FINANCIAL ADVISORY REPORT - Hindustan Petroleum

FINANCIAL ADVISORY REPORT

Strictly Private & Confidential

Development of Common User Facilities

Prepared by:

SBI CAPITAL MARKETS LIMITED 202, Maker Tower ‘E’, Cuffe Parade, Mumbai 400 005 Tel. (022) 22178300, Fax (022) 2216 0379 / 2218 8332

Website: www.sbicaps.com A Subsidiary of State Bank of India

June 2014

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(Strictly Privileged and Confidential)

IMPORTANT NOTICE

This Financial Advisory Report (‘FAR’) is strictly confidential and accordingly, this FAR and its contents

are on the basis that they will be held in and with complete confidentiality. By accepting a copy of this

FAR, the recipient agrees to keep its contents and any other information, which is disclosed to such

recipient, confidential and shall not divulge, distribute or disseminate any information contained herein,

in part or in full, without the prior written approval of SBI Capital Markets Limited (“SBICAP”). The

recipient also agrees to indemnify SBICAP against any claims that may arise as a result of a breach of

any confidentiality arrangement, which governs the contents of this FAR.

This FAR has been prepared for the internal use of consortium of PSU Oil Marketing Companies

(“OMCs”) led by M/s. Indian Oil Corporation Limited (“IOCL”) and may contain proprietary and

confidential information. The FAR has been prepared for taking internal financial approvals and the

same should not be used for purposes other than those specified in the FAR. This FAR has been prepared

by SBICAP, inter alia on the basis of the information and documents available in the public domain, data

made available by the OMC officials and in-house databases available to SBICAP as a part of its

professional practice and, which SBICAP believes to be reliable. SBICAP has not carried out any

independent verification for the accuracy or truthfulness of the same.

This FAR constitutes an opinion expressed by SBICAP and each party concerned has to draw its own

conclusions on making independent enquiries and verifications and SBICAP cannot be held liable for any

financial loss incurred by anyone based on this report. Further, on accepting a copy this FAR, the

recipient accepts the terms of this Notice, which forms an integral part of this FAR and the recipient shall

be deemed to have agreed to indemnify SBICAP against any claims that may be raised against SBICAP

as a result of or in connection with the data and opinions presented in this FAR.

The delivery of this FAR at any time does not imply that the information in it is correct as of any time

after the date set out on the cover page hereof, or that there has been no change in the operation,

financial condition, prospects, creditworthiness, status or affairs of the subject or anyone else since that

date. Further, capital costs and operating expenditures are subject to uncertainties concerning the effects

that changes in legislation or economic or other circumstances may have on future events, and different

people may have a different view in future. There will usually be differences between projected and

actual results because events and circumstances do not occur as expected, and those differences may be

material. Under the circumstances, no assurance can be provided that the assumptions or data upon

which any Projections have been based are accurate or whether these business-plan Projections will

actually materialize.

Neither SBICAP, nor State Bank of India or any of its associates, nor any of their respective directors,

employees or advisors make any expressed or implied representation or warranty and no responsibility

or liability is accepted by any of them with respect to the accuracy, completeness or reasonableness of

the facts, opinions, estimates, forecasts, Projections, or other information set forth in this FAR or the

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underlying assumptions on which they are based or the accuracy of any computer model used and

nothing contained herein is, or shall be relied upon as a promise or representation regarding the historic

or current position or performance of the OMCs’ or their affiliates, or any future events or performance

of the OMCs’ and their affiliates.

This FAR is divided into sections & sub-sections only for the purpose of reading convenience. Any partial

reading of this FAR may lead to inferences, which may be at divergence with the conclusions and

opinions based on the entirety of this report. Neither this Report, nor the information contained herein,

may be reproduced or passed to any person or used for any purpose other than stated above.

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Contents IMPORTANT NOTICE ............................................................................................................................................. 1

1. BACKGROUND ................................................................................................................................................ 6

1.1 SCOPE OF WORK FOR SBICAP .................................................................................................................... 7

2. COMMON USER INFRASTRUCTURE FACILITY .................................................................................... 8

2.1 EXISTING BILATERAL PRODUCT EXCHANGE & PRODUCT PURCHASE ARRANGEMENT ................................ 8 2.2 NEW FACILITY CONSTRUCTED AS CUF BY ONE OF THE OMCS .................................................................... 8 2.3 BILATERAL ARRANGEMENT FOR IMPLEMENTING CUF UNDER BOO/BOOT ............................................... 9 2.4 CUF TO BE IMPLEMENTED BY SPV ............................................................................................................ 10 2.4.1 SPV PROMOTED BY ONE OF THE OMC INITIALLY AND JOINED BY OTHERS AT LATER STAGE ..................... 10 2.4.2 SPV INCORPORATED AS JV COMPANY WITH PARTICIPATION OF ALL THE OMCS ....................................... 10

3. COMMON USER FACILITY IMPLEMENTATION BY SPV .................................................................. 12

3.1 CONSTITUTION OF ENTITY ......................................................................................................................... 13 3.1.1 GOVERNMENT V/S NON-GOVERNMENT COMPANY .................................................................................... 13 3.1.2 OTHER ASPECTS OF SPV FORMATION ........................................................................................................ 15 3.1.3 PRIVATE SECTOR PARTICIPATION IN THE SPV ........................................................................................... 16 3.2 BUSINESS MODEL OF THE ENTITY .............................................................................................................. 17 3.2.1 AWARDING BUSINESS TO SPV COMPANY .................................................................................................. 17 3.2.2 REVENUE SOURCES FOR SPV ..................................................................................................................... 18 3.2.3 LIABILITY OF THE SPV .............................................................................................................................. 19 3.2.4 PROJECT IMPLEMENTATION METHODOLOGY ............................................................................................. 19 3.2.5 TAXATION ASPECTS ................................................................................................................................... 20 3.2.6 RETURNS FROM PROJECTS ......................................................................................................................... 20 3.3 CAPITAL STRUCTURE & FUNDING OPTIONS ............................................................................................... 21 3.3.1 EQUITY FUNDING OPTIONS ........................................................................................................................ 21 3.3.1.1 EQUITY INFUSION BY PROMOTERS ........................................................................................................ 22 3.3.1.2 PRIVATE EQUITY PLACEMENT ............................................................................................................... 22 3.3.1.3 INITIAL PUBLIC OFFERING ..................................................................................................................... 23 3.3.2 DEBT FUNDING OPTIONS ........................................................................................................................... 23 3.3.2.1 KEY CONSIDERATION FOR DEBT FUNDING: ............................................................................................ 23 3.3.2.2 DEBT FINANCING - OPTIONS .................................................................................................................. 23 3.4 SEPARATION OF MANAGEMENT & CONTROL ............................................................................................. 24 3.5 STRUCTURE OF JV COMPANY .................................................................................................................... 25

4. THE SPV COMPANY FORMATION ........................................................................................................... 28

4.1 KEY STEPS IN SPV FORMATION ................................................................................................................. 28 4.2 KEY TERMS OF REFERENCE FOR STEERING COMMITTEE............................................................................ 28 4.3 KEY STEPS FOR JV INCORPORATION .......................................................................................................... 30

5. SUMMARY OF OMCS DISCUSSION ON CUF IMPLEMENTATION .................................................. 31

5.1 POL FACILITIES CONSIDERED FOR IMPLEMENTATION UNDER CUF ............................................................ 31 5.2 OPERATIONALIZATION OF CUF: ................................................................................................................ 31

ANNEXURE –I: FUNDING CONSIDERATIONS ............................................................................................... 34

ANNEXURE II: BOOT AND BOO PROJECTS ................................................................................................... 37

ANNEXURE –III: FUNDING OPTIONS .............................................................................................................. 39

ANNEXURE IV: SUMMARY OF DISCUSSION ON CUF IMPLEMENTATION BY SBU’S ....................... 45

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Definitions/Abbreviations AoA Articles of Association

BOO Build - Own - Operate

BOOT Build - Own -Operate - Transfer

BOT Build - Operate - Transfer

BPCL Bharat Petroleum Corporation Ltd

CAG Comptroller and Auditor General of India

CCD Compulsorily Convertible Debenture

CCEA Cabinet Committee on Economic Affairs

CCPS Compulsorily Convertible Preference Share

DPE Department of Public Enterprises

ECA Export Credit Agency

ECB External Commercial Borrowing

HPCL Hindustan Petroleum Corporation Ltd

IOCL Indian Oil Corporation Ltd

IOTL IOT Infrastructure and Energy Services Limited

IPO Initial Public Offering

JBIC Japan Bank for International Co-operation

JPY Japanese Yens

JV Joint venture

K-Exim Korea Exim bank

MLA Funding and Multilateral Agencies

MoA Memorandum of Association

O&M Operations & Maintenance

OMCs Oil Marketing Companies

POL petroleum/oil/lubrication

POL Infrastructure facilities Terminal /Depots/LPG Bottling Plant/AFS

PSE Public Sector Enterprises

PSUs Public Sector Undertakings

RoC Registrar of Companies

RTL Rupee Term Loans

SBICAP SBI Capital Markets Limited

SPV Special Purpose Vehicle

USD US Dollars

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1. BACKGROUND

The public sector Oil Marketing Companies (OMCs), viz. Indian Oil Corporation Ltd. (IOCL), Bharat

Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) are primarily

responsible for the marketing and distribution of petroleum products in India. OMC’s requires a robust

supply chain to cater to the growing energy requirement of Industries as well as domestic. OMC’s set up

POL Infrastructure facilities (Terminal /Depots/LPG Bottling Plant/AFS) across India to manage supply

of products. POL infrastructure forms the backbone of Oil Marketing Companies energy supply chain.

