 1164.21 3192.61 2736.55 2397.69

EXPENDITURE (B)
Raw materials 716.96 2060.69 1713.23 1529.43
Personnel 29.89 113.13 105.99 107.99
Admin, manufacturing and 249.21 674.29 588.07 454.56
other expenses
Interest 83.44 230.20 213.78 248.29
Depreciation 22.67 62.11 61.73 57.54
TOTAL (B) 1102.17 3140.42 2682.80 2397.81

Profit / (loss) before tax / 62.04 52.19 53.75 (0.12)

non-recurring items (A–B)
Note: The company had spent Rs 47.13 million in 1998–99 and Rs 55.06 million in 1999–2000 from the reserves to pay
the VRS compensation.
Source: Published annual reports of Pennar Industries Limited.
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 63

Seeing the writing on the wall, some staff and workers

started looking actively for jobs elsewhere, and left as soon
as they found something attractive. But, unlike retrenchment
or voluntary retirement, a resignation would not attract any
compensation. Therefore, many stayed on, doing practically
nothing and hoping for a good compensation package to go
out with. Morale was low. A few senior managers urged
Nrupender Rao to take tough measures to end the uncer-
tainty among staff and workers. He agreed that he should
downsize. But there was no money to offer a severance pack-
age that matched Pennar’s image as a caring company and
would be a worthy follow-up to the 1998–99 VRS.

PART II

“I could not sleep peacefully. Not because I antici-

pated any violence or threat from my workers but
because images of suffering workers and their fami-
lies kept coming back to me. It was painful. Some
workers came home and cried. They would not go
away… They knew I would do my best to help
them. They trusted me. But there was little I could
do for them now.”

— Nrupender Rao

COST CUTTING

Bewildered by the growing gap between income and ex-

penditure, Pennar adopted drastic cost cutting measures in
2000–01. The top management took a voluntary pay cut of
15 per cent. Several nonessential public relations exercises
were withdrawn. All parties, including the annual one to
which all employees were invited with their families, were
cancelled. Those in senior management, who were entitled to
business class travel and five-star accommodation, were now
asked to reduce travel, fly economy class, and check into
three-star hotels while travelling. Company guests were in-
creasingly accommodated at guesthouses rather than hotels.
64 ACRJ

In spite of extensive cost cutting, the gap between in-

come and expenditure kept growing mainly because of the
drying up of orders. “The liquidity problems were so se-
vere,” says Rama Rao, “that we were forced, on a few occa-
sions, to delay depositing Provident Fund and Employees
State Insurance dues with the authorities.”
It was clear to the management that there was no alter-
native to reducing the workforce, substantially and perma-
nently. Workers had turned down suggestions of a pay cut. A
temporary layoff was possible but not easy to implement.
The workers would, in any case, have to be paid half their
wages during the layoff period.

CLOSURE OF ISNAPUR PLANT

Management consultants, Deloitte Haskins & Sells, who had

been hired to analyze the company’s performance and sug-
gest a new strategic direction, identified overdependence on
the low margin CRSS and the high cost of debt as Pennar’s
main weaknesses. They forecast that, by 2002, the company’s
net worth would turn negative if the business was not re-
structured. They recommended selling the plant at Isnapur,
which could make only CRSS, and focusing on high-margin
products at the other plants. Pennar would not be viable,
they warned, unless the promoters immediately infused at
least Rs 500 million (Rs 400 million from the sale of the
Isnapur plant and Rs 100 million fresh equity) and per-
suaded its lenders to reschedule payments. The management
shared with the unions a summary of the recommendations.
Pennar could not sell the Isnapur plant; there were no
buyers. So the management shut it down in January 2001
and asked the staff and workers to report at the Patancheru
plant, where the 7-day, 3-shift operation had by then been
reduced to a 6-day, 2-shift operation. The workers at neither
Isnapur nor Patancheru liked this plan. But they were told
that because of the drastic reduction in orders one plant had
to be shut down. The Isnapur plant was chosen because it
could only make low margin CRSS whereas the Patancheru
plant could produce several high-margin items also.
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 65

