Mainstreaming The Sidelined

THE COMPASS

The much-touted merger of Madras Refineries (MRL) with Indian Oil Corporation (IOC) and Cochin Refineries (CRL) with Bharat Petroleum (BPCL) finally seem to be on course, with the Cabinet Committee on Economic Affairs (CCEA) preparing a note on the grand merger plans.

Analysts have welcomed the move since the smaller players such as MRL and CRL would be totally marginalised in a completely deregulated environment players. At the same time, the mergers would add muscle to the larger players by giving them access to untapped markets.

CRL is a standalone refinery and has a high gross refinery margin compared with the industry. Since it owns part of the evacuation infrastructure on site, it is in a better position to bargain vis-a-vis the marketing companies. Additionally, its product mix gives it an additional edge which has contributed to its higher profitability. CRL derives major contribution of its turnover from light and middle distillates which account for almost 80 per cent of throughput.

 

Margins in this category are comparatively higher, and that should be equally valid in a decontrolled scenario. CRL has a marketing tie-up with Indian Oil Corporation up to March 2003. It has picked up a 23 per cent stake in Petronet CCK, which will put up a product pipeline from Cochin to Karur to provide capacity to transport four million tonne of products every year.

Meanwhile, MRL has a capacity of 6.5 million tonne in Chennai on the east coast. It also owns a small refinery of 0.5 million tonne located in the Cauvery basin in the extreme south. Being a stand-alone refinery is MRL's biggest drawback.

Currently, products from MRL are sold to Indian Oil Corporation and from the Cauvery basin to IBP. Besides, infrastructure to transport the products is owned by Indian Oil.

Hence, it hardly enjoys any bargaining power in the deregulated scenario. Its plans to expand capacity by another 3 million tonne at a cost of Rs 1,915 crore is likely to happen after 2001.

The benefits would be two fold. On the one hand, IOC would get an access to MRL's southern location which caters to southern markets while MRL will automatically get access to IOC marketing outlets.

This was not possible in a regulated scenario. For BPCL, Cochin's low cost refining margin, higher value added distillates besides locational edge in southern markets like Kerala and other parts would come in handy. Besides, both MRL and CRL already have depreciated plants which contributes to their low cost of operations. For the acquirers, this is a great advantage because to set up fresh

capacities would not only entail huge capital expenditure but also the operational costs would eat into the profitability of the company.

Foreign co listing

It was argued in these columns (Compass, February 8, 2000) that the high-level committee on capital markets (HLCC) was putting the cart before the horse in chasing the mirage of getting foreign companies to list in India. In its infinite wisdom, the Securities and Exchange Board of India (Sebi) was pushing the proposal with the usual bunch of explanations in hand.

That it will lead to greater depth and variety in the Indian equity markets, greater exposure for Indian investors etc.

The bean counting Reserve Bank of India (RBI) has raised a valid point that this could be allowed provided there is no capital outflow out of the

country. But the moment this caveat in inserted, the whole scheme falls flat. For good reason, the proposal has finally been spiked.

After all which foreign company would be interested In raising money in India if there is no prospect of taking hard currency abroad? And obversely, if foreign companies need to raise money locally to fund local operations, there are a well established set of guidelines.

There is therefore no case for establishing a fresh set of guidelines for the contingency that an Oracle or Yahoo! may wish to raise money in India.

This confusion only goes on to show the chasm within the financial sector.

Buoyed by prospects of global valuations for key sectors like IT and telecom, Sebi is leading the brigade which wants immediate opening up of the domestic stock markets. But macro economic indicators do not permit the RBI to go easy on capital account transactions.

Universal banking

In one of its first few decisions after the monetary and credit policy, the RBI has dealt a body blow to universal banking which it had espoused as a "desirable goal". The RBI had said that it plans to provide "more freedom and flexibility to financial institutions (FIs) in raising resources through bond issues subject to limits fixed in terms of networth."

This led many FI into believing that RBI would relax the norms regarding resources mobilisation. However, draft RBI guidelines last week do not say anything new. Effectively, the central bank has neither relaxed the norms nor has it made resources raising any more flexible for the FIs.

Practically everything is same as the existing guidelines, except that FIs will not require RBI approval every time they launch a bond issue. This implies FIs can not raise bonds of less than 3 years and they still can not offer put and call options or even exit option before the end of one year. Besides, the ceiling of 200 basis points over gilts stays.

The FI community which was quite overwhelmed on hearing that central bank has expressed consensus over universal banking and were looking forward for more flexibility in raising resources have found the guidelines disappointing.