Presently most of the POL facilities are owned and operated by OMCs and at each of the major demand

centers, each OMC establishes their own infrastructure to cater its market demand. Typically these

facilities stores similar products and are located in the same vicinity/city/town. This leads to duplication

of facilities of similar nature at a single demand center. Additionally in the current industrial scenario of

increased concern over the maintenance and Fire and Safety, duplication of facilities also leads to

increased capex as well as maintenance cost

Currently the OMC’s share the infrastructure facilities through a Bi-lateral Product Exchange & Product

Purchase arrangement (Hospitality Arrangement) where one OMC can use the POL facilities of another

OMC based on bilateral agreement. The key limitations for this arrangement are as:

These facilities are planned as per OMC’s own demand requirements and may lead to supply

issues during peak season due to capacity constraints

It’s under a bilateral arrangement and there is no formal mechanism at industry level

Duplication of facilities leads to underutilization of infrastructure/resources on industry level.

To address these concerns, a cohesive approach is needed while planning future expansion/creation of

new POL infrastructure facilities and OMCs proposes to develop the same as common user facilities

(Terminals/Depots/LPG Bottling Plants). The key motivation is to rationalize the Capex requirements for

developing these facilities as well as operating the same in most cost effective & efficient manner. These

facilities would be primarily for captive usage by three OMCs and surplus capacity would be available to

all the industry players on payment of rentals for infrastructure usage.

To optimize the utilization of refining and marketing infrastructure by developing CUF will help in

eliminating wasteful duplication of investment. In this regard, the OMCs are looking for various options

for implementing such arrangement including forming a Special Purpose Vehicle company (SPV) for the

purpose.

Consortium has appointed SBI Capital Markets Limited (“SBICAP” or the “Financial Advisor”) on

assisting the consortium to take the process forward.

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1.1 Scope of Work for SBICAP

SBI Capital Markets Limited (SBICAP) envisages the following scope of work for providing advisory

services to the OMC consortium with IOCL as the coordinator:

Evaluate various options for creating of Common User Facility Infrastructure

Preliminary analysis of JV/SPV Structure

Suggest Terms of Reference for OMC’s implementing CUF structure

Outline the Capital Structure & Funding Options for the agency implementing CUF

Assist in creation of JV company

Develop the Business Plan for SPV, evaluate funding requirement, suggest funding plan for the

same

The above broadly outlines the scope of work and one or more steps may not be required during the

course of action. The deliverables based on above would be dependent on the information provided by

the OMC’s.

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2. COMMON USER INFRASTRUCTURE FACILITY

This chapter review the existing arrangements for sharing POL infrastructure facilities and provide

overview of various options available for implementing the Common User Facility (CUF). The structures

suggested in the chapter have also been deliberated during the joint meeting of OMCs.

2.1 Existing Bilateral Product Exchange & Product Purchase Arrangement

Presently this arrangement is used for meeting OMCs product supply requirement in the markets where

they do not own infrastructure facility. This is a bilateral arrangement between the facility owner and

offtaker OMC and as such its’ not mandatory/ no centralized arrangement is there for the same. One such

option is to formalize the same at industry level and continue with it.

The merits of the option are:

No new infrastructure is required to be set up and smooth control can be established through a central

cell with representative of three companies.

Improved utilization of currently under-utilized facilities

The key limitations of the same are as follows:

Existing facilities were planned based on individual Company’s demand projections. Thus limited

Infrastructure availability limits the additional free capacity available in future years.

In case of old installations where the capacity utilization is nearing peak and future demand growth

for owner may result into supply constraints for the hospitality partners.

In view of above it may not be a reliable mechanism from long term perspective and may lead to

duplication of facilities in future.

2.2 New facility constructed as CUF by one of the OMCs

To address the capacity constraints mentioned in above case, new facilities may be set-up by one of the

OMC as CUF i.e. with surplus capacity for catering other OMCs demand. Other OMCs may use the same

by payment of Terminalling charges.

Operationally this would be similar to the existing hospitality arrangement but at the same time will

remove supply uncertainties faced by other OMCs due to discretions exercised by facility owner and in

rationalizing capex requirements for a particular location. This arrangement would require the off-taker

OMCs to enter into binding agreement with the owner OMC for ensuring minimum utilization of

Infrastructure facilities (Minimum Guaranteed Volume (MGV)). Limitations of the above arrangement

are as:

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Timing difference in the individual OMCs demand projections and timing facility implementation

coupled with absence of any centralized arrangement makes it difficult to implement.

This arrangement can primarily be applied only for the new locations to be developed.

One of the key requirements for such arrangement would be determination of Terminalling charges to be

paid by the user. Currently there are defined charges which are being paid by the OMCs under hospitality

arrangements. However this being a new facility with specific capacity being created for the defined uses,

the charges may differ from those being paid under hospitality arrangement.

2.3 Bilateral arrangement for implementing CUF under BOO/BOOT

Two or more OMCs can come together and establish a common user facility for a specific

location/requirement. Either the OMCs can share resources and build it the CUF themselves or the same

can be awarded on BOO/BOOT contract. Under this arrangement, OMC would be owner of the product,

transfer the custody of product at the facility boundary to the CUF operator, use services for of the

facility, pay Terminalling charges and take back custody of the product in the desired parcel size at the

facility boundary. In other words BOO/BOOT contractor shall act as custodian for the product and

provide storage, safety and security services for the products and in consideration receives Terminalling

charges from OMCs. One such example is IOCL & BPCL jointly developing Raipur POL facility by way

of engaging IOT Infrastructure and Energy Services Limited for developing the Common User Terminal

on Build Own Operate (BOO) basis.

The key advantages of this arrangement are as:

Reduction in (upfront) investment/capex requirements and optimum utilization of POL infrastructure.

Land acquisition for the facility is generally a time consuming process, can be expedited by the third

party offering BOO/BOOT services.

Operationally this would be similar to Hospitality arrangement except that during the contract period,

ownership & operatorship of the facility would be with third party and all the user(s) would be

paying rentals for facility usage.

The limitations of this arrangement are as:

In absence of centralized planning and this being only a bilateral arrangement, duplication of

facilities cannot be avoided. Such arrangement would be on case to case basis and shall result into a

localized model for each and every location.

In case the facility is being set up using BOO/BOOT model by two users, the capacity limitation

would restrict the third party usage of terminal in future, similar to capacity constraints in the

Hospitality Arrangement.

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In case of more than one companies is involved, difficulties would be faced in arriving at consensus

location for establishing the infrastructure facility

Thus the above model may be particularly useful in case where more than one OMCs POL facilities need

resitement or more than one company want to set-up such facilities in a new area. In the resitement cases,

one of the key challenges to be addressed while opting for above arrangement would be redeployment of

existing manpower.

At the same time, in absence of formal mechanism, this option doesn’t fully address the issue of

duplication of facilities.

2.4 CUF to be implemented by SPV

In order to overcome the above mentioned limitation of centralised planning the facilities, CUF may be

implemented by a Special Purpose Vehicle (SPV), incorporated for the purpose and promoted by OMCs.

The same can be implemented under two options:

2.4.1 SPV Promoted by one of the OMC initially and joined by others at later stage

Under this model, a Special Purpose Vehicle Company is incorporated initially as subsidiary of one of the

OMC. SPV implements the project based on requirements of owner and other OMCs who later also takes

equity stake in the SPV.

The key advantage of above approach is implementation of Project by a third party incorporating needs

of all the participants/users and centralised control over the implementation and documentation by one

agency. However the approach would have following limitations:

SPV is initially incorporated as subsidiary of one of the OMC, which may affect the independent

decision making for the SPV

Choice of upcoming CUF location may not be optimum

For OMCs’ joining at a later stage, equity premium and management control rights will have to be

decided

Further implementation of CUF under this business model will have to wait for success of pilot

project

Being a 100% subsidiary of OMC, the SPV shall be a government company and would be subject

all operational advantages and limitations faced by a government company.

2.4.2 SPV incorporated as JV company with participation of all the OMCs

This business model partly overcomes the limitation posed by above structure. Under this option, a SPV

company with equity participation of all the OMCs shall be incorporated. SPV shall develop new POL

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facilities as CUF meeting OMCs infrastructure requirements and would enter into a “Use or Pay”

arrangement with users (OMCs) wherein a Minimum Guaranteed Volume (‘MGV’) would be committed

by each user. Key advantage of this structure over the single OMC promoted SPV as mentioned in

previous section are as:

Ownership/Equity participation by all OMCs will help in assuring cohesive decision making

Centralized planning helps in speeding up the location selection & hence implementation

Clearly carved out roles and responsibility of SPV & its promoters helps in smooth functioning of

SPV company as well as separation of Management and Control

The capital structure and constitution of the SPV may be structured so as to achieve the

government/non-government company structure

The only limitation of this model would be a possible procedural delay in formation of SPV compare to a

single OMC taking control over the SPV formation due to multiple layers of decision making. However

this limitation can be overcome by forming an empowered ‘Steering Committee’ with representatives

from all the OMCs s which can take independent operational decisions. A brief overview on the key

Terms of Reference for such Steering committee is provided given in Section 4 of this report.

In view of above discussions, in may be concluded that the formation of a new SPV company with

participation from OMC’s would help in meeting the objectives of developing Common User Facility.

However the following points for should be considered while outsourcing the POL installations to the

SPV:

Reliable supply chain is among the most critical success factors for OMCs business. Outsourcing

the Supply Chain infrastructure would also require development of proper control mechanism to

ensure their competitive position.

Under SPV model, if all the Projects are being executed through same SPV, diversity of supply

chain sources would reduce. Thus adequate control should be built in to avoid any risk of

disruption in supply chain on account of the same.

From above discussion, it may be concluded that either implementation of Projects on BOO/BOOT basis

by more than one OMC on bilateral basis or implementation by SPV with participation of all the OMC’s

may help in rationalization of capex and achieve operational efficiencies. Further due to Economies of

Scale, CUF will result in savings in capex requirements or equity contribution requirements of OMC as

compared to implementing the POL facility on standalone basis. An illustration of the same is given in

Annexure –I.

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3. COMMON USER FACILITY IMPLEMENTATION BY SPV

This chapter discusses various aspects related to implementation of CUF through SPV route with

participation of all the OMCs.

