Can we consistently identify gross overvaluation and gross undervaluation of stock markets?
Reliance believes that the new price will be effective for supplies between 1st April and 30th June. Fertilizer companies, on the other hand, have taken a stand that whatever the new price is fixed by the government, it cannot be applicable 'retroactively'
All the 16 urea producers have been obtaining their gas supplies from Reliance Industries Ltd’s KG-D6, based on a price level of $4.2 per mBtu for the last five years, and this contract expired as on 31 March 2014. The gas supplies from these wells have been going down and, presently, only 13 million standard cubic metres per day are available for distribution among the sixteen fertiliser units.
The Rangarajan Committee had, after great detailed study, recommended a price of $8.34 per unit, based on the gross calorific value (GCV) as against net calorific value (NCV) in the past.
The government notification, dated 10 January 2014, giving effect to this price, was actually gazetted on 17th January, for the price to be effective from 1 April 2014.
Although the contract and revision of price structure has been going on for months now, the Oil Ministry decided to approach Election Commission for clearance to announce the price because of the election schedule. The poll watchdog committee advised the government to hold the rate till mid may, by which time actual voting process would be completed.
In other words, the price (or rate) announcement would not "influence" the voter either way, because the voting would have taken place, and the process of counting and announcement of results would be starting from various places.
In an apparent move to safeguard its own interest, Reliance had sought to obtain additional letters of credit (LoCs) for $4.1 per mBtu more for every unit to be supplied, claiming that the old rate is "invalid", but supplies will be maintained, and that the rate will be as per the new rate applicable, with effect from1st April, as notified in the gazette dated 17th January!
In fact, this was as a sequel to the meeting convened by the Ministry of Petroleum and Natural Gas (MPNG) and Ministry of Chemicals and Fertilizers (MCF) with all stakeholders, who were asked to work the agreement details, while advising Reliance to continue supplies at the prevailing rates till the new rate (price) is announced by the government.
Apart from basic price per unit, Reliance believes that the new price will be effective for supplies between 1st April and 30th June and it is only the dollar value to calculate the price, which has to be announced (or reconfirmed).
Fertilizer companies, on the other hand, have taken a stand that whatever the new price is fixed by the government, it cannot be applicable "retroactively". The new price, in any case, excludes local levies, marketing margins and transmission tariff.
It may be recalled that the MPNG had on 21st November ordered that the margin to be charged over and above gas sale price should be fixed between the seller and buyer in all sectors, other than urea and LPG. It asked the Regulatory Board to determine the margin for supply of domestic gas to urea and LPG producers through its independent process. Now they are in the process of hiring a "consultant" to assist them in the task!
In the past, Reliance charged 13.5 cents per mmBtu as marketing margin over and above government set price of $4.205 per unit from KG-D6 gas, for the first five years' production, which ended on 31st March. Now the proposal base is the margin on gross calorific value (GCV) rather than net calorific value (NCV). If this is done, effectively, the marketing margin will increase by 11% which is opposed by the fertilizer units, who are the only consumers of gas from KG-D6. These urea units want to pay only 12.2 cents to RIL if base is changed from NCV to GCV.
All domestically produced natural gas will be priced at an average of international hub rates and the cost of importing LNG.
So far, fortunately, the urea units have not complained about non-receipt of gas from KG-D6. It is now a question of five-six weeks before this matter can be settled to mutual satisfaction. It is very clear that those involved in gas production have stated, time and again, that the price of gas fixed is not commercially viable and, if the price is increased to realistic level, in line with international prices, chances are both domestic and foreign investors would take a lot more interest in investing in exploration and development of this much needed industry, for national development.
As far as the fertilizer units are concerned, any increase that they have bear in terms of gas costs would be one way or other subsidised by the government. They must also realise that the cost of obtaining local supplies would reduce their dependence upon imports.
Both industries need each other’s support in the long run for their survival.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
Payments and settlements between PSUs and government departments that constitute a large market for the micro and small enterprises-MSEs have been very inefficient and these have been responsible for the creation of the NPAs in MSMEs
Micro, Small and Medium Enterprises (MSME) occupy an important space in the Indian economy both from the points of growth and employment. Still they suffer from serious disabilities due to their excessive dependence on debt markets. The window of opportunity that opened through the SME Exchanges has muted responses thus far. One of the key factors in the working capital cycle – credit sales suffer from payments beyond the due dates putting them in the non-performing asset (NPA) bracket – most often not on account but in spite of them. It is highly commendable that the Reserve Bank of India (RBI) has recently put out a document on the subject for comments from the public, as a sequel to the recommendations of the Committee on Financial Sector Reforms (2011-Raghuram Rajan). The issues raised are highly relevant and need resolution sooner than later. This brief only addresses the concerns raised in the document.