The union leaders at Patancheru publicly announced

that they would not let the Isnapur workers in. Violence was
expected; the police were called in. When the Isnapur work-
ers arrived, however, there was a sudden change in the
Patancheru unions’ strategy. They welcomed the Isnapur
workers and exhorted them to stand together to fight for a
good compensation in the event of retrenchment.
With the arrival of the Isnapur workers, the
Patancheru plant became grossly overcrowded. Now there
were 325 workers where 150 were sufficient. In order to rein-
force the sense of redundancy further, the management
pulled out 175 workers at random and put them in a large,
clean, air-cooled shed and asked them to relax there. They
were provided newspapers, magazines, and cool drinking
water. The plant was run with the remaining 150 workers.
The workers in the shed enjoyed themselves on the
first two days. From the third day onwards, several of them
felt awkward sitting there all day, chatting, sipping tea, and
doing nothing. A few stayed back at home although they
would lose the day’s wages if they didn’t clock in at the
plant. By the end of the first week, the number of people sit-
ting and relaxing in the shed dropped significantly. In order
not to let them feel that they had been identified as the re-
dundant ones, they were rotated with those working on the
shop floor. The major rotation, in groups of fifty, took place
five times. There were also frequent minor rotations. If ma-
chinery broke down, for instance, the operators attached to it
were brought to the shed and workers who could repair the
machinery sent to the shop floor in their place. The objective
was to convince them that the plant needed just 150 workers.

STEPS TOWARDS PERSONNEL REDUCTION

In August 2000, the company had applied formally (under

Section 25N of the Industrial Disputes Act, 1947) to the Labor
Commissioner for permission to retrench up to 212 redun-
dant workers. A copy of the application was given to the
unions as required by law; another copy was displayed on
the plant notice board. The unions, however, assured the
66 ACRJ

workers that they would not be laid off or retrenched. At no

time in the previous 45 years had a Labor Commissioner in
the State of Andhra Pradesh given any company formal per-
mission to retrench workers or close down a factory.
Neither did the company expect that such permission
would be forthcoming. So Rama Rao started working on a
new VRS for the workers. It would offer the redundant
workers 30 days’ wages (as against the statutory minimum
retrenchment compensation of 15 days’ wages) for every
completed year of service besides the standard retirement
benefits such as gratuity. Having already run up losses of
over Rs 100 million and anticipating at least Rs 500 million
losses by the end of the financial year, Pennar would find it
extremely difficult to raise the Rs 20 million needed for offer-
ing this severance package. Therefore, some senior managers
suggested to Nrupender Rao that the compensation be re-
stricted to the statutory minimum. But he was determined
that the workers should get at least a little more than their
legal entitlements. He was worried about the impact of job
loss on the workers and asked the managers to “find money
somehow”.
By the end of January 2001, the company grapevine3
brought to the unions and the workers news of the stripped
down VRS, which had not been formally announced yet.
They did not want to accept it. They could see for themselves
that Pennar’s production and sales had shrunk drastically.
Unlike in the past, their salaries were now being delayed by
two to three weeks almost every month. They, too, realized
that there were many more workers and staff than needed.
Many workers were ready to leave; but they wanted a repeat
of the 1998 VRS. If that was difficult, the minimum accept-
able to them was two months’ pay for every completed year
of service. This, they felt, was a fair demand. Besides, it
was expected that Parliament would soon make 45 days’ pay
the statutory minimum compensation for workers being

3Several workers had personal and social contacts with some senior managers as
they belonged to the same community or had come from the same village. These
managers told them about the VRS being planned.
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 67

retrenched. They did not want to settle for anything less. The
union leaders continued to assure them of at least two
months’ severance pay.
Meanwhile, the regional leaders of a national trade
union approached the company’s unions and offered to
intervene and get them a better deal; but the workers de-
clined their help and refused to go along with suggestions to
strike.
By March 2001, the workers had lost their confidence
in the three unions of the company. They believed that only
Nrupender Rao would be able to tell them where they stood.
During March and April 2001, six groups of 7–15 workmen
met him separately. Each meeting lasted two to three hours.
Similarly, five groups of staff marked out as redundant also
met him. Some of his senior colleagues advised him to avoid
these meetings; but he never refused to meet any employee.
During these meetings, several staff and workers broke
down. They did not know how soon they would get a new
job elsewhere or how they would feed their families. The job
market was depressing.
Some senior managers also sought reassurance about
their own jobs. Nrupender Rao told them that he could not
promise them anything. He advised them to look for good
jobs and leave when they found them. In a few cases, he
helped them get jobs in other firms.