The key function of the SPV would be to aggregate the POL infrastructure requirements of OMCs, plan

project implementation, develop and operate CUFs’ at various locations spread across India. The

following would be the key consideration for incorporating the SPV:

Constitution of the SPV

The OMCs have pan India operations catering to POL product demand across the country. These

CUFs needs to be integrated with the distribution chains of the OMCs. The entity should be

capable efficiently developing CUFs at any given location across India. The SPV may be

incorporated either as a company incorporated under Companies Act, 2013 or as a Limited

Liability Partnership. As per information available in public domain, from Income Tax perspective

a LLP structure is better than the others. However LLP business model is country is in initial stages

and not have been tested by many companies. In contrast, for a company incorporated under new

Company’s Act 2013, governing laws and structure of any company makes it easier for infusion of

stake-holders/investors and professionals in the company. Additionally companies enjoy better

credibility and investor confidence due to stringent compliance requirements of Company’s Act

and other laws in force. Thus LLP is better suited for small scale businesses as compared to current

requirements of pan India operations.

Thus in the current situation, considering OMCs’ as the promoters, the corporate structure i.e. SPV

Company incorporated under Companies Act, 2013 has been considered. The same can be

incorporated as Government Company/Non-Government Company. The key consideration for this

decision would be relative ease of SPV securing business from OMCs, degree of freedom to take

decisions (investments, mode of operation, flexibility in awarding contracts, hiring, etc.),

applicability of CAG audit and presidential directives, etc.

Business model of the SPV

Key factors governing choice of a particular business model inter alia includes:

Type of project to be implemented through SPV i.e. single user facility or facility where more than one user are interested

Revenue model

Mode of operations i.e. in-house operations v/s outsourcing

Roles and responsibilities of the SPV w.r.t the product handled, quantum of risk and liabilities to be taken by the Promoters/SPV

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Taxation aspect, etc.

The business model adopted by the SPV shall also impact its financing and manpower

requirements.

Capital Structure & Funding options

Capital structure describes how a corporation finances its assets. This is usually through

combination of equity, quasi-equity, debt in various forms, etc. The returns for the promoters can

be maximized with right mix of debt and equity.

The quantum of SPV’s funding requirements shall depend on the business model adopted by the

SPV i.e. in-house operations/outsourcing. The equity is to be funded by OMC/private equity

placement/ undertaking fund raising through capital markets. In case of debt funding, the same can

be raised from Banks/FIs.

Separation of Management and Control

For efficient functioning of the new entity, separation of management and control is necessary.

Accordingly the new entity should be having sufficient authority to take independent decisions

related to capital investments, operations, recruitment, etc.

3.1 Constitution of Entity

This section gives brief description on the constitution of the Company. The same is based on the primary

readings of various sections of the Company’s Act and past experience. However it is suggested that

legal/tax opinion, wherever required, should be taken on various discussion points highlighted in the

section below.

The key criteria to decide constitution of business entity are:

3.1.1 Government v/s Non-Government Company

As per sub-section (45) of Companies Act 2013, Definition of Government company states:

“Government company” means any company in which not less than fifty-one percent of the paid-up share

capital is held by the Central government, or by any State Government or Governments, or partly by the

Central Government and partly by one or more State Governments, and includes a company which is a

subsidiary company of such a Government company.

The government-owned corporations are also commonly termed as Public Sector Undertakings (PSUs) in

India. However this term is not defined under the Company’s Act specifically but is defined under SEBI

guidelines as “Public Sector Undertaking means a company in which the Central Government [or a State

Government] holds 50% or more of its equity capital or is in control of the company”

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Thus from the above reading, in case if any one of the OMC’s doesn’t hold 51% or more paid up capital

of the SPV Company directly or indirectly, SPV would be a non-government company in-spite of three

OMC’s out together 100% paid up capital of the Company. Other aspects of the above explanation are as

follows:

Meaning of "holding company" and "subsidiary" as defined in The Companies Act 2013:

As per sub-section (87) of Section 2 of Companies Act 2013, the term subsidiary is defined as:

“Subsidiary company” or “subsidiary”, in relation to any other company (that is to say the

holding company), means a company in which the holding company—

(i) Controls the composition of the Board of Directors; or

(ii) Exercises or controls more than one-half of the total share capital either at its own or together

with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have

layers of subsidiaries beyond such numbers as may be prescribed.

Thus from the above reading, till the time any of the OMC individually:

(i) Control the composition of board of directors (‘Board’) of SPV, or

(ii) Exercise or control more than 50% of Share capital of SPV

The SPV would not be classified as a subsidiary company of any Government Company and hence

would be a non-government company. Further in case of management control, the Memorandum

and Articles of Association of the company may give control to appointment management to any

shareholder despite holding than the minority of the share capital. Thus while incorporating the

SPV the same should be taken into considered and right to control the appointment of Board of

Directors, etc. should be accordingly decided.

The based on above, the constitution of SPV may be summarized in the following figure:

Constitution of JV

Government Company (Single OMC’s

shareholding is more than 51%)

Non-government Company

Jointly OMC’s hold more than 51%

Jointly OMC’s hold less than 51%

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3.1.2 Other Aspects of SPV formation

Formation of JV Company by PSE entities

Joint venture (JV) is a contractual arrangement whereby two or more parties carry an economic

activity under joint control. In the present case, three OMCs propose to participate in the SPV

Company and hence it would be Joint Venture of OMCs or CPSEs.

Sub-section (6) of Company Act 2013 recognizes JVs as:

“Associate company”, in relation to another company, means a company in which that other

company has a significant influence, but which is not a subsidiary company of the company having

such influence and includes a joint venture company.

Explanation.—For the purposes of this clause, “significant influence” means control of at least

twenty per cent of total share capital, or of business decisions under an agreement

Government Policy on JVs formation by PSE

With a view to granting managerial and commercial autonomy to successful profit making Central

PSUs operating in a competitive environment, the Department of Public Enterprises (DPE)

enhanced the delegated powers of the Board of Directors of Navratna PSUs in August 2005 to

enter into technology or strategic alliances, to establish financial JVs and wholly owned

subsidiaries in India or abroad. All the proposals involving investment over and above the

delegated powers are to be submitted for approval of the Cabinet Committee on Economic Affairs

(CCEA).

In the present case, IOCL is presently a Maharatna Company and BPCL and HPCL are Navratna

companies. Thus from the above, the OMCs’ are free to take decision w.r.t. participating in the

SPV which would be a Joint Venture Company. However the investment decision is governed by

the applicable delegated limits and should be given due consideration while deciding on the capital

structure of the Company.

CAG Audit

The Comptroller and Auditor General of India (CAG) audits government companies. In respect of

government companies, CAG has the power to appoint the Auditor and to direct the manner in

which the Auditor shall audit the company's accounts.

The audit of Government companies is governed by sub-section (5) of Section 139 of the

Companies Act, 2013.

Notwithstanding anything contained in sub-section (1), in the case of a Government company or

any other company owned or controlled, directly or indirectly, by the Central Government, or by

any State Government or Governments, or partly by the Central Government and partly by one or

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more State Governments, the Comptroller and Auditor-General of India shall, in respect of a

financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under

this Act, within a period of one hundred and eighty days from the commencement of the financial

year, who shall hold office till the conclusion of the annual general meeting.

Hence, for the applicability of this provision, it must either be a Government company, or a

company owned and controlled, directly or indirectly by the Central Government, or by any State

Government or Governments, or partly by the Central Government and partly by one or more State

Governments, and includes a company which is a subsidiary company of such a Government

company.

Thus in case the majority of the OMCs’ put together holds 51% of more stake in the SPV

company, the same would be subject to CAG audit as per Company Act 2013.

Applicability of Presidential Directive

Department of Public Enterprises clarifies this through ‘DPE/Guidelines/I/3 Power of President to

issue directives—Provisions in the Articles of Association—regarding’, where it says:

“…the Articles of Association of the public enterprises contain an article to the effect that the

President may from time to time issue such directives or instructions as may be considered

necessary in regard to conduct of business and affairs of the company and in like manner may vary

or annul any such directive or instruction.”

The same is applicable in case of all the Public Sector Enterprises (‘PSE’). Thus in case the SPV is

constituted with any one of the OMC holding more than 50% capital of the Company, the same

shall have to follow the Presidential Directives.

Land Acquisition for setting up facilities

Land acquisition has been a major concern in setting up POL infrastructure. The constitution and

the business model should be finalized after taking future requirement of land into consideration.

In case of a Government company, the help from the government can be sought. Whereas in case

of a private company the land can be acquired from market directly or it can be outsourced to a

third party (BOO/BOOT contractor).

Based on above the OMCs may suitably deliberate and decide on the shareholding of the SPV

Company. In case the OMCs decide not to have a non-government company structure, it should be

ensured that none of the OMC’s individual shareholding in the SPV exceeds 50% any point of time. Also

the constitution of board and voting rights should be such that none of the OMC fully controls the

management of the SPV Company.

3.1.3 Private Sector Participation in the SPV

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One of the options available w.r.t. shareholding of SPV is private sector participation in the SPV.

However the following may be noted w.r.t. the same:

Primary users of the facility shall be OMCs and facilities shall be developed primarily based on

the OMCs product throughput requirements.

The SPV would receive predetermined fix returns on the investment made and would have

limited upside potential from the perspective of returns on investment.

Financial investors look purely at the returns from project where as strategic investors also look

for other aspects of the Project including EPC contracts, O&M. etc. Typical minimum return

expectation for equity investors for such projects is 14-18%.

Return expectation of financial investors would reflect in increased terminal tariff payable by

OMC, while that of strategic investors may influence the decision making process w.r.t. terminal

operations including award of various contracts.

In view of above, it would be difficult to attract private players for participation in the SPV other than

infrastructure companies and infrastructure funds.

In case of private participation involving infrastructure companies, adequate safeguards should be

considered to avoid conflict of interest in case the same firm is also involved in implementing

downstream projects.

3.2 Business Model of the entity

The constitution of the SPV company would also have a key impact on the business model of the SPV.

The same has been discussed in the following sections:.

