• $1.55 billion penalty sought from RIL exaggerated, say analysts

    Mukesh Ambani led Reliance Industries Ltd (RIL) may have to shell out roughly $1.15 billion a s net value of the $1.55 billion penalty that the government imposed on it on Friday. “The $.1 55 Billion imposed by the government is admittedly a gross number, which should be $1.15bn net to RIL, in our view,” said Saurabh Handa, analyst with CitiResearch in a 6th November dated report.

    The government slapped a $1.55 billion penalty on RIL for producing ONGC’s share of natural gas in the Krishna Godavari basin. The letter was sent to RIL on Thursday asking it to pay the penalty amount. RIL in its media statement issued on Friday said it plans to issue arbitration notice to the government. The company said it proposes to invoke the dispute resolution mechanism in the production sharing contract (PSC). “RILremains convinced of being able to fully justify and vindicate its position that the government’s claim is not sustainable. The contractor’s liability has not been established by any process known to law and the quantification of the purported claim is without any basis and arbitrary,” it said.

    The $1.55 billion (approx Rs 103.38 billion) penalty is also higher than the annual oil and gas segment revenue of the company. Besides, it would erode nearly one third of the profit of Rs 27,630 RIL made in 2015-16. The Citi analyst in his report further said the penalty almost equals the total revenues earned from the sale of these gas volumes without allowing operating expenditure and capital expenditure to be deducted. “.Even without getting into the merits & justification of the govt’s action, the calculation itself in our view appears flawed and the resultant penalty appears grossly exaggerated,” the report said. The brokerage had earlier estimated the penalty at $0.25 billion.

    Kumar Anish, analyst with HSBC Global Research in his 7th November report said the penalty lacks commercial, technical and contractual justification. “The KG-D6 consortium has just about managed to achieve a payback of its expenditure in financial year 2015-2016, 15 years after first expenditure and seven years after first revenue from the KG-D6 block. Taking the time value of money into account, the present value of all expenditure exceeds the present value of all revenue from the block,” he said. “Therefore, no case of a windfall gain can be made out, in our view. In fact, there is no profit from the block in present value terms, either,” he further added.

    Even while the two foreign brokerage firms termed the penalty to be on the higher side, various other analysts expect the company to be able to absorb it. Analysts expect the penalty to be legally contested further, leaving less room for any immediate impact. Edinson Volquez Womens Jersey

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