The Union government has deferred, for now, the follow-on public offering (FPO) of Indian Oil Corp Ltd (IOC), a state-owned oil marketing company (OMC). There is speculation that the FPO may be revived sometime next year.
This is not an unexpected development. At one level, OMCs have been at the receiving end of the government’s unwillingness to let fuels be priced properly, whether by the market or by any other appropriate mechanism that allows a close correlation between the price of crude oil and refined products such as diesel.
What this does to OMC balance sheets is disastrous. For example, in FY10, under-recoveries amounted to Rs 46,100 crore. OMCs ended up getting cash/oil bonds to the tune of Rs 26,000 crore. These cannot be called anything but losses. Now, these are losses that make nonsense of calculating the value of any company let alone allowing investors to arrive at a value for the equity on offer.
That, however, was in the last fiscal: This year, conservative estimates pegged under-recoveries at Rs 53,600 crore based on a crude price of $79 per barrel. That level was breached sometime ago and now, given the steady upward rise of crude prices, calculating these losses would be difficult and the final, properly accounted, losses would not be available until sometime in the next fiscal.
More alarming estimates point to a level of around Rs 88,000 crore based on the assumption that crude price hovers around $90 per barrel. There is nothing alarming about this assumption. This is one aspect of the pricing situation that has undone the FPO.
This is also the explanation that has been offered by government managers. This is, at best, a partial explanation. The bigger issue is that of apportioning the losses. There is lack of clarity on this issue. In FY10, of the gross under-recoveries of Rs 46,100 crore, upstream companies shared 31% of the losses and OMCs 56%, much lower than the 69% they had to share in FY09. From an investor, retail or institutional point of view, the formula should be fixed so that there is continuity in estimating the losses of OMCs. Like crude prices, there is nothing fixed about that too.
Ideally, it is not companies, but consumers who should be bearing these costs. But that is a “political” issue the government refuses to face. Unless that is done, episodes such as the deferment of the IOC FPO cannot be ruled out in the future.
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