3.2.1 Awarding Business to SPV Company

Each CUF to be set up by SPV company would be primarily be utilized by OMCs. Thus

constitution of SPV company should enable the same.

In case the SPV is constituted as a non-government company, the same would fully restrict the

ability of OMCs to award repeated contracts to SPV on a nomination basis. In such case SPV will

have to compete with private players for the award of job from OMCs and the same would defy the

purpose of setting up of SPV as the centralized nodal agency for implementation of Infrastructure

facilities by OMC..

A framework for awarding the projects needs to be formulated, to decide on which type of projects

should be awarded to the SPV. There are various possible scenarios like

o Facilities for captive usage (e.g. marketing terminals attached to the refinery)

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o Strategic locations like import terminals, etc.

o Facilities which are not required by all of the three OMCs, viz. only two OMCs, only one

of the OMC

o Facilities which are common for all three OMCs etc.

o Resitement cases and merging of existing POL infrastructure

The motivation behind setting up the SPV is to realize operational synergy and save on capital

expenditure by aggregating requirements of all three OMCs. Awarding all the projects to SPV

without competition may also result into inefficient operations. Thus the control mechanism to be

built in the framework for awarding Projects to the SPV company

3.2.2 Revenue Sources for SPV

The SPV would provide Terminalling services based on pre-determined facility sharing schedule by users

and would earn revenue in the form of Terminalling charges. Also to make a particular project viable and

arrange funding for the same, the users shall be required to enter into a “Use or Pay” with Minimum

Guaranteed Volume (MGV) type of agreement with the SPV.

The charges paid to SPV should be based on the Capex incurred and O&M services provided. The

determination of such Terminalling charges can be as follows:

a. Capex recovery charges/Tariff: Capex Recovery Charges comprising the following

components:

Recovery of capital investment made by SPV towards the development of the terminal

Reasonable Return on total investment

Capex Recovery Charges will depend upon investment in the project, recovery period and required post-

tax rate of return on total investment. Thus one of the key decisions for OMCs’ would be fix the fair rate

of return and agree on the parameters used for determination of capex recovery including time period of

contract.

Considering the projects can be implemented with varying capital structure i.e. D/E ratios, the Project

IRR method may be adopted to make the process independent of the capital structure. The fair rate may

be decided in line with the policy or benchmark rate for investments require by the OMCs for similar

projects undertaken. From a financing perspective as well, project IRR of around 14% may be considered

reasonable.

The Project IRR of 14% should be analyzed over a sufficient time frame. In case of CUFs which has

operational life of around 25 years, IRR needs to be computed with for the contract period. Too small

time-frame would enhance the required IRR and vice-versa.

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b. Opex Recovery Charges/Tariff: This includes recovery of operating expenses of facility (both

fixed and variable)

O&M activity could be undertaken either in-house or can be outsourced to a third party. The

determination of O&M component recovery for Terminalling charges should be based on:

If the O&M services are outsources by SPV, the Opex Recovery Charges and Maintenance

charges should be determined though a competitive bidding by interested O&M providers.

In case of SPV providing O&M services itself, the charges paid to SPV should be sufficient

to cover its operating expenses.

The escalation factor in the O&M tariff may be based on established benchmarks such as

relevant WPI/CPI.

c. Maintenance Charges

Maintenance Charges are towards the recovery of Repair and Maintenance expenses of facility

including foreseeable replacements. As the maintenance cost would increase with the age and

usage of the facility, the charges may be fixed depending on the contract time slabs e.g. 1-3

years, 4-10 years, etc.

3.2.3 Liability of the SPV

In the present case the SPV would only be acting as service provider. The services would include

custodian, storage, safety and security for the product. Thus the insurance for the products stored should

be taken by owner of the products. Further the liability of the SPV should be limited to its role and

suitable indemnity should be provided to the SPV.

Similarly in case of product handling the role of SPV should be clearly defined and its responsibility

should be limited to receipt of product in the facility premises and supply on Ex-MI basis.

3.2.4 Project Implementation Methodology

Implementation methodology would impact the capital structure and hence equity funding requirements,

manpower requirements, etc. Each of the projects can be implemented by the SPV on its own or

outsource or a mix of both. The outsourcing can be for construction of the facilities as well as O&M

activities.

In-house project implementation: In this case SPV would require sufficient capitalization to

enable SPV to raise debt for funding the project. In addition to capital, in house project

implementation would require building complete organization with capabilities to handle the

multiple projects. The merit of the above option is development of in-house expertise. At the

same time execution of multiple projects would result in huge manpower requirements. Further

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during the initial years, the SPV Company may not have sufficient internal accruals to meet

equity requirements of the projects and the same has to be contributed from the Promoters.

Outsourcing model: In this case the construction contract can be outsource on various model

including outsourcing EPC work, O&M or complete project work under BOOT/BOO model. A

brief note on BOOT/BOO model is given in Annexure-II. As against In-house development, this

would require limited manpower including key management personal would be required with

expertise in specific fields such as engineering, contracting, project management, finance, legal,

etc. Also in case of BOO/BOOT contract, the capitalization requirement of the SPV reduces and

it could be a low capitalized company. This model also facilitates quick replication and

implementation of projects. The limitation of this model would be dependence on the external

contractors for all the activities being carried out by the SPV. At certain locations, the expertise

with the contractors might not be available and would have to be developed by the SPV.

Considering above, it may be considered to adopt a balanced approach on project to project basis. It

should be left to the SPV‘s management to decide on the same on case to case basis.

3.2.5 Taxation Aspects

SPV would be a service provider & Service Tax shall be applicable on the Terminalling charges.

Presently the applicable rate for the same is 12.36%. OMCs would not be able to avail full credit of the

same in the form of CENVAT credit due to limited Cenvatable downstream operations.

Income tax shall be applicable on the profits earned by the SPV. The current applicable rate for Corporate

Income Tax and Minimum Alternate Tax (MAT) are 33.99% and 20.96% respectively.

Further in case dividend is being declared by SPV for repatriating its profits to shareholders, then

dividend distribution tax shall be applicable, current applicable rate for the same is 16.995%. However

the funds can be infused in the SPV in the form of Promoter Loans and surplus funds, if any, can be

remitted to Promoters/shareholders in the form of loan repayment and interest.

However considering the benefits of CUF, tax implications may not considered a deal breaker. A

formal opinion on the taxation aspects can be taken separately on the same.

3.2.6 Returns from Projects

The SPV’s only business is to implement and operate CUF facilities. The facilities shall be constructed

based on given demand projections and this is not expected to drastically change from the actual demand.

Thus each project would have limited upside potential. Moreover, the SPV business model should be

self-sustaining and after equity contribution by Promoters for initial years, the SPV should have sufficient

accruals to fund its own capital requirements. In the present case, returns for the Promoters would be in

the form of:

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Savings in capital cost on account of shared capital cost in case more than one user using the

terminal

Dividends from SPV: In case any distributable surplus amount is available. In case a dividend is

to be distributed, Dividend distribution tax (currently effective 16.22%) would be applicable on

the dividend declared, however the same would be tax free in the hands of shareholders.

Capital appreciation on investments - Once SPV establishes a portfolio of assets, the Promoters

may unlock the value through a part stake sale (either IPO or private placement). Capital

appreciation would give a much higher returns compare to dividend income.

Saving in the opex, as the combined throughout requirement from more than once user would

result in savings on account of distribution of fixed operating cost over higher volumes of

product handled.

However, it may be noted that the profitability of SPV and the returns to Promoters would be dependent

on the terminalling charges which is a cost for OMC/ CUF users.

In the present case, source of the SPV’s revenue are Promoters and the returns from SPV’s are being

ploughed back to Promoters in the form of dividend/interest paid on Promoter Loan with an element of

taxation and, the same should be considered while constituting the JV and inducting any one as the

partner in the JV.

3.3 Capital Structure & Funding Options

Capital structure describes how a Company obtains the financial resources with which it operates its

business. Various capital structures can be adopted to meet both internal needs for capital and external

requirements for returns on shareholders investments.

The SPV’s capital requirement would primarily depend on the capex requirement of each project, timing

of implementation and mode of execution. Typically POL storage and handling infrastructure projects of

such nature can be funded with a D/E ratio of 60:40 or 70:30.

3.3.1 Equity Funding Options

To meet the SPV’s initial funding requirements including those for meeting administrative cost, equity

has to be infused by SPV promoters. One way to determine the equity requirement would be to club the

infrastructure requirement of OMCs for the next 2-3 years and sufficiently capitalize the SPV to the

extent it is sufficient to meet SPV’s equity funding requirement. Alternatively efficient method would be

to infuse funds in phased manner based on project to project basis. Once the cash inflow would start

flowing from the operational facilities into the SPV, the future requirement of equity to fund projects

would be met from through internal accruals. Other Equity Funding Options are IPO, PE placement,

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Loan from promoters, etc.

3.3.1.1 Equity Infusion by Promoters

Equity infusion from the SPV promoters can in the form of equity (equity shares, preference share

capital) or hybrid instruments (Compulsorily Convertible Debenture (‘CCD’), Compulsorily Convertible

Preference Share (‘CCPS’), etc.)

A CCD is a debt instrument mandatorily and automatically convertible into equity at a specified time, or

on happening of specified events, into equity. In the present context the key advantage of CCD would be

ensuring a fixed rate of return with an upside on conversion, deferring the issuance of equity, tax

advantages as interest/coupon paid are tax deductible. However the coupon paid on the CCD would be

treated as interest income in the hands of recipients and would be taxed accordingly. A brief note on CCD

instruments is given as Annexure-III.

In case of CCPS, dividends can only be declared out of profits; hence, no tax deduction in respect of

dividends on CCPS is available. Secondly, any dividends can be paid by the company only after company

has paid dividend distribution tax. In addition, unlike conversion of CCDs into equity, which is not

regarded as a transfer under the provisions of the Income-tax Act, 1961, conversion of CCPS into equity

may be considered as a taxable event and long term or short term capital gains may be applicable.

In the present case, it may be noted that profitability for the company is derived from the Usage charges

paid by user/Promoters. Thus relative merits and limitation of using hybrid instruments should be

evaluated in reference to this.

