After much media speculation over the status of BPCL's greenfield refineries at Bina in Madhya Pradesh and Allahabad in Uttar Pradesh, the company has decided, instead, to go ahead with an expansion plan at its existing site in Mumbai. BPCL has a capacity of six million tonnes in Mumbai, which it plans to expand to 10 million tonnes. No decision has, however, been taken on the other two refineries.

The refinery at Bina is yet to be cleared, a good four years after its conception. Oman Oil, the joint-venture partner with BPCL in the Bina refinery, had recently threatened to withdraw as environmental clearances for a single buoy mooring are yet to be granted. The viability of the project is also threatened by the Reliance Petroleum pipeline. Newspaper reports also suggest that the Allahabad refinery is likely to be a non-starter, what with Shell the joint-venture partner having second thoughts as it does not have any marketing rights.

But BPCL still has the three-million-tonnegreenfield Numaligarh refinery in Assam, which will be commissioned in 1999. The main advantage of this refinery despite the small size is geographical benefits it will give the company, with access to the eastern region. The company has a market share of around 12 per cent in the eastern region, against over 65 per cent of IOC and 17 per cent of HPCL.

The expansion of the Mumbai refinery from six million tonnes to 10 million tonnes will cost BPCL a mere Rs 700 crore, versus over Rs 1,000 crore for a greenfield project. The only drawback is the geographical restriction of servicing the same location that the company was catering to. However, one cannot ignore the fact that BPCL, despite being the smallest refining company amongst the top three, has a 20 per cent market share. This is almost the same as that of HPCL, which has a refining capacity of 10 million tonnes. BPCL has one of the most efficient refineries in the country with a fuel loss of 4.8 per cent, with the light and middle distilatescontributing as much as 83.8 per cent to the output. The company also has the most efficient marketing setup with a throughput per retail outlet of 1,938 tonnes per annum, against the industry average of 1,713 tonnes per annum.

For the first half of the current fiscal, the company recorded a refinery throughput of 4.38 million tonnes, while the marketing turnover was 8.24 million tonnes. Thus, there still remains a huge supply-side gap for the company, which is likely to be bridged through the current expansion.

Thus, with BPCL ensuring substantial savings in capital costs and a ready and efficient infrastructure, the company will benefit to a large extent from the expansion. However, it will have to keep its option open about setting up a greenfield project. The problem, however, will be finding a partner who is ready to invest without having rights to sell its product in the domestic market.

Share buyback

Intriguingly, the Companies (Amendment) Ordinance, 1998, managed to raise morequestions than it answered. However, the Sebi (Buyback of Securities) Regulations, 1998, in sharp contrast, are precise and clear. But there still remains a lacuna, which requires some clarification. This deals with the treatment of what would transpire in the event of the market outpricing the offer for buyback, a result of which would undoubtedly be a poor response to the buyback offer, making it practically meaningless for the company.

From the text released by Sebi, it appears that no provisions have been made for the offer's withdrawal. However, it would be illogical to believe that no exit option has been provided, since the ordinance requires that every buyback be completed within 12 months of passing a special resolution. However, Sebi regulations require that an offer for buyback shall not remain open for more than 30 days. Thus, it is safe to conclude that if in the period of 30 days, the market price remains higher than the offer price, the company cannot use this as an excuse to opt out.

Butdoes this mean that a company in such a predicament has to wait for the period of 12 months from the date of passing of a special resolution for the price to be lower than its offer price? Especially, if the company does not wish to revise the offer upwards? Chartered accountant Jayant Thakur makes an important point. Nowhere does the ordinance specify that the offer cannot be withdrawn after being made. If the company exercises the option of withdrawal, it is clearly a breach of contract, and the offence will have to be tried under the Indian Contract Act.

More importantly, since buyback effectively results in a hike in the promoters' stake utilising company funds, unless the company exercises the creeping acquisition option (at least 1 per cent of the paid-up equity), buyback should not be allowed. This will act as the second check, the first one being the time frame within which payment has to be made.

Emcee (With contributions from Shishir Asthana and Urmik Chhaya)