Without a comprehensive oil conservation policy in place and prolonged indifference towards developing renewable energy sources, we may be heading for a catastrophe, say industry veterans
Foreign publications are in a tizzy, analysing and commenting on the rapidly escalating petroleum face-off between Iran on one hand, and the western world on the other. However, India is unprepared to deal with the crisis. Without a comprehensive oil conservation policy in place and prolonged indifference towards developing renewable energy sources, we may be heading for a catastrophe, say industry veterans.
The US and European Union sanctions threaten to reduce sales of Iranian oil; while Iran has issued a counter threat of closing off the Strait of Hormuz, which is used by tankers carrying 17 mmbd (million barrels a day)—about a fifth of the world’s consumption. India, which is the second largest buyer of oil, has started to feel the pinch from the US restrictions on doing business with Iran. But since it has no sanctions in place in case the situation strains further, India may be heading towards a disaster.
“I am really concerned for the world and Indian economy. During the first two oil shocks LPG penetration in residential use was not all that high. Today it is very high in urban areas—more than 80%. Unlike developed countries we do not have sufficient strategic petroleum reserves. Also, we do not have the flexibility to switch between different kinds of fuels,” comments Bhamy Shenoy, who worked for Conoco in all phases of International petroleum industry from 1966 till 1987; and later served as an advisor for several oil companies and energy organisations in former Soviet countries and USA. Presently involved with many NGOs in Mysore, Mr Shenoy had successfully introduced the coupon system in Mysore, which rid the PDS of corruption in some districts in the state.
He says, “Now with the speculators ever ready to gamble, there will be quantum jumps in oil price. However for India, I am concerned about the physical shortage of petroleum products where required and the kind of unrest it will create. There will be riots in major cities of India when consumers will look for LPG.”
Though it is unlikely that Iran will risk military action by closing off the Strait of Hormuz, if that happens, it will be an unprecedented catastrophe, says Mr Shenoy. He says, “There is a possibility that Indian public sector oil companies losing as much as Rs360,000 crore on an annual basis should there be closure of Strait of Hormuz. Losses of 16 to 17 mmdb cannot be replaced easily. The International Energy Agency (IEA) has agreed that they would release 14mmdb from their emergency stockpile. Even assuming that IEA will succeed, there will be total chaos.” Unfortunately Indian planners do not have any contingency plan for such a disaster, he says, and instead, are only focusing on getting waivers from the USA.
His views are seconded by EAS Sarma, former power and finance secretary at the Centre. Mr Sarma says, “A small disruption in oil supplies can upset our apple cart easily. It can lead to political upheavals. Our transportation system can break down. The low-income families have become heavily dependent on kerosene everywhere. They have also become dependent even on subsidised LPG in some states. An oil supply disruption can hit the poor very hard.”
Mr Sarma also estimates that with oil supplies plateauing and the oil demand increasing from countries like China, India and Brazil, one should not be surprised to find the oil price crossing $200 per barrel in the near future. Dependence on imports from Mid Eastern countries will also affect India’s foreign relations.
“I have written several times to the government trying to impress on it the emerging seriousness of the oil crisis. My letters have drawn a blank,” says Mr Sarma. “The only issue on which there is political wrangle is on whether the prices of diesel and LPG should be increased or not, while there are bigger challenges ahead. Any responsible government, by now, would have gone in for a comprehensive oil conservation programme and a concerted effort to shift to renewable sources of energy.”
Mr Sarma rightly points out that neither nuclear power nor coal-based power will provide any relief on the oil front. “The latest move of the government to get imported nuclear reactors will compound the problem further by making us totally dependent on the West for both the reactors and the fuel. I hope that there is realisation, though belated, on the part of the prime minister to understand the emergent developments and respond to the same,” he says.
Downgrades of corporate ratings are predominantly due to weakening liquidity, volatile rupee, and pressure on demand and profitability says the ratings agency
Ratings agency CRISIL said during the third quarter, its ratings downgrade outnumbered upgrades for the first time over past eight quarters. With downgrades continuing to exceed upgrades in the next few quarters, CRISIL said, it expects pressure on the credit quality of Indian companies to continue.
“Our downgrades have outnumbered upgrades for the first time in eight quarters. We expect pressure on the credit quality of Indian companies to continue, with downgrades continuing to exceed upgrades in the next few quarters. High interest rates and sharp movement in currency value have added to the list of woes that India’s corporates face,” said Ramraj Pai, director, CRISIL Ratings.
The ratings agency said its rating action ratio (RAR), an indicator of the relative frequency of upgrades to downgrades, declined to 0.99 times in the third quarter from 1.11 times for the corresponding quarter past year. A third of the downgrades were caused by pressure on demand or profitability. Another third of the downgrades was the result of weakening liquidity, either on account of stretched working capital requirements or large capacity expansions; liquidity has emerged as a key monitorable for CRISIL in its ratings of entities.
CRISIL said, rating upgrades, however, were driven not so much by industry-wide factors, as entity-specific ones—including equity infusions by promoters resulting in correction in capital structure, and stabilisation of new capacities, which were earlier in project-implementation phase.
