The Central government on Friday signed a share holders agreement to sell its 73.47 per cent stake in Dredging Corporation of India Ltd (DCI) to four major port trusts for ₹1,056 crore at ₹510 per share.

BusinessLine first reported the deal on March 4.

Also read:Four major port trusts to buy Centre’s stake in DCI for Rs 1,056 cr

The deal will help the Central government inch towards its target of raising as much as ₹80,000 crore through stake sale in public sector undertakings in the fiscal year ending this month.

The decision to sell the Centre’s entire stake in DCI to government-owned Visakapatnam Port Trust, Paradip Port Trust, Jawaharalal Nehru Port Trust and Deendayal Port Trust will also help the NDA government avert political backlash in the forthcoming polls if the dredging firm was to be privatised.

“But, other than that, whichever way you look at it, the four port trusts stand to lose from the acquisition of a company running a business that they themselves had exited years ago because it was not considered core to their main port operating business,” an industry executive said, asking not to be named.

With DCI coming under its direct control, the four port trusts — which together hold 70 per cent of the maintenance dredging market at major ports — are expected to give work to DCI on nomination basis (without a tender) at their own ports.

In 2015, the Shipping Ministry formulated a new dredging policy mandating major port trusts to opt for open competitive bids for capital/maintenance dredging works instead of the nomination route.

Giving work to DCI on nomination basis may help the four port trusts secure the lowest possible rates for undertaking maintenance dredging at their ports. This would lead to an ironical situation, the industry executive said.

To get a Return on Investment of at least 16 per cent (the government benchmark in approving capital investments in major port trusts) from their acquisition of DCI, the dredging firm will have to raise its annual revenues and net profits substantially than what it has been reporting in the past. Then only can the four port trusts afford to get the 16 per cent return through dividends from DCI.

“Just giving contracts does not fetch returns. If these four port trusts give their maintenance dredging contracts on nomination to DCI, the rate at which the contracts are given becomes important. To help the port trusts get the desired return on investment, DCI will have to increase the rate for per cubic metre maintenance dredging which is currently hovering between $1-2 to $5-6 and the higher rates will have to be paid by the port trusts,” the industry executive pointed out.

On the other hand, for the four port trusts, it is critical to keep their annual expenditure on maintenance dredging to the minimum. This is because dredging expenses are typically priced into the vessel related charges (VRC) that the ports collect from shipping lines, their main users.

The VRCs at major port trusts are considered high compared to neighbouring ports in the region. Any hike in dredging costs will have to be recovered from shipping lines by raising the VRC, which may force lines to divert to less expensive private ports operating nearby like Mundra in the case of JNPT and Deendayal, Gangavaram in the case of Visakhapatnam and Dhamra in the case of Paradip.

So, while a lower rate for dredging would crimp the return on investment made by the port trusts in buying DCI, a higher dredging cost could lead to loss of business through diversion of lines due to higher VRCs unless the port trusts decide to absorb the higher dredging expenses.

“If DCI cut rates (it had offered to reduce rates by 10 per cent on prevailing rates during deal negotiations), it will make the return on investment further impossible. Otherwise, the port trusts will have fund a desired level of return on investment by paying a higher dredging expense from their own pocket. The ultimate loser will be the four port trusts,” the industry executive said.

Related Topics
comment COMMENT NOW