Govt refineries to gain from FDI cap hike

The government's decision to hike the foreign direct investment limit in refineries being built by the public sector to 49 per cent will lead to public sector oil refiners planning to set up more refining facilities, says experts.

"This is a step in the right direction as India is adding significant refining capacity. This will open opportunities for setting up more capacity and facilitate faster implementation of refineries at Paradip in Orissa (of Indian Oil Corporation), and at Bina in Madhya Pradesh (of Bharat Petroleum)," said Ajay Arora, Partner (transaction advisory services), Ernst & Young.

The government on Wednesday raised the limit of FDI in state-run refineries to 49 per cent from 26 per cent.

There is a lot of global interest in India's refining sector, in which companies like Reliance Industries Ltd manage impressive margins and the earlier 26 per cent FDI cap was proving a hurdle.

Last year, in a one-off waiver, the LN Mittal group was allowed to acquire 49 per cent stake in the refinery at Bathinda, which has a capacity of 9 million metric tonnes per annum.

This was the largest FDI in India's petroleum downstream sector and the largest rupee-debt syndication. The equity portion of the project is Rs 7,230 crore (Rs 72.3 billion) while the debt amounts to Rs 11,670 crore (Rs 116.7 billion). The project cost of this joint venture between HPCL and Mittal Energy is Rs 18,900 crore (Rs 189 billion).

The government has also done away with the condition of "compulsory divestment of up to 26 per cent equity in favour of Indian partner/public" for companies engaged in trading and marketing of petroleum products.

"The impact (of this) will not be very significant as other issues like under-recoveries impede flow of capital into the industry. There is also little interest among companies for marketing petro-products," said an oil sector analyst.

"The basic issue is under-recoveries. For the sector to be made more attractive, the issue of under-recoveries needs to be addressed for companies that are interested in setting up marketing outlets," said Manish Kumar of KPMG.

India, which is the world's fifth largest consumer of energy, accounts for 3.9 per cent of the global energy consumption. Its dependence on imports of crude oil and petroleum products is almost 80 per cent.

In 2006-07, the consumption of petroleum products in India was about 120 million metric tonnes, about 5.9 per cent higher than the previous year's figure of 113 MMT.