DOWNSIZING IN 2000–01

a) Staff ‘Resignations’

Between January and July 2000, up to 80 staff had been

quietly persuaded to leave with six months’ pay as total
compensation. This was very small compared to the VRS
compensation offered in 1998. But the staff who left had
realized that expecting a similar package was unrealistic. In
August 2000, around the time that the company applied to
the Labor Commissioner for permission to retrench 212
workers, it decided to terminate the services of 160 staff
68 ACRJ

without giving them any severance pay other than standard

entitlements such as notice pay and gratuity. (Compared to
the workers, the staff would find it easier to get new jobs be-
cause their skills were more varied.) The Heads of Depart-
ments (HoDs) were given a target percentage and asked to
decide who among their staff should leave and who should
stay. With the help of middle managers, each HoD listed the
surplus staff. The employees knew about this move but not
the extent of redundancy. So there was a lot of speculation
even among the managers.
The Heads put the staff into three sets: those who had
to be retained because of their key skills and superior perfor-
mance; those who needed to be sent away because of unsat-
isfactory performance and/or attitude problems; and, the
rest. From within the third set, each HoD had to decide who
should be sent away and who retained to meet the staff re-
duction target for his department. Eventually, 160 staff were
identified by the HoDs as redundant. These employees had
been with the company or its parent for anything from five
to twenty years. Some of them had even applied for volun-
tary retirement in 1998 but had not been allowed to leave
because the company needed their skills.
There was no general announcement about staff reduc-
tion. It was each HoD’s job to tell his redundant staff that
they should resign and leave. Some HoDs refused to do it.
They said that they would not be able to tell their staff to go
away without compensation. So Rama Rao sat with each
HoD concerned and met them individually. He told them
that the company had always been generous to its employ-
ees; but it was now going through such bad times that there
was no money to pay them any compensation whatsoever. If
the company retained them, there would be no money to pay
their salaries.
Once they knew that they were redundant, many of
them started looking for jobs elsewhere, and about 40 left
when they found suitable ones. The rest could not find any
jobs. Some wanted six months to a year with full pay to find
an alternative job. The company refused, but in special
cases gave them up to four months’ basic pay as notice pay.
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 69

A few, angry at being let down by the company they

had served loyally for several years, resigned quietly and
left. Three or four used highly abusive language to vent
their anger and frustration. There were, however, no cases
of violence.
Several staff refused to resign. They insisted on the
terms of the 1998 severance package as a condition for leav-
ing. They knew very well that while they did not have the
legal protection which unionized workers enjoyed, they
could not be easily terminated. In practice, the judiciary had
not been supporting termination of employment under the
discharge simplicitor clause. Judges tended to treat the right to
employment as more fundamental than the validity of any
contract employees may have signed or accepted. Moreover,
many companies found it difficult to prove conclusively that
there was a fair and objective application of norms in select-
ing the staff to be terminated.
Nevertheless, a discharge simplicitor letter was issued to
10 staff. Eventually, they also came forward to submit their
resignations. The company accepted their resignations and
withdrew their termination letters. One brought political
pressure through a Member of Parliament to retain his job.
But later, realizing the futility of clinging on, he resigned.
“There was considerable pain all around,” admits Rama Rao
reflecting on the events, “but in the end the resignations
went off quite smoothly.”
There was no attempt by the staff to approach the
court, either singly or in groups, to challenge the termination
of employment. However, two lower level staff who had re-
signed and left without any protest went to the labor court.
They demanded the same compensation as workers. They
claimed that they were really workers with no supervisory
function but wrongly categorized by the company as staff
and therefore denied the benefits of VRS given to unionized
workers. The court rejected the plea when the company pro-
duced evidence that they had some function above that of
workers. Although it won the case, the company lost a lot of
high value managerial time and resources in defending its
position.
70 ACRJ

