The Cabinet Committee on Economic Affairs approved amendments to the New Investment Policy by deleting the ‘guaranteed buyback’ provision and hiking the ‘fixed cost’ component in urea production. This increase, by up to ₹350 per tonne, would push up the subsidy burden on the Government by ₹980 crore. The fixed costs mainly include salary and wages, contract labour, repair and maintenance and selling expenses.
Also, the new policy will insist on a bank guarantee of ₹300 crore from companies planning investments in urea capacity. This is aimed at attracting only serious players. The new policy had evoked good response, with the Government receiving as many as 13 proposals from urea-makers entailing capacity addition of 16 million tonnes.
While the ‘guaranteed buyback’ provision, which assured buyback of urea for eight years from start of production, has been deleted, the Government will provide subsidy on sale of the nutrient produced from new plants.
However, the shares of urea-makers such as Chambal Fertilisers and Tata Chemicals hardly reacted to the Cabinet approvals, ending almost flat compared with their previous levels.
“The amendments will allow market forces to operate for new urea units. It is expected that this would attract investments in the urea sector for required indigenous capacity addition and increased production of urea domestically. This would facilitate actual implementation of the new investment policy,” an official statement said.
No new urea capacity has been added in the past 13 years due to lack of an appropriate policy framework, which had resulted in widening demand-supply gap. While the domestic production of urea has stagnated at 22 million tonnes, the current consumption is estimated at 29 million tonnes.
To bridge the gap and invite investment into both greenfield and brown-field projects, the Government had notified new investment policy on January 2 last year.
With the CCEA approval the minimum fixed cost would be ₹2,300 per tonne under the New Pricing Scheme III. In the case of plants that are over 30 years old, they would be given an additional ₹150 per tonne.
Who will benefit the most
The CCEA decision to increase the fixed cost reimbursement for urea units by ₹350 a tonne will boost the operating profit of urea producers in 2014-15.
In the listed space, Rashtriya Chemicals and Fertilisers (RCF) and National Fertilisers (NFL) may benefit the most, adding over ₹80 crore to their operating profit.
This is because RCF and NFL may be eligible to receive additional reimbursement over and above ₹350 a tonne, given that their current fixed cost is below the minimum level of ₹2300 a tonne.
The operating profit accretion for Tata Chemicals and Chambal Fertilisers from the move is expected to be around ₹30 crore and ₹60 crore, respectively.