The oil ministry proposal of new price only for incremental gas is a practical one to resolve the complex and long pending price issue, says Nomura
The petroleum ministry has proposed that a higher gas price as per the Rangarajan formula be allowed only for incremental production over and above average FY14 production, says a report from Financial Express. The proposal is negative in near term for producers, but a practical one to resolve the complex and long pending price issue, says Nomura in a research note.
"While it is just a proposal, and will need to be debated and approved by the Cabinet Committee of Economic Affairs (CCEA), to us it seems like an interesting idea to resolve the vexed gas price issue," the report says.
Nomura says, it (the proposal) will resolve the twin problems of giving a good price to encourage new investments, and at the same time no sharp cost increase for current gas users of gas particularly power, fertiliser and city gas.
"While operational modalities can be complex, we think these can be resolved. For example, in existing producing fields production will typically decline, and even to sustain current production, companies need to incur cost. If companies are not given a suitable higher price for sustaining
production, all the focus may shift to bringing new production online, at the cost of not sustaining current production," it added.
A bulk of the current production is from the nominated blocks of ONGC and Oil India. Nomura says, "If price hikes are not made applicable on the existing production, there may not be much protest from ONGC and Oil India, we think. We have held a view that, after the 100%-plus increase in June 2010, there was not much rationale for increasing administered pricing mechanism (APM) gas prices."
"For KG-D6, the existing pricing formula $4.2/mmbtu has already expired on 31 March 2014 and new pricing is due from 1st April. However, as the contractors, RIL, BP and Niko have already initiated the arbitration on gas pricing, government can decide not to give price hike
now pending result of arbitration," Nomura said.
Nomura expects the new proposal is likely to be negative for current producers, especially ONGC and OIL. It said, "While denial of higher gas price for existing production in KG-D6 would be negative for RIL, we think that the company can get the benefits retrospectively if it wins the arbitration proceedings initiated on gas pricing. We think that RIL has a strong case in the arbitration given that current pricing for the KG-D6 was valid only till March 2014 and production sharing contract (PSC) provides for market determined pricing."
According to the research note, the proposal would be positive for mid or downstream companies, while in the gas space GAIL, Indraprastha Gas and Gujarat Gas would emerge as beneficiaries. "No sharp increase in gas price for current domestic gas will be a key positive for GAIL in particular,as GAIL is using gas for internal consumption for LPG/ Petchem production as well as internal consumption of pipelines. In our numbers, we are assuming a domestic gas price increase to $8.5/mmbtu from 1 July 2014. City gas companies such as IGL and Gujarat Gas, would not need to increase the retail prices for CNG and domestic piped gas. This would provide these fuels with competitive advantage v/s other liquid fuels, and will likely spur volume growth," Nomura added.
Railways on Friday decided to hike passenger fares by 14.2% and freight rates by 6.5% from 25th June
Faced with an acute cash crunch, the Indian Railways on Friday decided to hike passenger fares by 14.2% and freight rates by 6.5% from 25th June. Currently, Railways is facing severe financial crunch with passenger subsidy touching Rs26,000 crore.
"The Railway passenger fare and freight rate revision was done as part of interim budget presented by the previous government. But the implementation of revised rates was withdrawn by previous regime because of the elections. Meeting the annual expenditure would not be possible unless the revised rates as finalized by previous government is implemented, hence order of withdrawing implementation of revised fare and freight has been withdrawn. Accordingly, the revised passenger fare and freight rates and freight structure rationalization will come into effect from 25 June 2014," the Ministry of Railways said in a release.
Second Class monthly season ticket (MST) fares of suburban and non-suburban shall be charged on the basis of 30 single journeys instead of approximately 15 single journeys. Fares of First Class monthly season tickets will be charged at four times the Second Class MST fares as is done presently. Revised fare are also applicable as per the existing method of computation on quarterly season tickets (QST), half yearly season tickets (HST) and yearly season tickets (YST), the Ministry said in the release.
