Indian government needs to review factors affecting LNG opportunities very seriously and ensure when adequate gas production is reached at domestic level, first priority should be for both agriculture and power generation so that a lot of subsidy burden can be reduced
In order to produce NKP (nitrogen, phosphorous and potassium) class of fertilisers, Fertilisers and Chemicals Travancore Ltd (FACT) requires Ammonia, for which it uses natural gas, obtained for Petronet LNG. Petronet LNG has a terminal at Cochin. Recently, the LNG price has been raised to $24.35 per unit (million cubic metres) from the existing rate of $21.5, causing avoidable hardship and increased costs to the fertiliser company. On the top of this, recently, FACT has been persuaded to buy an entire shipment of 80 million cubic metres, whereas the requirement is only 20 mcm for a month, with which they would be able to produce fertilisers, including roughly 80,000 tonnes of caprolactum and factamphos needed by agriculturists.
Normally, FACT shuts down the plant during April-May for annual maintenance, and their officials now feel that such a large supply would be a burden. Besides, every increase in LNG price, in dollar terms, sets back the company by about Rs50 crore per year.
RK Garg, director of finance, Petronet LNG, has clarified that sale of natural gas to consumers was being done by a consortium of GAIL, BPCL and IOC, and that gas is sold at spot rates. Naturally, if the rates prevailing in the global markets rose higher due to demand in winter, this will automatically affect the price in India. He has also stated that they normally give two months advance notice in regard to price increase.
In any case, in order to assist the regular and large consumers, like FACT, if Petronet LNG are notified their annual firm needs (commitments, really!) and then would be able to supply at better prices! This would be applicable to all fertiliser units, and they need not resort to import of ammonia itself directly, which is what FACT is planning to do! What is the problem for FACT to make this information available?
One more issue that has affected large consumers such as FACT, refers to the State government-levied VAT (value added tax of 14.42%) on LNG, and they have requested that this should be waived, for at least five years, for the industry to establish itself. In any case, any tax would ultimately find its way to be charged to the consumer and for the government to give subsidy on fertiliser has a cyclic effect!
It may be noted that in 2009, Petronet LNG signed a 20 year contract with Mobil Australia Resource Co Pty Ltd, for supplying 1.4 million tonnes annually for the Kochi LNG terminal. According to AK Balyan, managing director and chief executive of Petronet LNG, imported gas from the spot market comes at about $18 per unit (mmBtu) while on long term contract price comes to about $13 per unit, as against the domestic gas price, which ranges, from $4.2 to $5.7 per unit, at the moment. This will practically double with effect from 1st April this year! Even then, Indian gas would be cheaper, but the pity is that it is not available in the required quantity, at least for the time being!
Even the above contract is linked to crude oil prices internationally and if crude prices soften, gas price will automatically come down, as per Balyan.
In the recently held Petrotech 2014 conference, Veerappa Moily, our petroleum minister, had the opportunity to meet many interested delegates, one of whom, Nizar al-Adsani, head of the Kuwait Petroleum Corporation (KPC) had shown interest in the industry. Moily urged Kuwaiti participation in the LNG Terminals at Visakhapatnam (Andhra Pradesh) and the Mangalore/Pudur units in Karnataka since India plans to set up 12 such terminals all over the country.
In fact, earlier, ONGC and KPC had signed a memorandum of understanding as KPC wanted to invest 26% of Rs21,396 crore petrochemical plant in Dahej, Gujarat, as well as another in Mangalore. Further details are expected shortly.
In the field of LNG development, another important development relates to the global tender floated by GAIL for LNG ships to haul 5.8 million tonnes of LNG, purchased from USA, for delivery spread over 20 years, from 2017 onwards. These 12 ships are estimated to cost about $2.8 billion, in addition to which GAIL may also lease seven to eight vessels to bring in the LNG to India. LNG ships cost about $200 million each, depending upon design, type, capacity and volume, and the oil ministry wants domestic shipbuilders to explore the possibility of supplying some! China, with whom India is always compared, almost in every field, has built a number of such vessels, which are owned by local fleet owners!
It may be of interest for the reader to note that Cochin Shipyard built India's aircraft carrier, and there is no reason why they should not be given the opportunity to build LNG tankers. Apart from Cochin Shipyards, only Larsen & Toubro, who have technical collaboration with Mitsubishi Heavy Industries of Japan may be given special consideration to promote the Indian shipbuilding industry, as Mitsubishi have the required expertise.