b) VRS for Workers

The new VRS for workers, open for ten days, was formally
announced on April 20, 2001. In the preceding weeks, the se-
nior managers had let their workers know informally that
the VRS was coming and had encouraged them to opt for it.
On the day of the announcement, however, there was utter
confusion. The unions advised the workers against accepting
the VRS; they were still promising to get the compensation
doubled. Not a single worker opted for VRS in the first five
days.
Anticipating resistance and suspecting that the union
leaders were giving workers false hopes, Anantha Reddy,
Executive Director, bypassed the unions and addressed
an open letter to all the workmen. He also had it posted to
their homes for their families to read. Unlike the VRS docu-
ment, which was in legal English, this letter was plain,
direct, and in Telugu, the local language (see Exhibit 2 for an
English translation of the letter). It had a deep impact on the
workers.
At this stage, Rama Rao, along with the other two
General Managers, called a meeting of all the workers.
Almost 90 per cent of them attended. The union leaders
stayed away. The General Managers spoke at length of the
general recession, the national economy, the steel industry,
the CRSS sector and finally the position of Pennar in the
market. They said that, weighed down by heavy losses, the
company could no longer support a large workforce. They
conceded that the new compensation was very low com-
pared to the 1998 offer, but raising money for even the statu-
tory compensation was extremely difficult now. Banks had
stopped giving loans to CRSS companies. As everyone knew
very well, orders were down to just a quarter of what the
plant could process. Unless at least 200 workers left, the
management would be forced to close down the company. In
that case, no one would get any compensation at all. “Along
with Anantha Reddy’s letter, this plain talk also weakened
the workers’ resolve to hold on,” says Rama Rao.
Seven workers with a history of poor performance and
indiscipline were asked to leave by the VRS route, but they
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 71

Exhibit 2: Letter in Telugu* from Executive Director of Pennar to

workers

Pennar Industries Limited / I.T.A, Patancheru,

Medak Dist. – 502 319

C. H. Anantha Reddy
Executive Director April 20, 2001

Dear Pennar Operatives,

Pennar Industries has been in a crisis for a year as there is not

enough demand for its products and because it is unable to compete
with big companies like Tata Iron and Steel Company. Last year, the
production level of CRSS went down from 8,000 tons a month to
2,000 tons a month. Owing to this, the production at the Patancheru
unit had to be stopped. In the financial year 2000-01, there was a
loss of Rs 35 crore [350 million]. The situation is such that we cannot
provide work for almost 200 operatives and many staff members,
and we are not able to retain staff other than the essential ones.
In this scenario we are constrained to ‘lay-off’ and ‘retrench’
about 200 operatives. While retrenchment is for the least
experienced employees, those with more experience will get an
opportunity to leave under a ‘Voluntary Retirement Scheme’.
The Voluntary Retirement Scheme, released today (20 April,
2001), will be in force till 30 April, 2001. This does not mean that the
notices issued by management in February with regard to ‘lay-off’
and ‘retrenchment’ are cancelled. Those notices will continue to be
in force to the extent necessary to control the number of operatives.
Operatives taking the ‘Voluntary Retirement Scheme’ will get
the following payments:
1. Earned Leave Salary.
2. Gratuity
3. 30 days’ salary for each completed year of service as
compensation (a total sum of basic, fixed D.A. [Dearness
Allowance], and variable D.A. will be considered as salary). A
minimum of Rs 40,000 will be paid as compensation.
4. LTA [Leave Travel Allowance] due.
The full details of the scheme have been released through the VRS
notice. Applications for VRS will be accepted based only on the
terms and conditions mentioned in the Scheme.

*Translated from Telugu to English by Shri R A N Murthy of Indian Institute of

Management, Ahmedabad
72 ACRJ

Our objective in writing this letter to you is to make you

aware of the company’s position. We ask you to see for yourselves
all the pros and cons of the scheme and take appropriate decisions
yourselves.

Yours sincerely,

[Signed ]

(C.H. Anantha Reddy)

