India's Bongaigaon Refinery and Petrochemicals to Merge with Parent Company IOC

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Researched by Industrial Info Resources (Sugar Land, Texas)--Bongaigaon Refinery and Petrochemicals Limited (BSE:500072) (BRPL) (Dhaligaon, Assam), a refining and integrated petrochemical manufacturer, is likely to be merged soon with parent company Indian Oil Corporation Limited (BSE: 530965) (IOC) (Mumbai), India's largest petroleum company.

India's Ministry of Company Affairs, which ensures the compliance of the Companies Act of 1956, has completed all of the proceedings and formalities related to the merger, including shareholders' consent. Final approval from the central government is expected by the end of December or early January. The ministry has kept the swap ration unchanged at four equity shares at $0.20 each of IOC for every 37 shares at $0.20 each of BRPL. The ratio was recommended by the boards of both companies to the ministry in November 2006 as part of the original merger proposal.

BRPL was established in 1974 as a central government public sector enterprise to set up a 1 million-ton-per-year refinery and petrochemical complex in Dhaligaon. The plant was partially commissioned in 1979, attaining its full capacity only by 1988. The plant's refining capacity was augmented to 2.35 million tons per year in 1995. However, it was in 2005 when the refinery started operating at its fully installed capacity. The government fully owned BRPL until 1991 and divested nearly 74% of its equity stake to IOC in 2001. Following this, BRPL became a subsidiary of IOC in March 2001.

BRPL recorded a net profit of $60 million and a turnover of nearly $1.2 billion in the last fiscal year. Under IOC's administration, BRPL had closed its unprofitable naphtha petrochemical unit. A $400 million project is currently in process at BRPL's facility in Assam for enhancing quality and increasing yield.

Petrochemical products unlike other commodities cannot avail modified value-added tax benefits. IOC has been working to increase crude availability for BRPL's refineries in Assam. This will enhance the capacity utilization of BRPL, thereby leading to a higher sales tax. There is not enough demand for petrochemical products in northeastern India, so a large portion of the products produced at BRPL's facilities in Assam are sold through IOC in the rest of the country. This product transfer from BRPL to IOC attracts double taxation, depleting profit margins in the process. The merger with IOC will result in net savings of about $16 million as it will avoid double taxation on product transfer. Stocks transferred within a company are not taxed twice.

BRPL's merger with IOC offers the refining major strategic advantages. Refining capacities in Assam receive 50% exemption on excise duty, leading to higher margins. The region offers infrastructure and tax benefits for IOC to make it as its refining hub. The favored "navratna" public sector enterprise is planning to increase the crude oil supply to its refineries in Guwahati and Bongaigaon and work out a mechanism of transporting petrochemical products to rest of the country.

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