Concerned at Kingfisher Airline's rising unpaid jet fuel bills, the government has asked Hindustan Petroleum (HPCL) to invoke the corporate guarantee given by Vijay Mallya's United Breweries (UB) Group to recover dues and supply aviation turbine fuel (ATF) in future only against a bank guarantee.
The Oil Ministry on March 17 shot a letter to HPCL Chairman asking him to convene a "special board meeting" to consider among other things, invoking UB Group's Rs 250-crore corporate guarantee to recover part of Rs 602.05-crore outstanding.
"The government has noted with concern the continued outstandings of Kingfisher Airlines (KFA) with HPCL on account of ATF supplies," it said. "The outstanding were reported to be Rs 602.05 crore on March 4, 2010 with a security in the form of Rs 250 crore corporate guarantee from United Breweries and Holding Ltd (UBHL)."
The ministry asked HPCL to place KFA on cash-and-carry terms as is done by other state-run firms Indian Oil Corp (IOC) and Bharat Petroleum (BPCL) since early 2009.
The HPCL Board is likely to meet on March 30 to also consider the ministry's suggestion of making future supplies "against Bank Guarantee to cover entire outstanding dues including for credit period allowed by HPCL."
When contacted, a KFA spokesperson said its outstanding towards HPCL was not Rs 602.05 crore but did not say what it actually owed to the state-owned fuel retailer. "We are in full compliance with the credit terms as mutually agreed with HPCL from time to time," he said.
Ministry sources said normally, ATF supplies like any other fuel sold in bulk, are done against a bank guarantee to cover for the credit period.
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However, in case of KFA, HPCL did not insist on a bank guarantee and settled for a 'corporate guarantee', which the ministry feels "may be a worthless piece of paper that may not be encashed in case of default," sources said.
UBHL had last week issued a corporate guarantee of Rs 500 crore but the ministry is unimpressed and is insisting on a bank guarantee. They said HPCL's aviation business headed by a deputy general manager had extended credit to KFA beyond the corporate guarantee UB Group had given.
The ministry in its March 17 letter asked HPCL to post a "sufficiently senior officer in-charge of aviation in view of the complex problems facing the sector and considering that Executive Director level officers head the aviation department in IOC and BPCL."
The ministry also wants HPCL to adjust 50 per cent of the money received from KFA in future towards outstanding dues and 50 per cent towards current ATF supplies. HPCL sources said the company has now posted a General Manager-level officer.
The ministry in a separate note expressed concern on the outstanding of KFA towards BPCL.
"BPCL has entered into a consent agreement with KFA before the Mumbai High Court to recover its dues. An amount of Rs 70 crore has been recovered till date and a balance of Rs 270.37 crore still remains," the note says.
The ministry felt that BPCL may not be able to recover its entire due by the agreed date of November 2010 as KFA was paying only Rs 10 crore per month-- the minimum monthly instalment agreed.
KFA owed BPCL Rs 314.33 crore as on March 2009 and agreed to liquidate the amount by November 2010. It paid Rs 40 crore last November and has been paying Rs 10 crore each month which is not seen sufficient to cover the entire debt in the stipulated one-year time-frame.
On dues towards BPCL, a KFA spokesperson said, "We are in compliance with the mutually agreed settlement terms."
"BPCL is advised to place the matter of outstanding dues of KFA before the Board of Directors and also seek advice of the Board on the types of securities to be relied on while extending credit and the limits of which credit can be extended against such securities," the ministry note said.
IOC has a small amount pending with KFA at Rs 30.71 crore taking the combined outstanding of the airline to Rs 905 crore -— equivalent to eight months' fuel consumption.