flatly refused. They were formally charged with indiscipline

and informed that there were enough grounds to dismiss
them. Such a dismissal would not only jeopardize statutory
compensation but also make it difficult for them to get jobs
elsewhere. Some who were reluctant to opt for the VRS
were told firmly that they would be retrenched if they did
not sign up.
Nrupender Rao also met with different unions and
groups of workers. The unions still remained publicly op-
posed to the VRS. But the workers ignored them and signed
up. Says Rama Rao, commenting on the union leaders’ atti-
tude: “The union leaders also were convinced of the
management’s case, but they could not, for political reasons,
support it. When the redundant workers accepted the VRS
offer, the leaders heaved a sigh of relief in private.” The
workers who had been charged with indiscipline also
applied for VRS. The company withdrew charges against
them and allowed them to take voluntary retirement with
compensation.
There were 240 applications, 25 more than the com-
pany was prepared to accept. Some of the applications were
from key workers who had job offers from other companies.
They wanted to leave under the VRS so they could claim
compensation, but their applications were firmly turned
down. If they wanted to leave, they were told, they would
have to resign and forgo the compensation. Some good
workers resigned and left to take up other job offers. Others
decided to stay back.
Meanwhile, the company arranged for financial and
career counseling as well as re-skilling and entrepreneurship
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 73

training programmes at the National Institute of Small

Industries Extension Training (NISIET), Hyderabad. Many
staff and workers took advantage of these programmes.
As expected, the Labor Commissioner turned down
Pennar’s request for retrenching workers. But at a meeting of
Pennar’s management and union leaders, he said to the of-
fice bearers of the unions: “I have refused your company per-
mission to retrench workers. But don’t think this will do you
any good. I strongly advise you to accept the VRS and leave.
If you insist on compensation, which the company cannot
pay, the management may just close shop and go, as some
others have done in your neighborhood. Pennar’s assets are
pledged to banks. They will get their money back by selling
Pennar’s assets. If the company closes down, you will have
neither jobs nor compensation.”
On May 2, 2001, the company let 212 workers go under
the VRS.

A RETROSPECT BY UNION LEADERS

In July 2003, the case writer interviewed three Union leaders:

Mr Bala Reddy (General Secretary during 1999–2000), Mr
Ram Koteswara Rao (Working President during 1999 –2000),
and Mr Ram Mohan Rao, President, Telugu Desam Trade
Union Congress. Bala Reddy and Ram Koteswara Rao are
still with Pennar. Ram Mohan Rao was never an employee of
Pennar; but the workers had elected him President of their
union. He had negotiated with the Pennar management in
1999–2001, but later resigned because some members of the
union had been highly critical of his ‘failure’ to get the work-
ers two months’ pay as VRS compensation.
Here is a summary of the views expressed by these
union leaders while looking back at the downsizing.
Bala Reddy and Ram Koteswara Rao: There was no alterna-
tive to downsizing because the production had come down
from 8,000 tons per month to 2,000 tons. The competition, es-
pecially from Bhushan and TISCO (Tata Iron & Steel Com-
pany), was very strong. They were bigger and had newer
74 ACRJ

technology. Our company had loans of about Rs 180 crore [Rs

1800 million] to be paid back. The management had always
been generous and trustworthy. However, we got some fi-
nancial experts to check the company’s statement of accounts
and they confirmed that the statements were true.
The management held several discussions with us re-
garding the problems faced by the company. Although ini-
tially reluctant, we eventually accepted the downsizing
because we were convinced that the alternative would be
closure of the whole company and loss of all the jobs. In a
sense, no one was forced to leave; but the ones who stood to
lose most heavily if the company closed down, accepted the
low compensation offered and left. Several companies in our
neighborhood had closed down giving the workers no com-
pensation whatever; so there was a real threat of Pennar also
closing down and everyone losing out.
Some of those who left the company fearing that it
would close down are now returning to take up contract jobs
at lower wages. They regret having left the company, now
that Pennar is doing much better (production about 3,500
tons a month). They, along with some of the others who
haven’t been able to get any jobs, are angry with the union
and the management. They think that they were misled
into quitting. But they were not misled; if they had not left,
the company would have collapsed. We are lucky we didn’t
opt out.
Ram Mohan Rao: The VRS was inevitable. The management
floated it to ensure Pennar’s survival, not to make bigger
profits. The workers were aware of the company’s financial
position and production levels. They also knew how well
they had been looked after when the company was making a
profit. The management was transparent. Most workers who
left were not happy leaving; they left because they were
afraid they would get nothing if they waited indefinitely.
There are two things uppermost in a worker’s mind
when he is confronted with job loss: Will he be able to feed
his family? Will he get another job? Mr Nrupender Rao man-
aged the downsizing better than we could have done. He
managed it with sympathy and pain. Better planning was
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 75

unlikely to have saved the company. After the merger, the

CRSS market fell. There was little anyone could do.
The management’s refusal to let some workers go
when they asked for voluntary retirement was not right; it
was against natural justice. Once the company floated the
VRS, there should not have been any restrictions on who
should go and who should stay.
The unions did not prepare the workers suitably for
the downsizing. They continued to give the workers false
hopes because the leaders wanted to be re-elected. They also
wanted to appear confrontational; they were afraid that if
they told the workers the truth, they might not be reelected.
76 ACRJ