According to Mr Pai, corporate India continues to face challenges both in the domestic market, where there has been a slowdown in the economy and in infrastructure activity, and on the export front, with uncertainty looming large in Europe.
CRISIL’s estimates indicate that foreign currency debt of about USD17 billion will come due for repayment in the next 18 to 24 months. Refinancing the debt may be difficult because global investors have become increasingly risk-averse, given their uncertain economies back home, the ratings agency said.
Due to the sharp fall in price of the scrip on the listing day (from around Rs60 to Rs18.10), genuine investors who had purchased the shares on the first trading day have been left with no option, but, to continue holding the shares which have hardly any value and thus incurring huge losses
As part of the nationwide crackdown on Initial Public Offerings (IPO), the Securities Exchange Board of India (SEBI) has barred Tijaria Polypipes (TPL) as well as several individuals and stock brokers from accessing the securities market. As reported earlier, Hem Securities, the merchant banker to the issue, was spared from any wrongdoings. Incidentally, the merchant banker has had a history of violations in the past (see http://www.moneylife.in/article/72/22897.html).
On 27 September 2011, the company raised Rs60 crore to fund its proposed expansion and diversification plans at Rs60 per share. On 14 October 2011, the day of the listing, the stock trended much of the day between Rs40 and Rs60 before it collapsed to Rs18.10 towards the end of the day. SEBI received a complaint alleging insider trading and artificial volumes had caused huge losses to retail investors.
An investigation exposed a shocking tale of manipulation and deceit through the collusion with certain retail and qualified institutional buyers (QIBs). The three QIBs—Sparrow Asia Diversified Opportunities Fund, Credo India Thematic Fund (CREDO), and IPRO Funds were clearly allowed to exit the stock on listing day at a premium to the issue price. They exited at an average price of Rs62 per share, while the stock closed at Rs18.10 towards the end of the day.
The higher exit for QIBs was orchestrated through a set of brokers, namely—Grishma Securities Pvt Ltd (Grishma), Parklight Securities Ltd, Pinac Stock Brokers Pvt Ltd, and Volga International. These stock brokers used certain individuals as front-runners to buy the stock from QIBs and retail allottees who wanted to sell them. These individuals were neither original allottees nor subscribers to the IPO of TPL. A simple Google search will show that Parklight Securities has been habitually in trouble—it was banned for six months in 2003 was involved in the infamous Nissan Copper case and at least 15 other cases of manipulation. Each time, a generously indulgent SEBI allowed it to escape with a minor suspension, illegal administrative warning or a paltry settlement under its consent order scheme (see http://www.watchoutinvestors.com/history.asp?def_code=C0003520 ). Doesn’t this warrant a full fledged investigation?
These stock broking entities were creating artificial volumes in the scrip by carrying out structured reversal of trades, thereby inducing the innocent investors to purchase the shares of the company on the first day of its listing.
One of the stock brokers, Grishma, had used one particular client, Jivraj Zala to trade heavily in the scrip of TPL on the listing day leading to a loss of over Rs9 crore, without collecting any margin from the person. How did Grishma fund Mr Zala? Grishma manipulated the client ledger of Mr Zala to give an impression that there were funds in his account, by using other clients’ funds. This is not all. There were several other brokers who were front-running select clients in this manner, as well.
Grishma abused the KYC process by allowing Mr Zala to rack up several crores of losses, Rs9.95 crore to be precise, and yet KYC records showed that he had only an annual income of less than Rs4 lakh.
TPL lied in its prospectus that it had not raised any “bridge loans” when it had actually raised as much as Rs12.5 crore through inter corporate deposits (ICDs). According to the company, the ICDs were used to meet “business needs for a project under consideration”.
The companies that were issued ICDs, namely Nihita Financial Services Pvt Ltd, Bellisima Impex, Balasaria Holdings, were involved in diverting the IPO proceeds of TPL to select individuals and entities. For instance, Bellisima Impex transferred money received from TPL towards ICDs repayment, to Jivraj Zala, the very same retail client who lost crores of rupees.
Moreover, when the company was asked to produce evidence of ICD agreement papers, it produced fabricated copies, which were done in a very shoddy and amateurish manner, thinking it could outwit SEBI. Why did Hem Securities, the merchant banker to the issue, not verify this material fact?
To cut a long story short, TPL had orchestrated a very convenient exit for QIBs and certain retail allottees by arranging certain stock brokers to have a counter-party ready in order to buy out the IPO allottees at high prices, before the price plunged from roughly Rs62 to around Rs18.10. Due to the sharp fall in price of the scrip, genuine investors who had purchased the shares on the first day of listing have been left with no option, but, to continue holding the shares which have hardly any value and thus incurring huge losses.
The entire modus operandi was conducted in similar fashion with other brokers and entities which can be described in the graph below:
As a directive, SEBI has ordered TPL to deposit roughly Rs45 crore in an escrow account until further orders. This means the investors will not be getting back their money soon