Major events of the week were Changes in rules governing Oil & Gas exploration, fund infusion by the government in Public sector banks and Relaxation in Angel Tax in economy and policy space. Reliance ADAG group companies and Jet Airways remain in the news in Corporate space, albeit, for all the wrong reasons. Changes in rules governing Oil & Gas exploration – Government announced major changes in rules governing oil & gas exploration and production to boost domestic production. Most important of these is the change in auction method from royalty based auction to ‘work program’ based. It means contract would be awarded to the company making maximum investment in exploration and production instead of those who give maximum revenue to government. Amendments also reduce the amount of royalty producer would have to pay for production over and above the production plan. Other changes include allowing producers to sell natural gas at market price and remove the restriction on user industries. As per the current practice, price of gas is determined by the government as per a formula based on global prices and not dictated but domestic demand supply conditions. Current regulations also mandate sale of gas to specific ‘priority sectors’ which would get relaxed after the change. In yet another change, it has allowed public sector companies to induct private partners with focus on those having better technology for exploration. However, oil & gas exploration is highly risky, complex and uncertain proposition and asserting that these changes would boost domestic production would be farfetched.
Bank Recapitalization – Government announced capital infusion of over Rs 48,000 crore in the Public Sector Banks to help them improve their equity capital base. Government has infused Rs 1.9 lakh crore in PSB in about last eighteen months since Oct’17. Most of these banks have seen erosion of their equity capital due to higher provisioning for NPAs. This has also resulted in 12 of them being put under PCA by RBI. (Three of them were recently removed from the list). A significant part of the capital has been allocated to Allahabad Bank and Corporation Bank, two relatively big banks still under PCA. Fund infusion should help them come out of PCA and resume normal banking business. However, fund allocation across individual banks is not easy as it has to meet two objectives to help the weaker banks as well as reward the more efficient ones.
Relaxation in Angel Tax – In an effort to provide support to start-ups, government modified rules governing the angel tax. As per the change, investments made into a startup would be valued at par and not linked to market valuation. Rules existing until now used to taken into consideration the fair value of the startup based on a specific method and amount raised above that was considered as ‘other income’ liable to be taxed. Further, investment ceiling for tax concessions available to startups has been raised from current Rs 10 crore to Rs 25 crore. In other concessions, income limit to be considered as startup has been raised from Rs 25 crore to Rs 100 crore. Further, an entity incorporated over last ten years can claim exemption as startup against earlier limit of seven years.
Reliance ADAG Group – Reliance groups of companies promoted by Anil Ambani and the chairman himself hogged lot of limelight for a variety of reasons. To begin with, in a judgment related to payment of dues to Ericsson, the Supreme Court pronounced Reliance Communications and its promoter guilty of contempt of court. It ordered them to clear the dues within four weeks, failing which, the chairman would have to go to jail. In another incident, Mumbai High Court came down heavily on group companies for “misleading the court”. Case relates to sale of pledged share of group companies by Edelweiss since the value of share had fallen substantially and company failed to provide additional security. To avoid further decline in its shares till its businesses stabilize, the group managed to convince its lenders (against shares pledged by the promoter) not to exercise their right to sell the shares for a period of six months even if the value of the shares falls below the threshold. The groups companies would meet their obligations to make principal and interest payments as per the schedule. However, the arrangement hasn’t gone down well with RBI as lenders appear to have provided blanket protection to the group putting investors’ money at risk. It has, reportedly, asked lenders to furnish details of the agreement. Group companies are exploring various options to raise funds through sale of promoters’ stake to meet their obligations.
Jet Airways – Jet Airways continues to remain in news after last week’s revival plan proposed by the lenders led by SBI. As per the plan, lenders would be issued 11.4 crore shares in the airline at a price of Re 1 giving them over 50% share in the company. Banks would not pay for these shares but a small part of their existing debt would get converted into equity. The airline would raise additional resources from other investors including Etihad, whose shareholding in the company would increase further. It may result in existing promoters losing control of the company. Airline would further need to take measures to reduce debt by assets disposal etc. While the proposal is a last ditch attempt to save the airline, it doesn’t generate much confidence of having the potential to turnaround the company considering its high operating cost, high debt level and highly competitive business environment.
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