Cochin Refineries itching to expand

Things are finally happening at Cochin Refineries. An expansion project of 3 million tpa has been recently cleared by the government, in response to which the company has issued a tender notice inviting bids. The refinery had been waiting for nearly two years to get this the approval from the government.

Operating at more than its 100 per cent peak capacity levels, Cochin Refineries has been left with no alternative but to expand its capacities.

This can be seen from its 1996-97 performance, where sales have almost remained constant. Also, as the company is not allowed to sell its products in the market, it will not be able to record growth in total income through "traded goods". That only leaves capacity expansions to fuel growth.

Cochin Refineries plans to set up a 500 mw power plant using the fuel generated in its refinery through a joint venture with Kerala state electricity board. CRL will hold 26 per cent stake in the joint venture with its contribution standing at Rs 125 crore.

One major benefit for the company will be that it will have a ready market for the fuel oil produced in its plant. Chances are that the company will get the `marketing margins' associated with these sales. It may be noted that the company has already received clearance from the government to sell feedstocks like benzene, hexane, propylene, etc. Thus, even if the oil sector is not deregulated, Cochin Refineries has the potential for recording a decent growth rate.

RBI depreciation norms need clarity

The Reserve Bank of India (RBI) had advised commercial banks that excess provisions for depreciation in investments should be taken to the profit and loss account as a credit item. It has now, in a more recent circular, advised banks that they should also ensure that in this process net profit is not inflated.

If the excess provision is taken as a credit item in the P&L account, quite obviously net profit for the year would have to be higher by the amount of excess provision.

The only way net profit would not increase is if the excess provision is taken as a credit item below the line. But if that were the case, the credit would have to be to the P&L appropriation account and not to the P&L account per se. The P&L appropriation account would then be debited and the credit taken to a special reserve appearing in the balance sheet.

It is difficult to understand why the whole accounting process is not shortened by not routing the entry through the P&L account. In short, provisions could be debited and the required reserve credited, without the intermediate stage of passing through the P&L account. This is in line with the international practice.

Scant respect for result announcements

According to reports, CESC, an RPG group utility, has deferred its board meeting to consider the unaudited results for the second half of 1996-97 to June 10. The reason apparently is that some of the directors will not be available before June.

Sec 287(2) of the Companies Act provides that a quorum for a meeting of the board of directors of a company shall be one-third of its strength or two directors whichever is higher. It is difficult to understand why even two directors, or one-third of the board will not be available before June to consider the unaudited results.

It is well-known that unaudited results should be declared within two months of the closure of the financial year. The episode merely shows the scant importance in which the unaudited results are being viewed. After all the talk of corporate governance, the cavalier attitude towards declaring results needs to be deplored.

Another issue about the company is the refusal by the state to allow it to hike its fuel surcharge to 44 paise. It is reported that fuel adjustment charges will be hiked to 40 paise effective from April 1, 1997. The refusal is cited as one of the reasons for the poor performance of the company.

This does not make much sense. In terms of the guidelines of the D K Bose committee, calculations for fuel adjustment charges will have to be made at the maximum T&D loss of 14 per cent.

In 1995-96, T&D loss of CESC was 19.9 per cent and for last ten years it has been consistently above 15 per cent. Rather than complaining, CESC should concentrate on reducing its T&D loss. True, the company has been investing to improve the T&D loss, and that should hopefully show results.

RBI needs to update data

Now that the limit for investment in bank debentures has been removed, the Reserve Bank of India data on credit off-take needs to be changed to reflect the changed circumstances. At present, data is available fortnightly on off-take of food as well as non-food credit. But there is no data available on the amounts bank invest in corporates. With bank investment in debentures picking up, it would be necessary to incorporate this data too to track the level of funds made available by banks to corporates.

Similarly, now that financial institutions have started disbursing short-term finance to corporates, monitoring the amount of these funds will also be necessary. Currently, an increase in short-term credit from the financial institutions is not reflected in the data on credit disbursed to the industrial sector.

It would be necessary for the RBI to take this data too into account, as otherwise bank credit may show a dip while actually all that might be happening is that financial institutions have taken over some of the banks' limits.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.