3.3.1.2 Private Equity Placement

The equity funds can be raised using private equity placement route. The same can be to financial

investors/strategic investors. This option is applicable only if the consortium proposes to induct private

player as partner. A brief note highlighting the typical Private Equity Placement is given as Annexure III.

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3.3.1.3 Initial Public Offering

Fund raising through Initial Public Offering (‘IPO’) is a relatively extensive process and requires

established business model to command good valuations. Thus this option is not recommended in the

initial phases. A brief note on IPO process is given in Annexure III.

3.3.2 Debt Funding Options

Debt funding shall be arranged by SPV on a case to case basis for various projects to be undertaken. In

case SPV proposes to implement projects on BOOT/BOO basis, the SPV contractual structure should

facilitate the debt funding requirements of the BOO/BOOT contractor.

There are various debt Funding options like Rupee Term Loan, Foreign Currency Loan (ECB/ECA/MLA

funding), debentures, etc.

3.3.2.1 Key consideration for debt funding:

Each project undertaken by the SPV would have construction period of about 2-3 years

depending on the size of project. Debt repayment obligations should be structured as per the

Project cash flows; lower repayment obligations during initial years till project operations are

stabilized.

Currency of Funding – Rupee Term Loan v/s FC Loan: Mix should result in minimum funding

cost including interest & hedging costs while meeting long tenor requirements

Financial Covenants: Should not be restrictive on project’s operations and provide for curative

provisions.

Deviation in Project Schedule on account of unseen circumstances: Flexibility to modify

drawdown schedule is required in sync with Project progress with minimal or no commitment

charges /penalties is required. Also, No Carry cost should be there on account of funds undrawn.

3.3.2.2 Debt Financing - Options

The various debt fund raising options available to SPV are:

Rupee Term Loans (RTL)

Debentures/Bonds issuances

External Commercial Borrowing (ECB) funding

Export Credit Agency (ECA) Funding and Multilateral Agencies (MLA)

A comparison of these options is summarized in the following table and details of the same are given in

Annexure III.

Table 3-1: Debt Funding Options

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Parameters RTL ECB ECA MLA Domestic Bonds Tenor (in years) 10-12 7-10 10 – 15 10 - 15 7-10 Availability High Medium Low Low Medium/Low Risk of Interest basis Bank’s Base Rate LIBOR LIBOR LIBOR Fixed Risk - FX risk Nil Yes Yes Yes Nil - Interest rate Yes Yes Yes Yes No Drawdown Flexibility Yes Limited Limited Limited Nil Time for tie-up (month) 2-3 3-6 6-12 6-12 1

Covenants Standard Stringent Equipment/ EPC

linked Stringent Credit Rating

Suitability for Financial Closure

High Medium Low Low Low

In the present case, considering that the revenues of the SPV are denominated in INR, the flexibility in

drawdown required (on account of project uncertainties) with nil/minimum commitment charges, and

loan tenor & structured repayment obligations, RTL is a recommended option for the financial closure.

3.4 Separation of Management & Control

The most important aspect of business model would be separation of management and control. This

should provide sufficient authorization to the management for taking decisions related to efficient

functioning of such organization. Decisions related to investments, operations, recruitment, compensation

etc. should be free from Promoter influence. Since each OMC has existing in-house capabilities in

developing POL facilities, key management personals & workforce can be deputed from promoters in the

initial phase. Also, organization should be designed with a focus on:

Strategy: Vision & Mission, Corporate Governance, Competitive Advantage

Structure: Organizational role, Information flow, Power & Authority

Business Process: Key vertical, Identified Role & Responsibilities

Human Resource: KRA, Performance Management, Recruitment

Reward System: Compensation, Reward System

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3.5 Structure of JV Company

Based on the above discussion, a basic structure is given below:

The Mandate from OMC’s for building up POL infrastructure facilities (Depots/Terminals/LPG Bottling

plants) would be given to the new entity. The funding of capex requirement for these CUFs would be

through a mix of Debt and Equity. The entity can either build the infrastructure itself or contract it to an

EPC contractor, similarly for the operations and maintenance (‘O&M’) of the facility, it can be carried

out by the SPV/JV itself or it can be contracted to a O&M operator.

Summary

Based on above discussions, the comparative analysis of various transaction structures is summarized in

the table below:

A. Type of Company

Structure # Shareholding Type of Company

Structure1

Any one OMC shareholding in SPV not to exceed 50% but aggregate shareholding of the OMCs’ put together is more than 50% (This will also apply in case all the OMC’s hold 1/3 of the share capital)

Non-Government company

Structure2 Aggregate shareholding of OMC’s is 50% or less and balance shares held by private companies including Financial Institutes

Non-Government company

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Structure # Shareholding Type of Company

and Strategic investors

Structure3 One of the OMC individually holds is more than 50% shares of the SPV (thus OMC’s aggregate shareholding more than 50%)

Government Company

B. Comparative Analysis for various structures

Key Consideration Structure 1 Structure 2 Structure 3

Appointment of Directors OMCs to

decide

Shareholders to

decide

As per DPE guidelines – through

PESB

Land Purchase Option to directly purchase through

negotiations - hence faster

Government Land or through

Govt. acquisition - time

consuming and abnormal delays

Manning/ wage structure/

IR issues

DPE guidelines not applicable -

contract manning/ optimal cost/ low

risk on IR issues

DPE guidelines to be followed -

higher wages/ permanent work

force/ high risk on IR issues

Award of contract CVC guidelines not applicable –

flexible

CVC guidelines

Writ jurisdiction No No Yes

RTI applicability No No Yes

CAG audit/ review Yes Yes, unless

OMCs have no

control in Board

decisions**

Yes

Strategic Partners/

Investors

Optional Required Not applicable

Lenders' relative perceived

project risk

Low- medium

level interest

rates

Moderate- higher

interest rates

Lowest - easy funding, lower

interest rates

** as per the legal opinion1 received from M/s Amarchand Mangaldas & Suresh A Shroff & Co (AMSS),

as per Companies Act, 2013, in cases where "direct/ indirect control by the Central Government" exists,

CAG may also have the authority to appoint the Auditor. In case the constitution of SPV provides any

special rights by virtue of which the OMC’s individually of acting together can control SPV’s

management/key decisions then Structure 3 shall also come under the ambit of CAG.

Additionally, considering no significant advantage of Structure 3 over Structure 1, OMC’s decided to

examine Structure 1 and Structure 2 and also sought legal opinion from AMSS on: 1 AMSS legal opinion is attached as Appendix

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a. Applicability of CAG audit and relative flexibility in operationalization of SPV under Structure 1

and Structure 2

b. Applicability of Section 188 of Companies Act, 2013 in relation to the relative part transaction

especially in respect of awarding repeated business to SPV on nomination basis.

As per Legal Opinion sought by AMSS on the same:

CAG Audit will be applicable for Structure 1 whereas the same depends on rights provided to

OMC by virtue of SPV’s constitution as mentioned above

On related party transaction, AMSS recommends “OMCs to ensure that appropriate (domestic)

transfer pricing studies are carried out and independent reports procured from one or more

reputed independent consultants stating that the proposed transactions are on Arm’s Length basis.

Further, in light of the possible recurring nature of such transactions, such reports may clearly

state that such transaction arrangements based on any particular method or principle, such as

‘cost plus pricing’ shall qualify as an arms Arm’s Length transaction.”

Additionally the Legal Opinion mentions that “any transaction which qualifies as Related Party

Transaction would require the approval of the Board as well as prior approval of shareholders

(minority shareholders will have a major say for approval).” However in case the OMC’s are able

to established the transaction in Ordinary Course of Business and the same being an Arm’s length

transaction, the said approvals may not be required.

Further AMSS opined that there is not significant advantage in opting for Structure 2 as compared to

Structure 1 unless it offers substantial business/operational advantages. The same was also agreed by

SBICAP and OMC officials in previous meetings.

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4. THE SPV COMPANY FORMATION

4.1 Key Steps in SPV formation

The following are the steps involved in the incorporation of a JV Company:

4.2 Key Terms of Reference for Steering Committee

A steering committee should be formed comprising of representatives from OMCs’ for deciding on the

course of action for implementing CUF facility through the SPV company. The key terms of reference for

Steering Committee could be inter alia:

Defining objective of the SPV: Implementation of POL infrastructure facilities

Guidelines on award of projects to SPV: Guidelines needs to be formulated for Projects to be

awarded by OMC’s to SPV (i.e. single Sponsor requirement, multiple Sponsor requirements,

dedicated/captive facilities (e.g. refinery locations), etc.). For framing these guidelines, the specific

requirements, capabilities and commitments should be evaluated for each facility type. This should

also guide on criteria for finalising the location in case of preferred locations by different OMC are

not same and are in the vicinity of each other. Decision in such cases may be based on committed

sales volumes, cost of project under various scenarios, etc. This should also include the guidelines

on prioritisation of projects to be awarded by the SPV, i.e. new projects, resitement cases, existing

locations, etc.

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Suggesting Constitution of SPV Company: This includes recommending on being a private or

public company, inclusion of non-OMC investors, etc.

Equity contributions: Mechanism for equity infusion, i.e. against cash call, advance, etc. Forms of

equity contribution i.e. equity shares, promoter loan, hybrid instruments, etc., remedies in case of

default in equity contribution. Further in case where an OMC offers land or existing location, the

contribution of the same towards equity or mechanism to compensate the OMC should also be

discussed.

Shareholding pattern: Shareholding pattern of the SPV, i.e. OMCs’ holds equal stake or have

disproportionate shareholding & participation of other investors, exit options available to OMC’s

and restrictions on the same.

Constitution of the Board: The representation of SPV’s on the board along with voting rights

should be clearly defined. This should include minimum shareholding required for being eligible

for the board representation, rights w.r.t. appointment of Chairman and other key officials, if any.

Further in case the nominee director ceases to be on rolls of the nominee company due to any

reasons like superannuation, etc., then the interim arrangements in such situations should be

defined.

