The Straight Talker
New Delhi   12-Dec-2009
<b>Sarthak Behuria didn't mince words as he went from ministry to ministry, from bureaucrat to minister, to save India's largest company from tipping over. He might have to do it again.</b> On a muggy May afternoon in the capital in 2008, when IndianOil Corporation chief Sarthak Behuria thundered words that painted an image of a country without oil, it wasn't just an expression of a quarter of pain. It was an outpouring of years of anguish. IndianOil Corporation, the company that delivers half the country's oil products, had funds to buy raw materials for just four months, he told a press gathering. The other two public sector oil-marketing companies (OMCs), HPCL and BPCL, were worse off: three months. Everyone knew the problem: crude (input for OMCs) prices were simmering, but the government wouldn't let OMCs hike selling prices. At crude's all-tune high of $147, IndianOil Corporation was losing Rs. 410 crore a day, and it was powerless to do anything. If this continued, its losses for the year would wipe out its Rs. 41,000 crore reserves. Behuria's passionate summation that day highlighted the gravity of the problem and made the powers-that-be take note. A few months on, the government made good all the shortfalls for the year for the three public sector oil-marketing companies. Crude cooled down. So did Behuria. But take him back to that period of crisis, and Behuria flits between anger, frustration and scorn. The 56-year-old Chairman and Managing Director of IndianOil was spending more time pleading in government corridors than planning in his boardroom. He was shuttling between the oil and finance ministries. He was meeting the two ministers, he was making a case before top bureaucrats. "I had to plead before the government. I had to meet the finance and petroleum ministers on a regular basis with all the data and make presentations," recounts Behuria. He not only posed the problem. Behuria was here, there, and everywhere. When he wasn't bargaining with different arms of the government, he was conferring with the chiefs of the other two oil-marketing PSUs, whom he was representing, since they were based in Mumbai and he was in Delhi. He called up top Reserve Bank of India (RBI) officials virtually every day, trying to get IndianOil Corporation’s borrowing limit of Rs 60,000 crore raised. With no money for new projects, he was trying to rally the troops in the company. In the end, all the running around and straight talk created enough pressure on the government to prevent the Corporation, and the other two PSU refiners, from tipping over. That crisis has passed, but the problem may crop up again, as crude is once again rising. Says Vineet Nayyar, Managing Director of Tech Mahindra and an independent director on the IndianOil Corporation board: "Was he able to manage the situation? Yes. Was he able to change the situation? No. Fact is, nobody could." <b>Administered Pain Mechanism</b> It goes back to the way four petroleum products petrol, diesel, kerosene and LPG, which account for 65% of domestic consumption of oil products are priced in India. Although refiners buy crude at market prices, the government sets the prices of end-products. Prices used to be set under the administered price mechanism (APM), which assured refiners a 12% return. In March 2002, when a barrel of crude cost $23, the then-ruling National Democratic Alliance (NDA) abolished the APM and instead started revising product prices every fortnight in tandem with crude prices. But, as crude started rising, the free market was scuttled for political expediency, and the fortnightly recalibration stopped. In May 2004, when the United Progressive Alliance (UPA) took over, crude was at $34. With the Left parties as partners, the UPA didn't dare even explore price deregulation. The gap between input and selling prices for OMCs kept growing. Says SV Narasimhan, Director (Finance), and IndianOil Corporation: "Till $58 a barrel, we don't make a loss. And till $75, we can absorb losses." In June 2007, $75 was breached, but the government didn't raise prices. The first change happened in February 2008, when crude was at $95. By then, the gap between input and sale prices had widened alarmingly. In July 2008, when crude peaked at $147, the numbers showed that crude had increased by 111 % in the previous two years, but the selling price of petrol had risen only 16%. The shortfall between the revenues that OMCs actually earn and what they would have earned had product prices been market-linked is termed 'under-recoveries'. From Rs 2,190 crore in 2006-07, IndianOil Corporation’s under-recoveries jumped to Rs. 9,774 crore in 2007-08. The second quarter (July to September) of 2008-09 was the worst, as the company recorded a net loss of Rs. 7,050 crore (See graphic; Crude Behaviour). <b>Holding Back</b> Working capital became a problem. The Corporation was paving cash to buy crude, but its revenues were not enough to buy the next shipment. So, it borrowed