APPENDIX 1

A note on retrenchment, layoff, and VRS in India

Retrenchment

According to the Industrial Disputes Act, 1947, retrenchment

is the termination by the employer of the service of the work-
man for any reason whatsoever, otherwise than as a punish-
ment inflicted by way of disciplinary action, but does not
include (a) voluntary retirement of the workman, (b) retire-
ment of the workman on reaching the retirement age of
superannuation, or (bb) termination of the service of the
workman as a result of the non renewal of his contract of
employment, or (c) termination of the service on the ground
of continued ill health.
Section 25N prohibits the employer from retrenching
any workman until
1) he has been given three months’ notice in writing indicat-
ing reasons for retrenchment, and the period of notice has
expired, or wages in lieu of such notice has been paid;
2) the workman has been paid a compensation equivalent to
fifteen days’ average pay for each completed year of ser-
vice; and
3) a notice in the prescribed manner is served to the appro-
priate government authority and its permission is ob-
tained. Such permission or refusal shall be granted only
after making such inquiry as the authority deems fit.
However such a permission shall be deemed to be
granted if no communication is received from the author-
ity within sixty days from the date of notice.
The employer shall, as a rule, retrench first the work-
man who came last (“last come first go”). Extraordinary situ-
ations may justify variations of this scheme.
 DOWNSIZING AT PENNAR INDUSTRIES LIMITED 77

Layoff

Section 2 (kkk) 8 of the Industrial disputes Act, 1947, defines

“lay-off” to mean the “failure”, “refusal” or “inability” on the
part of employer to give employment to any number of
workmen on account of shortage of coal, shortage of power,
shortage of raw material, accumulation of stock, breakdown
of machinery, or for any other reason.
Section 25M, which imposes prohibition on lay-off,
provides:
(1) No workman (other than casual workman) whose name
is borne on the muster rolls of an industrial establish-
ment shall be laid-off by his employer except with the
prior permission of the appropriate Government or
such authority as may be specified by the government by
notification.
(2) An application for permission shall be made by the em-
ployer in the prescribed manner stating clearly the rea-
sons for the intended lay-off and a copy of such
application shall also be served simultaneously on the
workmen concerned in the prescribed manner.
(3) The appropriate Government or the specified authority,
after enquiry can grant or refuse to grant such permis-
sion and a copy of such order shall be communicated to
the employer and the workmen […]
(5) Compensation equal to fifty percent of the total of the
basic wage and the dearness allowance, shall be paid to
the workman for all days during which he is laid off,
provided he has completed continuous service of at least
one year.
(Adapted slightly from S.C. Srivastava (1994). Industrial Rela-
tions and Labour Laws. New Delhi: Vikas)

Voluntary Retirement Scheme (VRS)

Voluntary Retirement has been introduced in India to en-

courage surplus workers to retire prematurely and voluntar-
ily. Any employee who is eligible by virtue of age and/or
78 ACRJ

service can apply for early retirement when the scheme is

open. Usually, the schemes are voluntary. The company is
not obliged to accept every application for early retirement.
The company may not force eligible employees to opt for
early retirement either.
The main features of the various VRS offered by mem-
bers of the Confederation of Indian Industry are as follows:
1. Option for employees to take compensation as pension or
a lump sum.
2. Gratuity benefits in terms of the Gratuity Scheme and
rules and regulations of the Gratuity Fund.
3. Disbursal of the amount standing to the credit of the
employee in his P.F. [Provident Fund] Account according
to the rules of the P.F. scheme.
4. Encashment of leave according to the rules of the
company
5. Medical Benefits according to the current Medical Insur-
ance Scheme.
6. Bonus, if applicable, on pro-rata basis.
(Adapted from Confederation of Indian Industry (2002) Vol-
untary Retirement Schemes in Member Companies. New Delhi.)