The Index

Worse, `operating profit before working capital changes’ has not been adjusted for unrealised forex gains/losses, and `cash flow from investing activities have not been adjusted for increase/decrease in current liabilities relating to acquisition of fixed assets.

Para 27 of AS 3 states that unrealised gains and losses arising out of changes in forex rates are not cash flow. The effect of exchange-rate changes on cash and cash equivalents held or due in foreign currency is reported in the cash-flow statement to reconcile cash and cash equivalents at the beginning and the end of the period.

This amount is presented separately from cash flow fromoperating, investing and financing activities, and includes the differences, if any, had those cash flows been reported at the end of period exchange rates. Hence, it is clear that it is more of a non-compliance with presentation requirements, and the logic is hard to understand. Under the head "Cash Flow from Investing Activities", asset acquisition has not been adjusted for the impact on current liabilities as a result of acquisition of assets.

The company has changed the method of accounting for depreciation on certain assets from WDV to SLM, resulting in net profit being higher by Rs 7.79 crore. It does not end here. Auditors have expressed inability to comment on realisability of claims (Rs 22 crore), for which credit has been taken based on negotiations with customers, wherein principle customers have accepted the company’s claims.

Is it prudent to take credit on the basis of "in-principle" acceptance of claim? The book value of quoted investments is Rs 30.96 crore, and the decline in value ofinvestments is Rs 24.06 crore. Being a strategic investment, no provision has been made for the same, but the fact remains funds could have been put to better use from shareholders’ point of view.

Loans/advances (including overdue interest) worth Rs 71.70 crore comprise largely of firms with eroded net worth, but no provision has been made for the same. It might make commercial sense not to provide for in the books, but the fact is funds deployment was not prudent. The impact is reflected in the price and P/E of the scrip.

Cess on crude

It is wierd that to meet its revenue shortfall, the government is considering a rise in cess on crude oil by Rs 100 per tonne to Rs 1,000 per tonne. The purpose of the cess collected from oil exploration and production firms is that it is to be transferred to the Oil Industry Development Board (OIDB). The purpose of OIDB was to render financial and other assistance for promoting the oil industry.

However, this has never been the case. Since the inception of theact, the centre has collected around Rs 30,000 crore by way of cess. Of this, roughly over Rs 1,000 crore has been made available to OIDB for disbursement to the oil companies, which is around 3.3 per cent of the amount collected.

On the one hand, the government is talking about increasing emphasis on the oil-exploration sector, for which it is collecting cess from companies. On the other, it is not deploying the money meant for it, and utilising it, instead, to meet its revenue shortfall.

Another reason for the low utilisation of funds from OIDB is that it is charging a high interest rate for loan disbursement. Ideally, the loan made available by OIDB should be at a low interest rate as its cost of funds is negligible.

Though the Rs 100 per tonne rise is a marginal amount, it is affecting the performance of oil-exploration companies, who are paid an amount less than international rates. There is little to gain from the excercise as the collection from this rise in cess will be in the range of Rs300-350 crore only, but it highlights the desperation of the government to meet its shortfall.

Loans and cash credit

The RBI proposes, the market disposes. This is applicable to the central bank’s efforts to apportion credit limits between a loan component and a cash-credit part. The objective of the exercise has been to reduce corporates’ dependence on the cash-credit system, which shifts the burden of treasury management on to banks. For corporates, however, the advantages of the cash-credit system, with its flexible drawing arrangements, is manifold.

Although the RBI has been consistently bringing down the ratio of cash credit in the total credit limit, real progress has been dictated by market realities. For instance, because of the recession, currently, banks are sitting on piles of cash, and they desperately want to lend. Many top corporates are accessing CPs at rates which are less than a 100 basis points above the T-bill rate for the corresponding tenure.

Under these circumstances,corporates are in a position to call the shots. The loophole which the RBI has left is that there is no repayment period for the loan portion. Accordingly, banks are drawing up loan agreements of as short as one month or even 15 days. For all practical purposes, this is almost akin to a cash-credit account so far as flexibility of operations for corporates is concerned. The burden of treasury management continues to be very much on the banks.

Emcee (With contributions from Urmik Chhaya and Shishir Asthana)