Costly proposition

Calcutta, May 23: The Union ministry of finance has questioned the rationale behind the merger of IBP with Indian Oil Corporation.

The ministry has asked Indian Oil, the parent company of IBP, to explain the financial benefit it would derive out of the proposed merger.

So far, Indian Oil (IOC) has not spelt out in exact terms how much it would save from the merger. Instead, it has dwelt more on operational synergies. Although the oil major has spoken about financial gains, IOC has not put a value to it.

Sources said the ministry has asked IOC how a merger would be profitable to the group since IBP, as a marketing division under Indian Oil, would continue to post loss due to under recoveries as it is doing now as an independent company.

IOC, with a 53.38 per cent stake, has complete control of IBP.

IBP would have posted a loss of Rs 2 crore during 2004-05 had it not received Rs 85.46 crore from the Petroleum Planning and Analysis Cell.

With international crude prices hovering at $50 a barrel and the Centre holding on to the domestic retail prices, IBP has suffered an under recovery of Rs 563 crore from the sale of kerosene, cooking gas, petrol and diesel last year.

Although IOC would save on taxes from the proposed merger, the finance ministry has asked the company to quantify it.

Even though the petroleum ministry, the parent ministry of IBP and IOC, is in favour of the merger, the finance ministry?s comments are valuable because the proposal has to be approved by the cabinet committee on economic affairs.

It may be recalled that the finance ministry had questioned the swap ratio of 1:1.25 for the IBP-IOC merger saying it would lead to destruction of the government?s wealth.

This is because the government holds 82.03 per cent in IOC and a swap ratio in favour of IBP would lead to the dissolution of its share.

The ministry has also mooted the net worth valuation method to arrive at the possible swap ratio.

The consultants and valuer appointed by the two companies had taken into account the expected earning potential and share prices of the duo to arrive at the swap ratio.

To work out the net worth of the two companies, the book value of IBP and IOC will have to be taken into account.

As on March 31, 2004, IOC and IBP had a book value of Rs 200 and Rs 284 respectively. Going by that, the swap ratio will be more in favour of IBP.

Sources said the finance ministry is trying to evolve a set norm for valuation of state-owned entities, as many more mergers among PSUs are likely to take place.

IBP has recorded a sales growth of 12.3 per cent in petrol compared with the 4.1 per cent national growth. In diesel, sales grew by 12 per cent against the industry average of 4 per cent. With 3,275 retail outlets, IBP has 10.7 per cent market share in diesel and 8.9 per cent in petrol.