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Navratna PSU sells investments, takes loan to ‘bail out’ railways with Rs 3,000 cr payment

Container Corporation made advance freight payment of Rs 3,000 cr to Indian Railways at the fag end of FY19, helping improve its operating ratio.

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New Delhi: Yet another instance of a successful public sector company coming to the aid of the Modi government by helping its finances – which faced a massive shortfall in tax revenues at the fag end of fiscal 2018-19 – has come to light.

The state-run firm, Container Corporation of India, made an advance freight payment of Rs 3,000 crore to Indian Railways in 2018-19 by taking a working capital loan and liquidating its investments, ThePrint has learnt.

The payment obviously benefited the cash-starved railways but hurt the cash flows of the Navratna PSU.

The payment, made for freight movement for the year 2019-20, was part of the railways freight advance scheme, the guidelines for which were notified on 9 March.

It encouraged bulk transporters to make advance payments in the last quarter of a financial year to lock in fixed freight rates for the next year as the railways looked to curb the alarming rise in its operating ratio that had crossed 110 in November 2018.

Operating ratio — a key indicator of financial health — shows how much the railways spends to earn a rupee. So an operating ratio of more than 100 means that its expenditure is more than its earnings.

However, only state-owned firms such as Container Corporation and NTPC Ltd showed interest in the scheme and contributed Rs 13,000 crore. Private sector firms in sectors such as coal, cement, steel and fertilisers that transport bulk cargo did not find the scheme attractive enough.

Also readONGC says it’s not facing a fund crunch despite falling cash balance

‘Not attractive enough’

An analysis of the balance sheet of Container Corporation in 2018-19 shows that the Rs 3,000 crore outgo nearly wiped out the cash reserves of the firm and forced it borrow for the first time in years.

The scheme was introduced to help the railways to improve its operating ratio that had increased to alarming proportions, prompting the finance ministry to ask the national transporter to improve its operating finances, said a railway ministry official who did not wish to be identified.

He, however, pointed out that the rebate from the fixed tariffs may not be high enough to offset the interest cost of the loan taken by Container Corp.

“The fact that no private sector company has opted for the scheme shows that the scheme was not attractive enough and the benefits do not outweigh the interest costs,” the official added.

Emails sent to the top management of Container Corporation and the Indian Railways spokesperson seeking their comment were not answered.

‘Competitive advantage’

Details of the transaction are, however, mentioned in Container Corporation’s balance sheet for 2018-19.

In the notes section of the balance sheet, the PSU’s auditor said, “During the Financial year 2018-19, the holding company has entered into an agreement with the Indian Railways wherein the holding company agrees to pay INR 4,500 Crores in advance in two installments towards payment of freight charges for the Financial Year 2019-20 and paid INR 3000 crores as advance rail freight towards first instalment.”

To fulfill this commitment, the holding company liquidated its investment and borrowed Rs 700 crore as working capital loan from banks, the auditor added.

However, the company has justified the advance payment arguing that the locked-in tariff rates will help their business.

“As per management assessment, the benefit of fixed base rail freight for the financial year 2019-20 would not only offset the cost of fund and sacrifice of income on investments but will also give competitive advantage and help in growth of business of the holding company,” the auditor said, adding that it had “relied on the management’s assumptions and estimates in this regard”.

‘Vicious cycle’

Analysts said that this is another instance of a public sector undertakings coming to the aid of the central government before the close of accounts, adding that this will exert pressure on government finances for 2019-20.

The 2018-19 fiscal has been a bad one for government finances, with massive shortfall in tax revenues forcing an upward revision in the fiscal deficit estimates to 3.4 per cent of gross domestic product from the initially estimated 3.3 per cent. Economists expect this number to further inch up when the actual revenue and expenditure numbers are disclosed.

The situation was so severe that the Income Tax department even faced allegations of withholding refunds of taxpayers to meet tax collection targets.

The Modi government has also been pushing for greater disinvestment. The Oil and Natural Gas Corporation’s acquisition of state-run Hindustan Petroleum Corporation Ltd, and Power Finance Corporation’s acquisition of Rural Electrification Corp. in 2018 helped the government meet its aggressive targets.

Most state-run PSUs have also announced dividends and buybacks to help government finances.

“This poses a challenge for the new government as government finances will be under pressure and seeking advance payments creates a vicious cycle. In all likelihood, the railways may have to continue with this kind of a scheme next year also to keep its operating ratio under 100,” said an economist who did not wish to be identified.

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  1. IR has borrowed a lot of money, including from the LIC. It is almost certainly now in a debt trap. A lot of the shaky investments were made during the tenure of Chartered Accountant Suresh Prabhu.

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