Commitments of each JV partners: This includes commitments in the form of “Use or Pay”

agreement as well as providing management and technical expertise during initial years. In case of

deputation of officials from JV partners to SPV, terms of such deputation should be clearly

defined. Further understanding between the promoters to be developed on treatment of the payment

made due to revocation of “Use or Pay” agreement, i.e. in the form of advance to SPV, to be

adjusted later during period of excess usage, penalty, etc. In case of treatment as advance, allowed

time period and restrictions on adjustments should also be discussed.

Transaction between Promoters and SPV: The nature of transaction between the JV partners and

SPV, particularly in the business area of common interest should be clearly defined as Arm’s

Length Transaction.

Special rights of Promoters: The key decisions related to SPV, where the promoters proposes to

have minimum consent of consortium or voting quorum or veto rights of one or more members

should be discussed and defined.

Commercial Framework: The Promoters should clearly define the roles and responsibility of SPV

i.e. operations boundary (E.g. who takes the insurance, product pilferage, etc.). Further guiding

principles forming the basis of determining the returns for the SPV in the form of usage charges,

e.g. minimum Project IRR, etc. should be discussed. In additions it is suggested that other issues

related to recruitment by SPV, compensation, etc. should be discussed by the steering committee.

The above list is indicative and not exhaustive. Further in the process, the steering committee may be

required to appoint external consultants and should be empowered to do so.

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Once the key terms of reference for JV are formulated, the JV agreement may be signed and the same

would pave the way for incorporation of the JV.

4.3 Key Steps for JV Incorporation

The following section gives brief process of incorporation of JV Company.

A. Name: The proposed name of the JV Company would have to be reserved by filing Form 1A with

the Registrar of Companies (“RoC”). Six proposed names for the JV Company are required to be

provided, with significance of the key or coined word(s), if any, in the proposed names(s) (in

brief).2 Further, the appropriate nature of the JV Company should be chosen (i.e., public or private)

and an appropriate place for the registered office of the JV Company is to be chosen. In this regard,

stamp duty friendly states such as Delhi and Tamil Nadu may be preferred. Please note that it takes

approximately 6-8 weeks to incorporate a company after filing the relevant forms and documents

with the relevant RoC.

B. Authorised capital of the JV Company - The amount of authorized capital enables a company to

issue shares up to the authorized amount. The authorized capital of a company should be higher

than the amount of capital that a company would require in the near term, so that such amount may

be infused by way of contribution to the share capital. It may be noted that the registration charges

and stamp duty payable for incorporating a company are calculated with reference to its authorized

share capital and the stamp duty rates vary from one state of India to another. The minimum paid

up capital of a private company must be Rs. 100,000.

C. Constitutional Documents – Drafting and filing the Memorandum of Association (“MoA”) and

the Articles of Association (“AoA”) of the JV Company. The main objects of the JV Company

would have to be specified in the MoA. Further the terms and conditions of the joint venture will

also need to be incorporated

D. Incorporation- A JV company is required to have at least 2 shareholders. The board of directors

of the JV Company must consist of a minimum of two directors. There is no need for the directors

to be Indian residents.

2Please note that a higher authorized share capital is required if the proposed name contains certain words, such as “Corporation,” “International”, “India”, “Products”, “Udyog”, “Industries”, “Global/Globe”, “Worldwide”, “Universal”, “Continental”, “Inter Continental”, “Asiatic/Asia”, “Manufacturing” or “Enterprises”.

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5. Summary of OMCs Discussion on CUF Implementation

Implementation of CUF facilities through a Special Purpose Vehicle (‘SPV’) route was found to be the

preferred option to operationalize the CUF. Further the following points were concluded during the

meeting held between OMC representatives:

5.1 POL facilities considered for implementation under CUF

New POL facilities shall initially be considered for implementation as CUF facilities; later, once

CUF model is established, existing location can be considered later under the same.

Due to specific requirements at each of the airport location, Aviation Fuelling Stations shall be

handled shall be developed as CUF by suitably forming separate JVs as per the requirements in the

individual airports in line with Delhi Aviation Fuel Facility Private Limited or Mumbai Aviation

Fuel Farm Facility Private Limited

Similarly the facilities at strategic locations such as refinery evacuation facilities, extended storage

facilities connected through cross-country pipelines, Coastal Locations (such as POL/LPG Import

Terminals), etc. shall be kept out of the purview of CUF.

SBICAP in consultation with OMCs’ have identified 15 POL locations, where 2 or more OMCs

have facilities with common boundaries. A committee of OMCs is set up to study 2 sample

locations from the above and explore the possibility to bring them under CUF.

The key considerations for the same would be operational feasibility, compliance of OISD

standards, manpower requirement and redeployment needs, alternate supply sources in case of

emergency requirements, etc. The study will help in identifying key challenges and possible

solution for the same and help in guiding implementation for other locations in future.

The SBU-wise identified locations and discussion on CUF implementation for the same has been

presented in Annexure IV.

5.2 Operationalization of CUF:

The SPV’s revenue would primarily from the Terminalling Charges/Tariff for facility usage paid by

users (primarily OMCs). The same would be based on the principle of recovery of cost (for the

capex incurred and O&M services provided) and reasonable return on investment.

Participating OMCs can also consider inviting other interested users on a case to case basis, subject

to availability of capacity. The same will help in sharing infrastructure by larger base and thereby

help in reducing tariff.

Initially to implement CUF facility, the SPV can consider awarding initial projects on BOO/BOOT

basis to reputed parties. This will help the SPV in establishing business model with low

capitalisation and manpower recruitment. Subsequently, the SPV can decide on various other

options like construction and operation by SPV, construction by SPV & operation through

outsourcing, etc.

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Since the OMCs would be awarding contract to SPV for implementing CUF on nomination basis,

they will be required to establish the same as an ‘Arm’s length’ transaction. Accordingly a

procedure for awarding contracts on ‘Arm’s length’ basis needs to be in place and the same may

be undertaken through reputed consultants.

OMCs/Users would be required to enter into “Use or Pay” arrangement for a minimum level of

facility utilisation (Minimum Guaranteed Volume)

Based on the deliberations held, OMCs may consider adopting SPV route for CUF implementation and

take necessary approvals for the same.

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Annexure

Page 34 of 47


Annexure –I: Funding Considerations

A. Illustration of Savings in Capital Cost

OMCs have conducted an internal study to evaluate the savings with CUF model on account of reduced

terminals. Capital outlay for implementation of CUFs vis a vis individual POL infrastructure is given

below:

Capital Outlay Required: Individual Projects

Head Metric Unit

Time period 5 years

No. of Terminal/Depot / AFS 30 Nos

Core Cost per installation 100 Crore

No. of LPG BP 30 Nos

Cost per LPG BP 60 Crore

Debt Equity ratio 0.6 Nos

Head INR Crore

Cost of Terminal 3,000

Cost of LPG Plant 1800

Core Project Cost 4,800

Financing Charges 508

Total Fund Required 5,308

Head Year 1 Year 2 Year 3 Year 4 Year 5

Total Project Cost 1,062 1,062 1,062 1,062 1,062

Cumulative Project Cost 1,062 2,123 3,185 4,247 5,308

Debt 637 637 637 637 637

Equity 425 425 425 425 425

Cumulative Equity 425 849 1,274 1,699 2,123

Capital Outlay Required: combined Projects

Head Metric Unit

Time period 5 years

No. of Terminal/Depot / AFS 15 Nos

Core Cost per installation 140* Crore

No. of LPG BP 15 Nos

Cost per LPG BP 84* Crore

Debt Equity ratio 0.6 Nos

* 40% increase in capex has been considered on account of increased throughput, land and other

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facilities, whereas total no. of locations are reduced

Head INR Crore

Cost of Terminal 2,100

Cost of LPG Plant 1,260

Core Project Cost 3,360

Financing Charges 356

Total Fund Required 3,716

Head Year 1 Year 2 Year 3 Year 4 Year 5

Total Project Cost 743 743 743 743 743

Cumulative Project Cost 743 1,486 2,229 2,973 3,716

Debt 446 446 446 446 446

Equity 297 297 297 297 297

Cumulative Equity 297 595 892 1,189 1,486

Total equity requirement from OMCs comes out to be significantly lower (Rs. 2123 Cr) when OMCs

develop the projects through CUF compare to individual implementation (Rs. 1486 Cr).

B. Illustration of Equity Requirement

Initially the projects implemented by SPV shall require funding support from the shareholder’s, i.e.

OMC. For illustrating same, it was assumed that SPV shall be implementing two terminals (“Projects”).

Each of the Projects envisages 24 months of construction period and timelines for implementing Projects

is as given below:

Project Timelines:

Terminal 1 Terminal 1 Terminal 2

Construction start date 01-Jul-14 01-Jan-15

Construction period (months) 24 24

Commencement of Operations 01-Jul-16 01-Jan-17

Project Cost (Rs Crore) 250 200

D/E Funding 1.5: 1 1.5: 1

For the purpose of simplicity, it is assumed that the said Projects caters to each OMC’s requirements

equally and alternately to meet market requirement, each OMC would have to set up its own terminal of

lower capacity at aggregate cost of Rs 450 crore.

The construction timelines for both the Project is as follows:

Quarter from the Construction Start Date

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Total

% Capex 10% 10% 10% 10% 15% 15% 15% 15% 100%

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In addition to core Capex, there would be Interest During Construction (IDC) which is an additional cost.

Considering above the as built cost for Projects works out as given in following table:

(Rs Crore)

Project Core Cost IDC As Built

Project Cost Equity

Funding Debt

Funding Terminal 1 250 16.55 266.55 106.62 106.62

Terminal 2 200 13.24 213.24 85.30 85.30

Based on above timelines the, the equity investment requirement of OMC’s is estimated to be as

follows:

(Rs Crore)Project/FY ending 31 March 2015 2016 2017 Total

Terminal 1 (Rs Crore) 31.99 58.64 15.99 106.62

Terminal 2 8.53 38.38 38.38 85.30

Total 40.52 97.03 54.38 191.92

Each OMC’s share (33.33%) 13.51 32.34 18.13 63.97

Thus with above, the estimated share of each OMC for two Projects works out to be Rs 63.97 crore as

compared to Rs 191.92 crore estimated to be incurred by each OMC if they implement the terminal to

meet only own requirements individually.

