Behold! A new scam has been unearthed... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Behold! A new scam has been unearthed... 

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In this issue:
» Burden of forex debt weighs on these companies
» GST can help bring prices down
» Absolutely no chance of another Lehman: Geithner
» Indian Inc turns to Australian mining cos for help
» ...and more!

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00:00
 
2010 was a year of scams. We had the CWG (Commonwealth Games) scam. The dust was just starting to settle and the country was rocked by the 2G scam. Well hold your breath, now there is another scam and it is even bigger than the 2G or CWG scams. This time the sector hit with a scam is the LNG (liquefied natural gas) sector. And the person in question is the Petroleum Secretary.

We are talking about the LNG scam. This scam is related to an agreement that the government owned Petronet LNG had with Qatar based RasGas for the supply of LNG. As per this agreement RasGas had offered to sell LNG to Petronet for US$ 2.53 per mmBtu (million British thermal units) at a crude oil price of US$ 20 per barrel. Further as per the agreement, LNG price would rise/fall by US$ 0.02 per mmBtu for every dollar movement in crude price. Therefore as per this agreement, Petronet would pay US$ 4.13 per mmBtu of gas when oil prices touched US$ 100 per barrel. The deal was valid for 25 years. This was in 1999. But come 2003, things changed.

In 2003, RasGas decided to revise the contract and Petronet agreed. This time it agreed to pay the earlier agreed amount from 2004 to 2009. After that the price of gas would be directly linked to the crude prices. This meant that the price would go up by US$ 1 per mmBtu for 5 years from 2009 and then from 2014, LNG would be priced at US$ 12.66 per mmBtu. If this new contract had not been accepted the price of LNG would have been US$ 3.04 per mmBtu for 25 years.

This revised pricing would mean that the Indian consumers would pay an additional amount of US$ 3.7 bn a year. This translates to a total of US$ 55.5 bn over 15 years. So why did Petronet agree to this? Being fully aware of its impact on the Indian consumers it went ahead and agreed to this price. Now the Parliamentary Standing Committee has woken up to the scam and has stated that state firms like Petronet should be brought under the purview of CAG audit. But the thing is why didn't anyone realize this earlier? After all, the agreement was entered into in 2003. And it is now 2011.

In a democracy, the government is a representative of its people. But when it acts in its own interests, the hopes and faith of the people are shattered. And unfortunately for India, this has now become a recurring incident. It is high time that the government woke up and realized that it is supposed to work in the interest of its people. Otherwise we just might see an Arab spring occurring in India as well.

Do you think India would ever become a scam free nation? Share your comments with us or post your views on our Facebook page

01:20  Chart of the day
 
Time and again, we have highlighted how higher levels of forex debt may turn out to be a curse for India Inc. With the rise in domestic interest rates, several companies had rushed abroad for their funding needs. However, the recent fall in the rupee would translate into trouble for these companies. A US$1 loan that translated to Rs 45 on the books would now be restated as a Rs 49 loan. As a result, the quantum of debt in absolute terms would be higher. At the same time the companies would need to provide the marked to market loss for these loans in their income statements which would depress their profits. This may just be a short term phenomenon. But if the rupee continues to fall in value, then these companies would see their numbers dwindle thanks to the higher levels of forex denominated debt in their books. Today's chart of the day shows the companies that have the highest amount of forex denominated debt.

Data source: Business Standard
* RCOM (Reliance Communications), IOC (Indian Oil Corp.), BPCL (Bharat Petroleum Corp. Ltd.),
NTPC (National Thermal Power Corp.)