However, the Indian shipping industry, according to KM Sheth, executive chairman of Great Eastern Shipping Company, are burdened with a "service tax of 12%" and tax on seafarer's income, resulting in loss of experienced personnel from the industry. In fact, only tax incentives have helped the development of this industry in countries like Singapore, Norway and Greece, to name a few. At one time, Indian vessels carried 35% of the national cargo, but today, it is less than 10% as we appear to depend upon foreign carriers, and our growth is only 1.5% of the world's tonnage!
Indian government needs to review these factors very seriously and ensure when adequate gas production is reached in the domestic sector, the first priority should be for both agriculture and power generation so that a lot of subsidy burden can be reduced, if not totally avoided! But for the present, instead of indirectly forcing FACT to import Ammonia, the government must seriously consider waiving the service tax of 14.42% for a start!
(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.)
Why are there so many bank branches in a tiny town
Here is a quiz question. Which town in India has the maximum number of bank branches and is the favourite destination for public sector banks to launch new products and services? In case you are clueless, the answer is Sivaganga, a little-known district in Tamil Nadu, which happens to be the constituency of P Chidambaram, India’s finance minister, at various times over the past 15 years.
While Amethi and Rae Bareilly, the constituencies of Rahul and Sonia Gandhi, respectively, may be lagging in development and infrastructure, Mr Chidambaram has ensured that his constituency is not lacking in banking services and easy loans. The district has a whopping 200 branches and every bank chairman knows that the best way to attract the FM’s benevolent attention is to open a branch, or launch a mobile banking service at Sivaganga, and to invite Mr Chidambaram to inaugurate it. According to a newspaper report, the finance minister has visited his constituency 95 times in the past four years and is always happy to do a bit of ribbon-cutting during those trips.
Unfortunately, senior bankers also admit that no chairman cares about the branch beyond the grand inauguration and initial lending to impress the minister. Immediately afterwards, the branch begins to languish.
Once Again, Anti-Investor Move, To Revive Investor Sentiment!
How did the capital market regulator react to one of the worst years for the primary market? By scrapping mandatory IPO (initial public offerings) grading and making it voluntary! Chairman UK Sinha’s public speeches are about restoring investor confidence but he clearly does not know how to do it. So, powerful companies and market intermediaries, once again, used a depressed primary market to successfully lobby for a dilution of investor protection measures. IPO grading was advocated by investor activists and associations around 2003 and was reluctantly mandated by the Securities and Exchange Board of India (SEBI) in 2007, only to be dropped six years on.
SEBI’s excuse for scrapping mandatory grading is the reported findings of ‘various studies’ that a large number of investors are ‘not influenced by grades’; that plenty of low-grade IPOs received a big response from retail and institutional investors and, thirdly, that IPOs with high grades yielded more losses. In a clear contradiction of these claims, media reports also say that SEBI’s action was ‘a move to uplift the dormant primary market’. It is also unclear how SEBI rejected yet another study which shows that, over time, IPOs with higher grades yielded better price multiples.
Indian institutions have scant regard for history, so SEBI did not bother to consult investor associations who had fought long and hard for IPO grading. Nor did it bother to examine whether the grading process could be made more meaningful or adequately publicised. Thanks to pressure from powerful corporate lobbies, the IPO grading process was hobbled at the very inception. Investor groups wanted IPO grading to be independent and rating agencies to be paid from the large pool of badly utilised investor protection funds with stock exchanges and the ministry of corporate affairs. This did not happen. Companies were paying for their own rating—leading to charges about shoddy ratings—especially when India’s top rating agency, CRISIL gave Reliance Power a 5-star grade at the peak of the bull run of January 2008.
However, the grading did protect genuine investors, who had no time, or ability, to wade through bulky offer documents to find out what the companies wanted to hide. The simple 5-point grade, based on an expert evaluation of fundamentals by a rating agency, at least, acted as a fact check, even if it did not cover price risk.
By making it voluntary, SEBI has effectively killed IPO grading. But, instead of celebrating their victory, companies and market intermediaries should be really worried at the complete absence of protest. It shows that the investor simply doesn’t care and that is the real reason why only three companies made a public offering in 2013.