Having said that let me mention that in order to bind the corporates and the public sector units (PSUs) over their commitments to the MSMEs, the Companies Act 2000 has been amended to disclose all debts over Rs2 lakh in their half-yearly balance sheets. Unfortunately, neither the auditors, nor the credit rating agencies took a serious cognizance of it. Then the Canbank Factors Ltd and SBI Global Factors Ltd, were set up (1991) that had very disappointing response. Therefore, the proposal to set up a Trade Credit Exchange (TCE) where the buyers and sellers of the Bills accepted by the Financial Institutions meet to sell or buy the Bills of Exchange negotiated by the later to provide liquidity for the instrument during the tenor of the bill.
The MSME Development Act 2006 provided for arbitration and settlement processes with the State Commissioner of Industries as the Arbitrator and these have also not been able to resolve the issues either timely or to the mutual satisfaction. The main reason is that the MSMEs particularly the MSEs are in captive markets where the government departments and the PSUs even refused to accept bills that had a discount offer of 1% for prompt payment for fear of accountability and adverse comments from the Comptroller and Auditor General (CAG) eventually.
Several PSUs other than the eleven Ratnas depend heavily on budgetary grants and acceptance of memorandum of understandings (MoUs) by their related departments for honouring their purchase commitments. The state PSUs are worse still. The PSUs like the Hindustan Copper Ltd (HCL), accept goods but put payments on hold until they receive payments for their supplies. The tenor of the bills of MSMEs invariably is 60 days following the categorisation of MSME – NPAs on the threshold lines of 90 days. Therefore the question that needs to be addressed is, would the government departments and the PSUs be prepared to become the part of the TCE and conform to the trade discipline? The entire initiative now proposed would depend upon the positive response to this question.
India Inc has been having public debate on these issues and they are very likely to fall in line.
Micro and small enterprises function mostly in captive domestic unlike the medium enterprises that function both in diverse domestic and global markets. Contractual obligations therefore are more one sided and oppressive in favour of the buyer. Therefore, protection becomes imminent for the MSEs more than for the medium enterprises.
Payments and settlements between the public sector undertakings and government departments that constitute a large market for the micro and small enterprises have been very inefficient and these have been responsible for the creation of the NPAs in MSMEs. Factors did not take off. The vicious cycle of payments can be broken with only out-of-the-box solution. What the factors do basically is to create secondary market for the bills accepted by the financial institutions against goods supplied by the enterprises as part of the working capital cycle.
Additional Features to make the Secondary Markets Succeed
Government of India (GoI) can create a special fund and keep it with the two major factors –CANBANK and SBI GLOBAL Factors for the exclusive retailing to the MSMEs. This Fund should be taken recourse to by the Factors in upfront purchase of the outstanding bills beyond the agreed tenor of 60 days between the vendor and vendee when-after they can be taken to the mainstream of the factors. This would enable the free wheel of working capital to move in favour of the MSMEs.
MSME Development Act 2006 needs to be amended to make provision for the creation of such a Fund. Factors Act also needs to be amended to provide for ‘with recourse’ wheeling.
MSEs are more worried about the timely availability than cost of finance. They are not therefore so much weary about the going interest rate for working capital at 15% per annum. Even when inverse factoring takes place, if the fee plus the discounting charges of receivable factoring is retained at this rate, it would be good. But given the fact the interest and charges are outside the domain of the regulator, it depends upon how the regulator is going to enforce cost discipline to ensure that the new initiative would have many takers.
Rating institutions should be factoring the behaviour of corporates towards the MSMEs in their rating criteria as important point when there can be a modicum of compliance of the new TCE regime.
Although National Small Industries Corp Ltd (NSIC) through its vendor registration window for the SMEs has data base, the poor monitoring of payments has distanced many SMEs away. The New Exchange could have a fresh registration mandated for the Bill Trade Platform.
Pricing model options are in order although the better option would be the first one where the MSME bears the discount when the MSME seller secures immediate realisation of its bills that would allow working capital cycle undisturbed.
The secondary market should be order-based instead of auction based as the absence of bidders could spoil the broth. RBI suggested the auction-based trading.
(Dr Yerram Raju Behara is a former senior executive of SBI and former Dean of Studies at Administrative Staff College of India (ASCI). He is presently visiting Professor at Institute of Small Enterprise Development, Kochi and Advisor, KESDEE Inc, the E-Learning Centre at San Diego. The views expressed in the article are his personal.)