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Pipavav port sale could stumble over issue of residual concession period

Pipavav port sale could stumble over issue of residual concession period

MUMBAI: The entity that buys Gujarat Pipavav Port Ltd (GPPL) from APM Terminals Management BV, its largest shareholder with a 43.01 per cent stake, can run the port only for 10 years. This is because the 30-year concession agreement for the facility ends in 2028, which experts say could be a potential deal breaker/spoiler. The Pipavav deal could also be the first instance of a stock-exchange-listed port being sold/acquired. The dynamics in such a deal are vastly different from off-market deals such as the acquisition of Dhamra, Kattupalli and Hazira ports by Adani Ports and Special Economic Zone Ltd (APSEZ), Gopalpur port by Shapoorji Pallonji, Subarnarekha by Tata Steel and even the acquisition of Pipavav port by APM Terminals from its original promoters SKIL Infrastructure Ltd in 2005. SKIL Infra was granted the rights by the Gujarat Maritime Board (GMB) to develop and operate the port in Amreli district for 30 years beginning September 1998. The concession can be extended by a maximum of two years, according to the agreement signed between GMB and GPPL. GPPL, India’s first private port, was listed in 2010 and is only the second listed Indian port after APSEZ, which runs Mundra and a slew of other ports.

Further, any acquisition of 10 per cent or more shareholding in GPPL requires the prior approval of GMB. “It doesn’t make sense for anybody to buy it when you know pretty well that the concession will only be there for another 10 years and there is no certainty whether the concession will be extended or not after that,” said a Mumbai-based port consultant. This could be mitigated a little bit if the concession agreement for Pipavav mandates the port authority to pay a “fair compensation” to the private developer when the latter hands it back at the end of 30 years. Such clauses are typically written into port concessions — whether the private developer will be compensated for the assets it has created or whether it will revert to the government authority free of cost.

“Upon expiry of the concession agreement, all assets shall be transferred to the GMB based on the valuation provided by an independent appraisal team,” says the concession pact for GPPL. “Accordingly, the valuation of immovable contracted assets and essential movable contracted assets based on the depreciated replacement value of assets shall be carried out in accordance with the most recent guidelines of the asset valuation standards committee, statements of asset valuation practices and guidelines notes, the Royal Institution of Chartered Surveyors, United Kingdom, publication dated January 1995 or as amended from time to time.” Since GPPL is a listed company, the buyer will have to first purchase the stake of APM Terminals from the stock market and follow it up with an open offer under the SEBI takeover code. “So, the valuation will not be based on the prospects of the port for the balance 10 years. The buyer will be buying it at market value and, in all probability, the entity will have to pay a higher price” the consultant said.

GPPL is mandated to pay GMB a waterfront royalty of ₹10 per tonne for solid cargo and ₹20 per tonne for liquid cargo. The royalty will rise by 20 per cent every three years beginning 2003, according to the pact. GPPL paid a concessional waterfront royalty of ₹5 per tonne for solid cargo and ₹10 per tonne for liquid cargo for many years until the approved capital cost for the port was set off against the difference between the waterfront royalty and the concessional waterfront royalty. “The deal is not that simple. APM Terminals is looking to exit because the revenue share payout has risen sharply; it may not be beneficial for them. Besides, with the volumes not picking up as expected, particularly coal cargo, there is uncertainty over port economics,” the consultant added. GPPL reported a net profit of ₹249.91 crore on income of ₹718.46 crore for FY17. The company declined to comment on a potential sale of the port, saying such calls have to be taken by its promoters in Denmark.