The equity contribution will be in the form OMCs’ and debt can be arranged from Banks’/Financial

Institutions. Further in case SPV implements the Project through BOO/BOOT contracts, the BOO/BOOT

contract would be incurring the capex. The will reduce SPV’s capitalization requirements but at the same

time may marginally increase the Terminalling charges.

Further in order to secure debt funding for the Project:

OMCs/Users would be required to enter into “Use or Pay” arrangement for a minimum level of

facility utilisation so as to achieve the debt serviceability of the Project i.e. achieving a Debt Service

Coverage Ratio of 1.

Viability of each project to be examined on case to case basis and minimum commitment from the

OMC’s as mentioned above to be decided for each of project individually.

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Annexure II: BOOT and BOO Projects

Traditionally end-users of any infrastructure facility including governments and state owned agencies

have themselves build infrastructure projects in most economies including India. But due to reason like

huge capital requirement and specific expertise required in implementing such project, many end-user

agencies have started involving the private sector to participate in infrastructure projects.

Unlike the conventional financing, third party investment in infrastructure projects, need to

comprehensively incorporate all aspects of risk and return on a project finance basis where there is

limited recourse or non-recourse financing. This is normally undertaken by establishing a Special

Purpose Vehicle (SPV) and justifying the return through the cash flows of these specific projects. The

same is commonly undertaken using three structures, namely, BOT (Build - Operate - Transfer), BOO

(Build - Own - Operate) and BOOT (Build - Own -Operate - Transfer). A brief discussion on each of

these arrangements is provided below:

The differences between BOT, BOO and BOOT arrangements can be seen through three phases of the

project viz. Development, Operation and Termination. The degree of third party involvement increases

correspondingly as we go from BOT to BOOT to BOO format.

A. Build – Operate and Transfer (BOT) format

In a typical BOT model, the government entity enters into an agreement with a third party company

(BOT contractor) to finance, design and build a facility at its own cost. The BOT contractor are then

given a concession, usually for a fixed period to operate that facility and obtain revenues from its

operation before transferring the facility back to the owner at the end of the concession period. This

enables the project company to receive sufficient revenues to service its debt during this period. A typical

example of implementation of the same is road projects, where the private company is also given the

responsibility of maintaining and collecting the toll during the concessionaire period. After the

completion of the period it transfers the operation to the government. It must be understood in the BOT

format at all times title to the assets of the concession (mainly land) will remain vested in the owner/

authority providing concession.

B. Build Own Operate (BOO) format

Under the BOO format, the ownership of the asset is retained in perpetuity by the third party or

concession holder or the developer. Typical example of the same is development of power plants, where

the private developers own the plant and are governed by a power purchase agreement, which is usually a

fixed term contract. The physical assets of the project do not revert to the state after the concession period

is over.

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C. Build Own Operate and Transfer (BOOT) format

In a BOOT project, the ownership is vested with the third party or the concession holder, albeit

temporarily & the same transferred to the concession provider at the end of concession period at a pre-

determined terminal amount or as per agreed payment formula.

In any project, the structure needs to be finalised keeping in mind the various related issues through a

techno-economic feasibility study. Additionally while structuring the project and involving the third

party/private sector to meet the huge demand of funds and provide technical expertise required for growth

should be considered.

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Annexure –III: Funding Options

A. Equity Funding Options

Equity Funding for the terminal project can be raised in various forms. The two commonly used methods

i.e. private equity placement and IPO are briefly given in the following section:

i. Private Equity Placement

Key Investor classes for the private placement are:

a. Banks, FII & FI’s: Consideration includes Govt. v/s Non Govt. company structure, stable

dividend income, long-term investment horizon, passive investors.

b. Strategic Investors: Brings business expertise along with funding, investment rationale includes

similarity of operations, diversifications, economies of scope, active investors with long term

investment horizon.

c. Private Equity Investors: Key considerations are valuation and Exit options, Focus on capital

gains, medium term investment horizon, active investors with focus on growth.

The Private Placement process would involve the following:

Outlining the process flow, including strategic assessment of the business, analysis of financing

alternatives, scope of potential due diligence, outlining key terms of the issue, etc.

Approval of Investors List by the company to be approached

Approaching Investors – Circulation of Brief Information Memorandum to gauge Investor

appetite

Circulation of Detailed Information Memorandum to potential Investors post receipt of EoI in

above stage and signing of confidentiality agreement.

Management meetings, Due Diligence by Investors

Discussion on transaction structure, Negotiations with the Investors

Receipt of Binding Offers and discussions

Preparation of Execution of Shareholders agreement and Other Documentation

The instruments used for equity investments can be structured e.g. in the form of equity shares,

preference shares, compulsorily convertible debentures (CCDs), etc.

Private equity placement is relatively less expensive and exhaustive fund raising exercise as compared to

IPO. In addition to access to capital, in case of strategic investors, it offers additional advantage from

having access to their knowledge. It also helps in building confidence among other stake-holders

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ii. Initial Public Offering (‘IPO’)

Fund raising through Initial Public Offering (‘IPO’) is a relatively extensive process and requires

established business model to command good valuations. Thus this option is not recommended in the

initial phases and could be utilised for unlocking the value once the business of the company has

stabilised.

IPO process requires extensive preparation on areas like – preparation of a business plan, amount of

capital expenditure required, portion of equity to be raised through the offer, capital structuring, issue

structuring, financial statements, litigation details, etc. The IPO process can be broadly classified into

following steps:

Preparation & Due Diligence

Filing and Marketing Strategy

Marketing & Bookbuilding

Closing

The entire process of IPO takes approx. 4-6 months and depends majorly on the capital markets outlook

and SEBI observations on the placement document. The IPO should comply with SEBI ICDR

Regulations& Listing Guidelines of Exchanges

B. CCD and CCPS

i. Compulsorily Convertible Debentures (‘CCD’)

CCDs are debt instruments which are automatically convertible into equity after a certain time. It is a

deferred equity instrument which is treated at par with equity from the equity investor’s points of view,

yet the legal nature of CCD is debt because of its superiority over equity holders during the time of

winding up of company. Another important aspect of CCDs is the redemption of obligation some form or

other (in the form of equity issuance rather than through cash payment), which further strengthens the

fact that legal nature of CCD is debt only.

There are several advantages for issuance of a CCD.

One of the advantages is that, it defers the issuance of equity.

Another advantage is the tax benefits as the interest paid provides tax benefit to the issuer.

For both investor and issuer, it provides an upside to current equity price because the conversion

is deferred.

To an investor, it is a way of ensuring a fixed rate of return with an upside on conversion,

whereas straight equity cannot promise any fixed rate of return.

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SEBI ICDR Regulations covers compulsorily convertible debentures, however, in case of CCDs, there is

parity with equity shares because, SEBI don’t grant exemption in terms of Reg29A of the Takeover

Regulations while computing the holding period of equity shares, if the equity shares have resulted out of

conversion of CCDs, the holding period of the two is reckoned together.

ii. Compulsorily Convertible Preference Share (‘CCPS’)

Compulsorily convertible preference shares are another type of securities which defers the conversion

into normal equity. Till the time of conversion a preference share dividend is paid to the holder. It has got

similar advantages compare to CCDs except:

Dividend doesn’t provide tax advantage as compare to interest paid on debt.

Lenders often put restrictions over dividend payment in the form of negative covenants.

Claim of CCPS holders would ranks below claim of CCD holders at the time of winding up of

issuer.

The legal nature of CCPS would be treated at par with equities because there is no obligation on

the issuer to redeem the CCPS at any point of time.

In view of the above, it can be inferred that both CCPS and CCD have many inherent advantages, but the

legal nature and tax advantages of the two are different, hence the issuance of such instruments would

depend on the specific requirements of issuer/investor on a case to case basis.

C. Debt Funding Options

Debt can be raised from various sources and in various forms. The debt instruments commonly used are

briefly described in the following sections:

i. Rupee Term Loans

SPV could raise debt funds in the form of Rupee Term Loan (RTL) which could be raised from a

consortium of domestic bank. In the present case the lenders will get the comfort from promoters and the

customers of SPV. RTL are available in the market linked to respective bank’s base rate.

Key aspects of funding through Rupee Term Loans

There would be good appetite for SPV borrowing for the project given the assured revenue and

promoter’s profile.

Longer tenors of up-to 10-14 years would be possible in this market since domestic lenders have

gained significant experience of long term lending to infrastructure projects over the past few

years.

Prepayment and cancellation options can be negotiated and covenants are relatively easy to meet.

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Flexibility is offered in terms of drawdown in line with the project progress and hence no or

minimum carry cost

Since the SPV has no running operations, the pricing of Rupee Term Loan in the initial few years

would be high compare to an entity already having some assets and operations. As the facilities

would start earning revenues, the pricing for later projects would become much more attractive.

ii. Debenture Issue (Rupee)

SPV could raise debt funds through a domestic issuance of debentures.

Key aspects of Funding through Rupee Bond Issue

As against borrowing through rupee term loans, Bond route provides a broader market since

mutual funds and provident funds may also participate in the placement.

This could be the fastest route for raising funds as against a syndicated loans, since the

investment decision would be taken by the treasury department of the banks and once the issue is

rated, the decision making process with all investors is much simpler and faster.

Another advantage would be relatively easier documentation unlike like comprehensive loan

agreements. The debentures can be secured or unsecured. However the same would impact the

pricing of the issue.

The funds would have to be drawn by SPV in one tranche as against the staggered requirement as

per project progress. This leads to additional costs in the form of carry cost.

The Bonds would be usually carrying a fixed coupon, resulting in a situation that SPV would not

be able to get any advantage if the interest rates fall and vice-versa.