02:10
 
Call it a double edged sword. The much awaited Goods and Services Tax (GST) that is expected to be introduced next fiscal year can become the much needed weapon in the government's armor. Saddled with the twin problems of high inflation and high fiscal deficit, the government can use the GST regime to improve India's economic statistics. As per industry body ASSOCHAM, GST will enhance India's tax to GDP ratio by nearly 1.6%. The same will have a benign impact on the economy's fiscal deficit. Moreover, GST will remove cascading taxes, leading to reduction in prices of most manufactured goods by about 10%. This will certainly come as a relief to the policymakers as well as the central bank both of which have been trying their best to rein inflation. Higher savings, improved tax compliance, economies of scale, and supply chain efficiencies are expected to be the icings on the cake. While the much awaited fiscal reform sounds very promising, we really hope that the implementation is satisfactory enough to deliver the desired results.

03:00
 
Thanks to the globalised world that we live in, it does not take long for a crisis that starts in one country to spread to another. Therefore, there were jitters galore in the US following the news of a handful of Euro countries on the verge of a default. However, the US Treasury Secretary, Tim Geithner, has come forward to soothe some really frayed nerves. "There is absolutely no chance of another U.S. financial institution collapsing like Lehman Brothers Holdings Inc. in 2008", Geithner is believed to have said before the Senate Banking Committee. He further mentioned that the direct exposure of the US financial system to the countries under the most pressure in Europe is very modest. Besides, all institutions in the US, large or small, are in a much stronger position now than during the 2008 crisis as per him. Should we take Geithner's comments at face value? Certainly not. It should be noted that similar confidence was echoed by a certain Mr Dick Fuld barely hours before Lehman Brothers; the company he helmed went belly up. Thus, it is always better to form one's own opinions rather than rely on someone else's view, no matter how influential or insightful the person may appear. One may never know what vested interests he may have up his sleeve.

03:45
 
In a power deficit country like India, the importance of coal as a key requirement cannot be undermined. Yet, despite having reserves of coal, India has to import heavily due to the poor quality of its coal reserves. India typically sources its coal imports from Indonesia, Australia and South Africa with Indonesia accounting for a larger chunk of the pie as it is the cheapest option. However, because the Indonesian government has made recent changes to its tax regime and also because of governance and infrastructure issues, Indian companies have turned their focus elsewhere. And Australia has fit the bill quite well in this regard. Australia has high quality coal, good infrastructure, political stability and the ease of doing business there is good. All of this has made the country a good region for Indian companies to acquire mines there and set up joint ventures to tap into the continent's vast reserves. Indeed, India is set to account for a larger share of the global coal trade. The Australian Bureau of Agricultural and Resource Economics and Sciences has predicted that Indian coal imports would rise from 60 m tonnes (MT) in 2010 to 77 MT in 2011. This would go up to 128 MT in 2016, and account for 30% of the increase in the global coal trade over the period. Indeed, India's energy requirements are rising steadily and good sources of coal will certainly be a must going forward.

04:25
 
It was a mixed week for the global stock markets. While developed markets posted healthy gains, emerging markets closed the week in the red. The US stock markets closed the week on a positive note over speculations that Europe is making calibrated efforts to contain its debt crisis. Further, better than expected jobs data also propelled US stocks. Although the unemployment rate remains in the region of 9%, the jobs data for the month of July and August were revised on the upside fuelling positive sentiments across Wall Street.

Indian stock markets were on a downtrend for the entire week. However, gains in the last trading session helped Sensex recoup earlier losses. Improved outlook on Indian exports (due to depreciating rupee) and increase in the rating of country's equities by Citigroup excited investors. With losses recorded in the previous trading sessions, the Sensex finally closed down by 1.3% during the week. Among the other world markets, Brazil was down by 2.1% and Singapore by 1.3%. However, France and UK were both up by 3.8% and 3.4% respectively.

Data source: Business Standard


04:55  Weekend investing mantra
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." - Warren Buffett
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26 Responses to "Behold! A new scam has been unearthed..."

Prakash Jhaveri

Oct 14, 2011

it seems it is time for krishna to take new avtar. 100
crimes are over. The krishna has to take birth in every citizen of India to kill Bhrastachar. It is not only takers, givers are equally responsible and panishable.