more. "Between July and September 2008, borrowings of the three OMCs increased from Rs. 71,000 crore to Rs. 1,10,000 crore," says Narasimhan, "Ours rose from Rs. 34,500 crore to Rs. 60,000 crore—our borrowing limit." Also, between 2004 and 2008, the cost of borrowing had increased from 8% to 15%. For IndianOil, that meant an additional interest outgo of Rs. 3,000 crore. With cash tight, the Corporation was forced to choose between current operations and future expansion. Postponement or scrapping of ongoing projects, worth Rs. 40,000 crore, would have demoralised employees and antagonised investors. "We decided to take up new projects selectively,” says Behuria."Projects in an advanced stage of execution got priority." Also, morale was slipping among the marketing people. Product demand was rising. Private refiners like Reliance and Essar had shut their petrol pumps, which they had the freedom to do unlike their public sector peers, and redirected their produce into export markets. More demand was coming their way, but the PSU OMCs did not want to sell more. "We restrained our sales people," says Behuria. "But they realised it was not an unreasonable demand, because the more we sell, the more we lose." <b>Bonding Exercise</b> Someone needed to make good the under-recoveries. That had to be the government since it wasn't letting OMCs increase prices. But it was a reluctant parent, and its many arms and the loosely defined nature of control and responsibility in PSUs posed a great challenge for even someone as determined as Behuria. A St Stephen's and IIM-Ahmedabad graduate, Behuria has been an oil man all his working life. Before taking over at IndianOil Corporation, he rose through the ranks at BPCL to become its Managing Director. He knew the drill, but he gave it his stamp. Says Mr. A. K. Purwaha, Chairman, Engineers India Limited: "There has always been a certain maturity about him as far as crisis management is concerned. It was evident even at BPCL." Sometime in 2006-07, Behuria first approached the Finance Ministry to pay for the under-recoveries. It refused, saying it didn't want to ruin its budget deficit. "They had a stock answer: 'No one is stopping you from hiking prices"' says Behuria. Oil prices came under the Ministry of Petroleum and Natural Gas, but after clearance by the Union Cabinet. And that wasn't coming. Behuria was making two to three visits per week to the ministries, sometimes with the other oil-marketing chiefs, but mostly alone, as the others were in Mumbai. On one of those visits, Behuria floated the idea of oil bonds. The government could issue bonds, with tenure of seven years, to oil-marketing PSUs to the extent of their under-recoveries. The PSUs could sell these bonds and raise cash. The government would have to service only the interest portion on a running basis; the principal would come up for repayment only seven years on. "Initially, the then Petroleum Secretary SC Tripathy was against the idea. So, I decided to meet the then Cabinet Secretary, BK Chaturvedi," recalls Behuria. "I showed him numbers how the bonds could save us." Pressure was building on the government it didn't want to hike oil prices for fear of a political backlash. It didn't want to lose revenues by lowering duties. So, it agreed to issue oil bonds, but only for one-third of the under-recoveries. Another one-third would be absorbed by oil-marketing PSUs and an equal amount by upstream PSUs (ONGC, OIL and GAIL). In 2006-07, oil bonds worth Rs. 28,300 crore were issued. This climbed to Rs 32,300 crore in 2007-08 and Rs 76,000 crore in 2008-09. The Corporation closed 2008-09 with a modest profit (by its standards) of Rs. 2,950 crore. There was still one problem. In order to use the bond funds, IndianOil had to sell the oil bonds. But since the bonds didn't qualify for statutory liquidity ratio (SLR) status, banks weren't too keen on them, and they nearly always traded at a discount to market price of 2% or more. After some prodding by Behuria, in 2008, the RBI started buying the bonds from the oil companies at the prevailing market price. Behuria also got the RBI to increase the Corporation’s borrowing limit of Rs. 60,000 crore to Rs. 80,000 crore. Luckily, as the oil bonds came, IndianOil Corporation didn't need to raise more debt. As crude prices started heading south, its borrowings, in fact, fell from Rs. 60,000 crore in September 2008 to Rs. 45,000 crore in March 2009. "The recession was like a windfall for us," says Behuria. Had crude stayed at $ 140 levels, none of these measures would have sufficed. According to government estimates, the under-recoveries of the three oil-marketing PSUs for 2008-09 would have been a steep Rs. 2,45,000 crore. And the profits of all oil PSUs, upstream and downstream, would have been wiped out. That's still a danger. If crude surges uncontrollably tomorrow, and there are no corresponding increase in fuel prices, Behuria may once again have to walk around the corridors of power engaging in some straight talk.