Earlier in March, Mallikarjun Kharge, while presenting the interim rail budget had factored in an across the board 10% hike in passenger fares besides an additional 4.5% raise as fuel adjustment component (FAC) and an increase of freight charges of 6.5%.
On 16th May, the Railways had announced a hike in both, passenger fares and freight rates, by 14.2% and 6.5% respectively from 20th May. However, the hike notification was put on hold later in the day leaving the decision to the next Railway Minister.
Railways was aiming to garner Rs8,000 crore through the increase in passenger and freight charges last month.
According to Nomura, the fare hikes will add slightly to inflation in the near term. "The rise in passenger fares will add around 10 basis points to CPI inflation, while there will be a limited indirect impact on the CPI from the freight hike. WPI inflation is likely to see a marginally larger impact (the railway accounts for around 35% of freight traffic in India) as the cost of transporting goods such as coal, cement, oil, steel and food grains will rise. However, the hikes will improve the profitability of the railways and hence they are a move in the right direction," it said in a note.
The commodities regulator and the banking regulators need synergies with related stakeholders rather than other trading platforms
Reserve Bank of India (RBI) governor Dr Raghuram Rajan has expressed apprehension about having a Unified Financial Agency (UFA), as recommended by the Financial Sector Legislative Reforms Commission (FSLRC). Especially, Dr Rajan is not happy with the idea of merging organised financial trading activities like bond-currency controlled by RBI and commodity futures regulated by Forward Markets Commission (FMC) as he feels there is no synergy between these. However, the FSLRC is not the only one who appears to have failed to assess the commodities market. Till date the government is not sure about commodities trading and who and how it should be regulated or controlled, as highlighted by the National Spot Exchange Ltd (NSEL) payment crisis. But more about it later.
Comparing trading of commodities and bonds and the role played by incumbent regulators FMC and RBI, respectively, Dr Rajan said, the FSLRC also seems to be inconsistent in its emphasis on synergies and regulatory uniformity. "For instance," he said, "in forward trading where a real commodity is delivered, regulatory oversight over the real markets for the commodity where price is discovered, as well as over warehouses where the commodity is delivered, may be important sources of regulatory synergy. Should the FMC be subsumed under the Unified Financial Agency or would it be better off having stronger links to the ministries overseeing the real commodities? I think the answer needs more investigation."
"Similarly, is the regulation of bond trading, more synergistic with the regulation of other debt products such as bank loans and with the operation of monetary policy (which requires bond trading) than with other forms of trading? Once again, I am not sure we have a compelling answer in the FSLRC report. My personal view is that moving the regulation of bond trading at this time would severely hamper the development of the government bond market, including the process of making bonds more liquid across the spectrum, a process which the RBI is engaged in," Dr Rajan said.
Coming back to NSEL, which, although blamed for the payment crisis, has brought forward the regulatory vacuum, especially in the context of how a spot exchange needs to be run. There was no clarity on who should regulate spot exchanges. It was not under the control of Forward Markets Commission (FMC) as spot contracts are different from forward contracts. Also, since it is not a contract on financial assets, Securities and Exchange Board of India (SEBI) or Reserve Bank of India (RBI) could have regulated it. NSEL knew this better than anybody and exploited the vacuum to float contracts, which created opportunities for transactions in commodities.
Then one day when Ministry of Consumer Affairs (MCA) came out of slumber, it felt the need to regulate the exchange. Why was the regulation of NSEL never taken seriously? How can an exchange be allowed to trade critical asset like commodities without proper regulation? This is a classic case of regulatory vacuum. Or is it that it was known to the government and was being overlooked?
NSEL must be hauled up for wrongdoing, if any, but nobody seems to realise that the buck, in this case, should stop right at the top—with the Ministry which allowed a commodity spot exchange to be set up with just a government notification.
