The hullabaloo over worms in bars of ‘milk chocolate’ has barely begun to die down when the industry has managed to raise the hackles of consumer groups with a mischievous little ploy to hide cost and pricing details that are required to be disclosed by chocolate and ice cream manufacturers.
The problem starts with the Department of Company Affairs (DCA) quietly issuing an administrative order (circular No.36/2003 dated 29/12/2003) on December 29, 2003 exempting products like chocolates and ice creams from submitting the cost of production, selling price, etc, which are required under the Cost Accounting (Milk Food) Rules 2001 on Cost and Pricing of Milk Products. In effect, the DCA unilaterally decided that chocolates and ice creams are essentially not milk products. It says that since no minimum milk input percentage has been prescribed to categorise such items as milk products under the Cost Accounting Record Rules, they would be exempted from making these disclosures, which would now apply only to milk food and instant milk food products.
There are several problems with this exemption. For starters, the advertising message of all chocolates and ice creams proudly proclaim them as ‘milk’ products; and it is an important selling proposition. It also works well because the products are targeted at impressionable children. Obviously, manufacturers would like one set of rules when it comes to advertising and selling and another when it comes to accounting disclosures. But you must remember that government departments never ever grant generous exemptions without concerted lobbying by special interest groups. Who lobbied for the exemption in this case?
The Ahmedabad-based Consumer Education and Research Society has lodged a protest with the DCA calling the exemption ‘unjustified, illegal and uncalled for’ and wants it withdrawn. Prof Manubhai Shah, Chairman Emeritus of CERS says that seeking the exemption maybe just a ploy by the industry to hide its high profit margin. He is also amused at DCA’s contention that his favourite food, ice cream is not a milk product. He says, “Under the Indian law, the statutory requirement, almost a definition for ice cream, is that it must have minimum 10 per cent of milk fat. There is no other ingredient in ice cream that is so compulsory as 10 per cent of milk fat, so ice cream is nothing but a milk product”.
That is why when Hindustan Lever launched its oil based Walls brand, it had to be called ‘frozen desserts’ and not ice cream. But the milk content in chocolates/ ice creams and their pricing are not the only issues involved here. The larger question is, can the DCA change key rules by merely issuing an administrative order?
CERS alleges that the exemption was not in the form of a notification, much less a formulation or amendment to the Rules under the Act. Such a notification or amendment to the Rules requires the seal of approval from the higher authorities and cannot come into force unless they are notified as a draft, and finalised after seeking suggestions and objections from stakeholders. Moreover, the DCA deals with companies whose business involves a wide spectrum of stakeholders, including ordinary investors who depend on published information contained in statutory financial statements to make investment decisions. That is why all independent regulators such as the Sebi, TRAI and the electricity regulators follow a consultation process for rule making. The DCA itself follows the committee and consultation process for all major amendments in its regulations, so why did it conclude that ice creams and milk chocolates could be exempt from price disclosures without a public discussion? Does the issue of an administrative order amount to a possible misuse or abuse of authority, wonders Prof. Shah.
At the very least the order should have been accompanied by instructions to companies not to advertise their brands as milk products if they claimed an exemption from disclosing cost details. That hasn’t happened either. But the DCA would probably argue that regulating the advertising message of companies is not under its purview. Also, if the DCA felt that an exemption for chocolates and ice creams was justified, why didn’t it consider the larger issue of whether the Cost Accounting (Milk Food) Rules 2001 on Cost and Pricing of Milk Products rules served their purpose or needed to be extensively reworked?
Now consider who benefits from the exemption. While there are hundreds of small ice cream and chocolate brands in the country, the biggest players with clout to lobby government are Nestle, Hindustan Lever, Cadbury and Amul. Of these, the latter two are private players after Cadbury bought back its shares and delisted from the bourses, while the first two are subject to a host of disclosures as listed companies. Nestle and Amul are also big players in the milk business. They sell milk, curds, condensed milk, cheese, milk powder and a variety of other milk based products that are all clearly subject to the cost disclosure rules.
Moreover, Amul being a cooperative enterprise has even more stringent auditing and reporting requirements. There seems to be only one, or at best two beneficiaries that seem to emerge from among the big players. And one of them seems to reopen the concern expressed by some leading industrialists to the Sebi over delisting of companies, especially multinationals. These industrialists had pointed out that listing requirements force them to make detailed disclosures of production costs and prices in their annual reports, which are available to their competitors.
However, they are at a big disadvantage when the competitors are delisted companies and do not need to disclose and such information. In this case, it was mandated by a special order, but that too has been withdrawn or exempted. Did the DCA knowingly allow this to happen? Unless it rectifies the situation, that would be the obvious conclusion.
Disclosure: The writer is a trustee of the Consumer Education and Research Centre