Bond market in the country is maturing, relatively small market limited to good credit rating

companies; credit Rating for debenture issuances is mandatory and green-field Projects may

require credit enhancement to improve ratings for getting better price

Bonds are not pre-payable, except in a case where call option is built into the structure without

providing for a put option. However, market appetite for such issuance would not only be limited

but also the call option premium would result in an additional 10 to 30 basis points in terms of

option premium depending upon market conditions.

SPV could consider the Bonds option at a later stage after completion of the project by exercising

the prepayment option in respect of Bank’s Base Rate linked RTL, depending on the interest

rates at that time.

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iii. External Commercial Borrowing (ECB)

ECB facility is governed by ECB guidelines issued by RBI. While it is possible to raise ECB funds

denominated in US Dollars (USD), Pound Sterling, Japanese Yens (JPY), Euro or the Renminbi, the most

common currency use for ECBs is USD.

Key aspects of Funding through External Commercial Borrowing facility

Availability is more for ECB with 5 to 7 years average maturity, longer tenor ECB facility

availability is very limited; competitive pricing may not be possible.

Given promoters agreement for the services/use of facilities, the funds should be available at

attractive spreads over benchmark 6 Month LIBOR.

Since the borrowings would be in forex denominated, to the extent of the import component of

capex being funded by such borrowings, any variation in the Rupee- USD exchange rate will not

affect the quantum of funds required to be raised as debt by SPV for meeting the capex.

Limited appetite for green field projects to be executed on limited/non-recourse basis. Further

ECB lenders propose relatively stringent covenants and due-diligence as compared to RTL.

Longer construction periods and limited flexibility in drawdown schedule may lead to higher

commitment fees.

Suitable hedging mechanism to be in place depending on currency of Project cost and project

cash flow. In the present case since revenues for the SPV would be in INR, the same would be

requiring hedging and would be an additional cost.

Withholding tax implications for Foreign Bank may result in additional cost.

iv. Export Credit Agency Funding

ECA facilities are also governed by ECB guidelines issued by RBI. Export Credit Agencies (ECAs) are

the entities formed by various countries to promote export from their respective nations, e.g., Korea Exim

bank (K-Exim), US-Exim, Japan Bank for International Co-operation (JBIC), Export Development

Canada, etc. These agencies provide long term fixed and floating rate financing to companies that import

capital goods from their countries. However, subsequent to formation of Euro Zone, some of the

European ECAs expanded their role to include export support on a pan European basis.

In addition to direct funding, some of the ECAs provide guarantees, based on which the borrower can

raise cheaper funds in the international or Indian markets.

Key aspects of Funding through ECA facility

The advantages of availing ECA financing are the same as ECBs. In addition,ECA sources can

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offer longer tenor funds than ECB lenders and also offers attractive fixed rate funding options

ECA funding involves more elaborate assessment process

Tie-up is more time consuming than ECBs

Some of the ECAs require an Indian bank to provide counter guarantee against their funding

v. Multilateral Agency (‘MLA’) Funding

MLA funding is similar to ECA funding except, ECA is mostly Supplier’s country specific funding

where the quantum is restricted to the capex import component. A few MLAs are International Finance

Corporation (Investment Banking arm of World Bank) & Asian Development Bank. These ECB facilities

are similar to those offered by ECA lenders except these are usually supplier country agnostic.

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Annexure IV: Summary of discussion on CUF implementation by SBU’s

A. LPG Business

Existing Locations:

In case of existing LPG plants, locations where two or more OMCs are having their LPG Bottling Plants

were identified. There are 31 locations where bottling plants of more than one OMC are operating at

present. Out of 31 locations, at 22 locations, two OMCs are operating and at balance 9 locations, all three

OMCs are operating. However at none of the locations other than Kondapally the boundaries are shared.

Conclusion: Merger of the existing LPG Plants and its operation under CUF principle is not

recommended due to following reasons:

Investments have already been made in the respective infrastructure.

Different OMCs have different wage structure.

The staff required at state of the art plants is already optimized by OMCs. No further reduction in

manpower is expected in these plants. In case the plants are transferred to JV, it will lead to

idling of present manpower deployed at these bottling plants and re-deployment of this

manpower will be a major constraint.

OMC plants are located far from each other (except Kondapally) at any given one location.

Merger of these plants together will be practically difficult.

In case capacities are merged and higher capacity bottling plants are operated under CUF

principle, the following problems are envisaged:

o The cylinders of the three Oil Marketing Companies are not interchangeable and

therefore it will warrant proper segregation of cylinders for filling, dispatch of the

cylinders belonging to particular OMC to the distributors of same OMC.

o Segregation of defective cylinders for repairs and testing would become a major

operational constraint

o It would also lead to accounting issues.

Merging of capacities beyond a particular threshold may have repercussions on safe

handling/operations at such bottling plants and the risk perception with merging of facilities may

also undergo major change which may not find favors with Statutory Authorities.

The above Issues mentioned are complex issues and would need detailed feasibility study which will

bring about radical changes to make it implementable which is not possible on immediate basis. As per

current practice, the OMC plants are already working as CUF per se and at present, based on the spare

capacity as well as on logistic considerations, OMCs are having bottling hospitality exchange from 49

bottling plants to limited volumes. Regular meetings are held between OMCs to identify new locations

for such hospitality. In view of above, Industry feels that it will not be advisable to include existing LPG

plants under ‘CUF’ Concept.

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New Locations:

With respect to construction of new bottling plants under CUF principle, earlier 3 locations i.e. bottling

plants at Chitradurga (Karnataka), Agra (UP), Sirsa (Haryana) were identified for construction under

CUF principle.

However, consequent to capping of domestic cylinders, there has been a drastic dip in the demand of

LPG, resulting into underutilization of the existing plants. Therefore, during the Industry meeting held

on 24.05.2013, it was discussed that the proposals for setting up of bottling plants at the above 3

locations are not viable and therefore further progress on the same be kept on hold till the market

correction takes place and demand gets stabilized.

Notwithstanding the above, the issues as highlighted in conclusions would also remain very much

relevant to setting up of new bottling plants on Industry basis following CUF principle. It would need

further study to identify various possible changes after which only the proposal can be re-considered for

further evaluation for its implementation.

B. Aviation Business

During the meeting on 8th March, 2013, under the Chairmanship of Secretary (P&NG) and Secretary

Ministry of Civil Aviation to discuss the issues related to Open Access Facility for ATF at Airports,

Secretary PNG suggested:

That Feasibility of setting up ATF infrastructure and HRS facilities at major Airports, including

Chennai, Kolkata and Goa through JVs should be examined.

To ensure participation of various stake holders , including private players, in setting up and

managing ATF infrastructures at airports

Subsequently, on 23rd May, 2013, during meeting of Aviation SBU Heads, it was agreed by all three that

integrated Hydrant Refueling System (HRS) will be built at Chennai, Kolkata and Goa by a JVC/SPV of

IOCL, BPCL and HPCL and a working group of three companies will meet to work out the modalities.

For all existing locations Industry is of the view that:

JVC / SPV should be formed as an independent entity to operate under Open Access model

where ATF Infrastructure owner at Airport and ATF suppliers are at arms length to ensure that

there are none conflict of interests.

JVC /SPV should take ownership of existing ATF infrastructure of all 3 PSU companies and start

developing the requisite fuelling Infrastructure through the process of Integration of existing

facilities and development of additional facilities in line with the development and requirement

of Airport and ensuring that there is no loss to OMCs.

Issues to be resolved / under discussion:

During the Working Group meeting on 8th June 2013, for discussing the modalities to set up

Integrated Hydrant refueling facilities at Chennai, Kolkata and Goa under SPV / JVC

arrangement

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IOCL was of the opinion that integration of Hydrant pipelines and pits to be done at tarmac of

the airport only, whereas BPC and HPC recommended to integrate entire Hydrant refueling

system at the airport , i e. Fuel farm (i.e. tank farm with receipt facilities, filtration, pumping

system etc.) along with the pipelines and refueling pits at the tarmac.

Additionally, IOC opined that Transfer of assets of individual Oil Companies to the JV can be

discussed and finalized as a subsequent step.

List of existing locations under ‘CUF’ : - All existing locations under Phase-I are enlisted below, to

be considered under ‘CUF”:

PHASE-I LOCATIONS

Sr. No. AIRPORT OMCs present

1 CHENNAI IOC,BPC,HPC

2 GOA(CIVIL ENCLAVE) IOC,BPC,HPC

3 KOLKATTA IOC,BPC,HPC

Conclusion:

Industry is of the view that as per the directions of MOP&NG and MOCA , ownership of ATF

(ATF Suppliers) at the airports are to be segregated and Common User Facility (CUF) should be

created by an independent JVC/SPV, at existing locations through the process of integration of

existing facilities or additional / new facilities plus development of Hydrant at Tarmac

There will be rationalization of the existing infrastructure and avoid duplication of static and

mobile facilities

Unlocking of land will happen as the scattered infrastructure in various parts of airport will shift

to one place

This will create a level playing field for all market players desirous of supplying ATF to Airlines.

This will ensure that there is no clash of interest between ATF fuel infrastructure owner at the

airport and ATF supplier and will give access to other suppliers and fair competition

Certain issues as mentioned above, i.e. whether to integrate entire Hydrant refueling system at the

airport or only tarmac and issue of transferring assets to JV etc. needs to be resolved at Industry

level.

C. Retail Business

In Industry meeting held at IOC HQ on 3rd June 2013, the matter for merger of existing locations was

deliberated. Subsequently, during the Industry meeting held at IOC on 19th June, 2013, each company

provided the details of its existing locations. IOC as an Industry Coordinator is in the process of

compiling OMC’s list of existing locations for circulation amongst Industry members.

In the meantime, BPCL & HPCL has compiled list of BPCL’s existing locations along with relevant

details,

Conclusion (Merger of existing Retail locations): As per the existing locations identified by BPC /HPC,

it may be possible prima facie, to merge total 15 IOC/BPC/HPC locations, i.e. North -6 , East – 1,

West – 5 and South – 3, subject to On- Site feasibility study.