Kolkata: After a brief burst of bonhomie between the West Bengal government and The Chatterjee Group (TCG), the co-promoters of Haldia Petrochemicals Ltd (HPL) have again locked horns—this time over the proposed sale of the state’s 40% stake in the firm and the way to determine the fair price of HPL’s shares.

At stake is close to 4,000 crore of bank loans and a petrochemical plant, which, according to TCG, was built at a cost of 7,800 crore. Its current depreciated value would be significantly lower.

TCG, which owns 41% of the firm, wrote to the state government recently, opposing its plan to determine the valuation of its stake in HPL through a “limited auction".

The state, which had formed a panel of four ministers to decide on its next step, insists that an auction is the only transparent way of deciding the price at which it will cash out.

At the same time, the West Bengal government says it will honour TCG’s so-called first right of refusal on its shares in HPL. This means the state will offer its shares in HPL first to TCG, but at the best price discovered through an auction—the process described by TCG as a “limited auction".

In a recent letter addressed to Amit Mitra, West Bengal’s finance minister and the head of the advisory panel on HPL, TCG has said that conducting a “limited auction" would violate the articles of association of the firm, according to state government officials, who did not want to be identified.

HPL’s articles of association say the valuation is to be determined based on the net worth of the firm and its earnings potential at the time of the stake sale by an independent agency appointed jointly by the state government and TCG, the officials said. TCG says a stake sale through an initial public offering (IPO) is also not permissible, they added.

However, when lenders had in 2005 agreed to refinance HPL’s loans, an IPO was considered as a means of fresh equity infusion. But the restructuring of loans couldn’t eventually be concluded because the company couldn’t drum up investors.

TCG declined to comment.

TCG and the West Bengal government put up a united front in the past few months with the aim of earning the confidence of HPL’s lenders, burying their decade-old differences. The lenders had by then stopped making fresh loans to the cash-strapped firm, which in the 15 months till 30 June, made a cash loss of 684 crore.

However, the joint effort to revive lenders’ confidence failed—HPL has not been able to secure any financial aid from banks, and its working capital shortage may force it to suspend production.

Banks want the promoters to sort out their differences and a strategic partner inducted, without which they are unlikely to resume lending to HPL.

Halting production at this juncture will be a setback for the state government. HPL has already had to scale back production by at least 40% of its installed capacity to conserve working capital and to pare operating losses.

The firm’s managing director Sumantra Choudhury said the HPL management would make all efforts to keep the plant running despite worsening operating conditions. HPL’s working capital is depleting; it is unable to liquidate its inventory of around 18,000 tonnes; and polymer prices are weakening, according to him.

He had earlier said that it was meaningless to run the plant at 58-60% capacity because the company was unable to recover fixed costs. However, it now appears that under pressure from the state, he is trying to keep the plant running despite mounting losses.

Former managing director Partha S. Bhattacharyya—a TCG nominee who quit in June—also faced a similar situation towards the end of his term. He, too, was of the view that production shouldn’t be halted because the cost of restarting the plant was unknown and that it could potentially exceed the daily operating loss.

“It’s a headache," said Partha Chatterjee, the state’s commerce and industries minister and HPL’s chairman, when asked about the firm. “I wish I could wash my hands of it." Yet, at the same time, he said the HPL management wasn’t keen to suspend production immediately.

The key question now is whether TCG will move the court to block the state from holding a “limited auction" to determine the valuation of its stake. The state government and TCG have fought several legal battles for more than seven years over management control and the company almost ran aground. HPL, though, will not survive another protracted legal battle, according to former managing director Bhattacharyya, who said so in a note to the firm’s board.