Like 

BHARAT BHUSHAN BANSAL

Oct 13, 2011

Corruption Free India could be dreamed only and only if few major factors which promote corruption must be curbed .

1. We must reduce luxury from life and honour hard working . Today everybody want easy money without work . We live with double standards where we want all others to be honest but for self all facilities .

2. Learn to honour law . We daily break law for petty reasons either it is red light or railway platform ticket and furthermore if caught want to escape showing our connections and power .

3. Honour hard work and money earned with honesty . Social bycott of curropted person.

4. At the time of education, compulsory military training alongwith other practical social camps .

5. Very Strict Law . Change the theme of law No culprit should escape even though some innocent punished by mistake . ( We have to accept this short terms hardship for long term benefit )

6. All parties must declare their candidates 2 yr. before elections so that we could judge the candidate and get all detailed informations and working style of him / her . Now a days we even don't know properly him and we've to vote .

Like 

s.b.rasania

Oct 11, 2011

It is horrible. They are looting the nation. Send this article to the P.M.

Like 

sethu

Oct 10, 2011

Petroleum buying involves scams all over the world.India being as it is the corruption is much more that too in petroleum buying.But it is very difficult to prove that there had been scam since it is a complicated buying and international credit ,specification variations ,etc are involved.

Like 

Azad Bharat

Oct 10, 2011

At Thane - a suburb of the 'great' Mumbai city... people are lighting candles because there is a power cut twice a day for a total of more than 4 hours each day. People lighting candles in the 'Commercial Capital' of the country and in the 21st century. Must be some kind of a joke. Roads are in such a pathetic condition (before of after the rains...) that it is not a pot-holed road anymore. It is a situation where the potholes have little bit of roads built into it. And then there is a political party which instead of looking into these things is more worried (and furious) about changing the name of Bandra-Worli Link bridge from Rajiv Gandhi to some other name.... even as people travel jam-packed like cattle on those local trains. The Hindustan Times Newspaper (Mumbai Edition) was screaming the other day with the headlines "Rs. 131 CRORE spent on your VANISHING FOOTPATHS" with photographs of the so called footpaths. What are our priorities as a country. Will we ever become corruption/ scam free.? There are no easy answers!

Like 

Shibu John

Oct 10, 2011

I never expect I can complete my life in a curruption free India

Like 

Sanjay Bhatt

Oct 9, 2011

Long term contracts are subject to renegotiation and in any case we do not have a choice as we are energy dependent. We cannot have a breakdown in gas supply. May be i did not get your point on the scam.

Like 

J. A. Lakhkar

Oct 9, 2011

Sir, please stop looking for scam in every commercial transaction! Qatar is the largest producer of LNG in the world. In 2003, when there were no prospects of commercialisation shale gas reserves, Qatar was almost in a monopoly situation to dictate the gas prices. In the original Petronet-Qatar contract, there must be a price renegotiation clause at regular intervals, which must have been enforced by Qatar. Even were such a clause absent from the contract, all that Petronet could have done was to go into arbitration which would have alienated the then most important gas supplier, thereby affecting the gas availability to Indian industry. We expect more investigation and balanced comments from Equitymaster!!

Like 

Mesa

Oct 8, 2011

This is the price we pay for democracy.

Like 

bhamy Shenoy

Oct 8, 2011

Dear sir,

on the surface it looks like a scam. However from the brief details the article provides it is not possible to conclude that there is a scam. I am not sure Rasgas would sign a deal like you have suggested by offering to fix LNG price for 25 years. This is a lesson gas industry has learnt. There must have been provisions in the contract to open the contract under some circumstances. Also some of the figures quoted in the article do not make sense. How was $12.66/mmbtu arrived at ?

In this era of scams public is ready to jump to the conclusion that there is a scam. It is possible that there could indeed be a scam in this LNG, but it is not possible to arrive at that based on the information given.

Like 
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