Mumbai: The Directorate General of Hydrocarbons (DGH), the nodal agency for development of hydrocarbons in India, has postponed clearing around Rs358 crore of expenditure claimed by Reliance Industries Ltd, or RIL, as “corporate office support” for developing oil and gas blocks allotted to it till the Comptroller and Auditor General of India (CAG) completes its audit.
DGH has said it would base its approval on the comments and advice of CAG, which is conducting an audit into the costs incurred by RIL for one of its blocks, KG D6 (Krishna-Godavari D6), India’s largest gas find till date.
RIL has shown overheads such as directors’ emoluments, directors’ office expenses, and services such as administration, human resources (HR) and audit as a part of the expenses incurred by it in the course of developing oil and gas blocks allotted to it.
As per the production sharing contract signed by the government, an operator has to share a part of the revenue earned by selling oil or gas with the government after deducting the cost of developing the block.
If DGH ultimately decides against clearing the Rs357.72 crore shown by RIL as corporate office support cost, the share that the company would have to pay to the government would stand proportionately increased.
“Since the block (KGD6) is currently under the audit of CAG, and CAG is yet to submit its report, it will be appropriate to obtain the comments and advice of CAG before taking further view on parent company overhead proposed by the operator,” a DGH letter dated 21 September to the joint secretary of the ministry of petroleum and natural gas stated.
These expenses were incurred between 2000-01 and 2008-09, according to the auditors’ report furnished by RIL to certify the same.
An RIL spokesman declined to comment for this story.
S.K. Srivastava, director general of DGH, said the government agency had disallowed approving parent company overhead expenses in the past and a letter had been written to the ministry, but declined to give any further details on the matter.
The DGH letter, an RIL letter to DGH dated 28 July, and the auditor’s certificate have been reviewed by Mint.
While the scope of the CAG audit was to ascertain whether there was on overstatement of capital expenditure on RIL’s part with respect to development work at KG D6, the DGH letter says that it would wait for the KG D6 audit report before clearing corporate office support costs incurred by RIL for all the 35 oil and gas blocks where it operates.
The intention of the audit was to find out whether there was any loss of revenue to the government due to inflation of capital expenditure incurred. The government is to get 10-90% of the revenue generated from the sale of gas over the life of the KG basin, after deducting the expenses incurred by the operator, RIL in this case.
PTI had reported on 7 September that CAG had completed the audit and sent a part of the report to the ministry for its response.
The audit, initiated after allegations on RIL’s expenses were made by Anil Ambani-controlled Reliance Natural Resources Ltd, was subsequently extended to other big contracts whose fields had begun production.
The 21 September letter written by DGH to the joint secretary (exploration) of the ministry of petroleum and natural gas stated that the expense accounts between 2000-01 and 2007-08 were earlier presented by RIL as parent company overhead expenses, but disallowed by DGH on grounds that the operator (RIL) “has no parent company”.
Subsequently, RIL reversed the parent company overhead costs till 2007-08 and reclassified them as corporate office support expenses.
It added the corporate office support costs for 2008-09 and presented the cumulative expense schedule to DGH for approval.
The 21 September letter states that DGH has already once disallowed the said reclassification citing “lack of appropriate auditory evidence”.
Following this, RIL obtained a certificate from the auditor of the joint venture between RIL and Canada-based Niko Resources Ltd, chartered accountants Haribhakti and Co., and submitted it to DGH for consideration at a management committee meeting scheduled for 30 July. While issuing the certificate that such expenses were allowed under the production sharing contract, Haribhakti “relied on the certificate given by the statutory auditors of RIL, Chaturvedi and Shah chartered accountants,” the letter noted.
The statutory auditors certified that the said amount had been allocated and incurred for the stated purposes, it added.
The auditor’s report states that between 2000-01 and 2008-09, RIL had allocated Rs500.12 crore towards corporate office support costs, including Rs99.43 crore for directors’ emoluments, Rs185.72 crore for directors’ office expenses, Rs193.24 crore in consideration for time spent by the core management for exploration and production-related functions and shares services including payroll, administration, HR, audit and taxation, and Rs21.73 crore towards IT support.
The actual spending, however, was Rs357.72 crore for 35 oil and gas blocks, according to the auditor’s report.