The fertiliser industry has urged the government to provide subsidy in the form of cash and not bonds, saying the long-term special securities are trading at heavy discounts impacting the balance sheet of companies.
"The bonds given to fertiliser companies are quoting at a discount of about 15 per cent. So a bond with a face value of Rs 100 will fetch only Rs 85. This amounts to the government paying only Rs 85 against the dues of Rs 100," said Fertiliser Association of India Director General Satish Chander.
Since these bonds are classified under the ‘Other Approved Securities’, banks and insurance firms are not obliged to buy them, making them unattractive against other AAA rated corporate bonds with higher yields, industry experts said.
To further his point, the FAI official said, "The companies are asking for delivered costs of fertilisers. They have to give cash to raw inputs providers, transporters and others. Moreover, when they deposit tax, they will have to give it in cash. So what they need is cash and not bonds."
These apart, the government imports urea at about Rs 31,000 per ton where as domestic producers get about Rs 13,000 a ton, Chander said, adding that the government has been paying in cash to overseas sellers.
Moreover, payment in the form of bonds is not an economically viable option for a cash-strapped sector like fertiliser, the experts said.
Fertiliser companies will find it extremely difficult to either gather additional working capital to meet requirements of funds blocked in bonds of 16 to 18 years long tenure or sell them in markets at heavy discounts and incur losses, the FAI DG explained.
Experts also said that if the government decides to issue bonds in the same proportion as last year and keeps it at 18 per cent of the total subsidy bill, the amount of such securities this year may be to the tune of Rs 21,560 crore, based on a subsidy estimate of Rs 1,19,772 crore for 2008-09.
At the current discount rate of 15 per cent, such bonds will land the companies in a capital forgo of more than Rs 3,200 crore, they added.
The MRPs of fertilisers have not been changed since February 2002, even though the cost of production has increased significantly.
Earlier, the MRPs contributed about 70 per cent to the total delivered costs of fertilisers while they account for only 20 per cent of costs now, the FAI DG said, adding that the companies, at present, need to depend on the government to recover the balance 80 per cent of total delivered costs.
Moreover, he said, the concession is paid after prolonged delays with some portions in bonds.
"Delayed disbursement of concession means protracted recovery period of the major portions of cost already incurred by the fertiliser companies. This seriously affects cash flows of fertiliser companies," he pointed out.
The industry has also sought compensation against the loss in sale of bonds during the last fiscal. The government had issued bonds worth Rs 7,500 crore out of the Rs 40,338 crore fertiliser subsidy during 2007-08.