The Ministry of Consumer Affairs, with no experience of regulating a market (or consumer issues for that matter), triggered chaos with an order that virtually shut down an exchange overnight. This, after it sat on concerns about NSEL’s ready-forward trades (conducted openly and transparently by the bourse), for more than a year. When NSEL suspended all contracts other than e-series, and decided to merge settlements, it triggered a panic, which ultimately turned into a Rs5,600 crore payment crisis.
The question again is why there was no attempt to create a framework or infrastructure to regulate commodities exchanges. Why were spot exchanges not under the regulation of FMC, which regulates commodity trading? Why a half-baked system without proper oversight and regulatory inspections was allowed to operate under the sleepy disinterest of the Ministry of Consumer Affairs?
NSEL's mission statement reads, “To develop a pan-India, institutionalized, electronic, transparent Common Indian Market offering compulsory delivery-based spot contracts in various agricultural and non-agricultural commodities with a reduced cost of intermediation by improving marketing efficiency and, thereby improving producers’ price realization coupled with reduction in consumer paid price”.
However, nobody was interested in knowing or investigating how the spot exchange became a place for speculation for investors and commodity holders. People with no direct interest in commodities started speculating in commodities. There are reports which suggest that the spot exchange became a place where 10% plus returns were guaranteed. While commodity holders deposited commodities in the warehouse to sell commodity, investors bought it and sold a longer settlement period. For example, if the depositor of the commodity sold it on T+2 basis and was bought by an investor, the investor further sold it for T+25 basis. This resulted in the creation of a repurchase contract, which is also known as repo contract. This was the beginning of speculative activity. Most of the transactions were driven by speculation and the opportunity to make short term and quick money.
Earlier, while speaking with Moneylife about the T+2 and T+25 contracts, the top management of NSEL had said, “In T+2 contracts, farmers, producers and traders sell commodities for delivery on T+2 days and they get payment on T+2 days. The actual users, processors and exporters, buy commodities in T+25 contracts, make payment on T+25th day and get delivery. An investor buys the commodity in T+2 contract and sells the same in T+25 contract. As a result, trading volume for T+2 and T+25 is identical. All such trades are backed by physical delivery of goods and warehouse receipts (WRs).”
However, as it has come to light, NSEL sacked its chief executive Anjani Sinha accusing him of having hushed up the fact that WRs were not backed by physical stock of commodities. The forward contracts of NSEL should have been backed up by the goods in the warehouses but nobody seemed to verify whether the goods actually existed or not. In addition, there was no mechanism or third party verification of stocks that NSEL claimed to have in its warehouses. The WRs were used in similar manner to bank receipts used by Harshad Mehta during the 1992 scam. (http://www.moneylife.in/article/nsels-warehousing-receipts-similar-to-bankers-receipts-of-harshad-mehta-scam/34239.html)
Debashis Basu and Sucheta Dalal in the book 'The Scam', had written about how the quality of regulation failed to keep pace with the volumes -most glaringly in stock markets- and the absence of penalties and disclosures of transactions. The same holds true for the commodities market this time around.
What is shocking is that there is still no attempt to conduct a detailed investigation along the lines of the Janakiraman Committee of 1992 or any attempt to pin accountability for the failure to regulate by the Ministry and the mischief by the NSEL.
The NSEL crisis is a great learning for regulators, investors as well as exchanges. There is an immediate need to regulate exchanges on a comprehensive basis. In addition, the government needs to ensure that blatant speculative activities are not allowed through exchange platforms especially in case of commodities.
Will the Narendra Modi-led government take the lead in order to have proper regulations in place in an over regulated environment? Will RBI governor Dr Rajan's strong views and comments on FSLRC report sound the bell for the government? Only time will tell.
As Moneylife pointed out, the recommendation of creating UFA looks revolutionary on paper, but is neither practical nor of any use. From the consumers’ perspective, the track record of these regulators is a huge disappointment. In fact, there is hardly an example about an investor or saver receiving satisfactory redressal of his grievances from these regulators.
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