State-run Shipping Corp. of India Ltd (SCI) has put up one of its four oil supertankers for sale as the firm pushes to reverse two straight full-year losses and retain its coveted navratna tag, a status that gives it greater autonomy from government control and flexibility in deciding on investments.
India’s biggest ocean carrier is under threat of being stripped of its navratna status—granted in 2009—if it makes losses in the year to March 2014, which would be its third in a row.
According to the guidelines of the department of public enterprises for India’s state-owned entities, a company will lose its navratna status if it posts losses for three consecutive years. SCI reported losses in fiscal years 2012 and 2013— ₹ 428.21 crore and ₹ 114.31 crore, respectively. It posted a loss of ₹ 98.70 crore for the quarter ended 30 June, more than the ₹ 54.87-crore loss it made a year earlier.
Losing the navratna status will mean that SCI will not have financial autonomy—such as deciding on projects worth up to ₹ 1,000 crore—and, hence, will have to seek approval from the shipping ministry for its capital expenditure plans.
The supertanker—Desh Ujaala—with a capacity to load as much as 316,217 tonnes of crude, will be available for sale at Singapore anchorage on 22 November, according to a tender issued on the website of SCI.
The Mumbai-based firm is making all efforts to return to profit and avoid this embarrassment, which would be a rare instance of a state-owned entity losing its navratna tag.
SCI paid $65.2 million (around ₹ 403.5 crore today) to buy the new oil supertanker, or a so-called very large crude carrier, that joined its fleet in 2005.
It’s unheard of in the company’s history to sell a young ship (eight years old) when it can be run for at least 25 years, in accordance with international regulations. In today’s second-hand (used ship) market, the supertanker will fetch $35-40 million. For the record, SCI says the freight market for supertankers is not in good shape and, hence, it decided to sell the ship.
But SCI has not many choices before it. Its cash surplus built-up during the good years is fast depleting. With the freight market remaining sluggish, the firm has very little room to post profits unless it takes difficult decisions.
To be sure, the company is not making cash losses despite being caught in one of the worst downturns in living memory. The losses are mainly book losses due to a higher depreciation on new ships that joined its fleet over the past three years.
As the downturn in the shipping industry started to bite, SCI put a freeze on ordering new ships from April 2012. Beginning April 2011, 23 new ships have joined SCI’s fleet while 28 old ships were sold as scrap.
SCI currently has 14 ships under construction at overseas and local yards that were ordered prior to April 2012.
The company has already started making difficult choices, mindful that its actions will be subjected to intense scrutiny by the Comptroller and Auditor General of India (CAG), the government auditor, in later years.
In September, when China’s Rongcheng Shenfei Shipbuilding Co. Ltd slipped on its delivery schedule for constructing a container ship with a capacity to load 3,500 standard containers, SCI grabbed the opportunity to cancel the ship that it had ordered in July 2011 for $33 million, and freed much needed cash. In good times, SCI would have condoned such delays and continued with the shipbuilding contract.
With just five months left for the fiscal to end, the sale of the supertanker is seen as a sure shot way to prop up the company’s books even if it means selling the ship at a price much lower than what it was purchased for.
The irony of all this is that SCI has suddenly woken up to see the benefits of a navratna tag and wants to utilize the powers granted under it just to preserve the status.
Being a state-controlled firm, SCI continued to follow government-framed rules, procedures and regulations while buying and selling ships despite having greater financial powers bestowed on it by the navratna status.
Thus far, SCI has shied away—for reasons best known to it—from reaping the benefits of a navratna status to the fullest extent, be it on buying used ships or on re-negotiating prices with shipbuilders on new ships ordered a couple of years ago to factor the current market realities, something which has been happening globally since the meltdown.
SCI’s rivals, who are free from such rules and regulations on buying and selling ships—a normal part of the shipping business—have been swift and agile in this regard while steering themselves through difficult times.
The firm also expects to make some money by selling its 50% stake in a chemical carrier joint venture (JV) it ran with India’s Forbes and Co. Ltd and Sterling Investment Corp. Pvt. Ltd (entities owned by India’s Shapoorji Pallonji Group) from 2009.
The SCI board recently decided to exit the chemical carrier joint venture after continuous losses eroded the net worth of the joint venture firm.
SCI’s decision to float a joint venture with a group that had neither the experience nor the cargo in this business has been a topic of discussion in shipping circles.
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