Changes In Road Transport Corp Act Soon

The Centre has begun working on amendments to the Road Transport Corporation Act, 1950, in an effort to restructure state road transport undertakings (SRTUS). Reform in the sector is also expected to pave the way for fiscal correction in state finances. SRTU subsidies and losses are one of the major causes for large state fiscal deficits.

Officials said the draft amendment would soon be circulated among all state transport secretaries and chairmen of SRTUs before being sent to the Union cabinet for approval. The draft amendment is expected to focus on complete corporatisation and help work out a financial overhaul of the Road Transport Corporation Act and similar state Acts.

SRTUs incur average losses of Rs 1,500 crore each year. Accumulated losses of all SRTUs are estimated to be over Rs 10,000 crore. Consequently, no SRTU is in a position to earn the mandated 6 per cent return on capital employed.

Among the major sections expected to be amended in the Act are Section 25 and Section 26. Section 25 says all shares issued by the undertaking will be guaranteed by the state government. All capital support provided to the SRTUs is in the form of perpetual debt and preference shares where there is a compulsory dividend liability. The annual dividend liability for the SRTUs is about 8 per cent per annum.

However, many states have defaulted in meeting dividend liability since none of them have hiked tariffs in line with rising operating and maintenance costs. SRTUs on their own cannot raise tariffs and are therefore in arrears in paying dividends.

Also since 1993 capital support from the Centre has been cut off as a result of the mounting arrears. Capital support has been linked to tariff revisions by SRTUs and their earning a minimum 6 per cent return on capital employed. In addition, under Section 23 (3) of the Road Transport Corporation Act states are allowed to expand the equity base of the company to include non-government shareholders. However, share capital cannot be expanded in view of state government guarantees provided under Section 25.

Section 26 of the Act refers to borrowings by the state government. Under this section, SRTUs are allowed to raise debt funds only from financial institutions and banks. They are not allowed to raise debt funds directly from the financial markets in the form of lease or hire purchase finance or bonds. But states like Tamil Nadu and Karnataka have got around this provision by floating finance companies that raise funds on behalf of their respective road transport undertakings. The two states have been funding the shortfall in central capital support through this method.

Financial institutions have been reluctant to fund SRTUs in view of arrears in debt service payments. Sources said the amendment of the Act could pave the way for capital restructuring of SRTUs. Some states have been requesting this in an effort to reduce their interest dues and wipe out part of the losses. But financial institutions are resisting in view of the fact that such equity may not meet the minimum return expectations without tariff reform.