GD capsule 4

Theme: Corporate governance, oil prices
News: Essar and IBP, the oil marketing companies, are reducing their retail outlet timings to reduce losses
Background:
With spiraling crude prices, oil companies are losing money because they are not allowed to raise prices due to so called administered pricing mechanism. This results in companies selling petrol at huge losses. So much that they are better off not selling them. This is the reason why the aforementioned companies are cutting their outlet time to limit losses.

How it relates to CG (corporate governance):
CG in part means the companies act in the best interests of all shareholders, including minority ones. The government (majority shareholder) decision to maintain price even in the light of oil prices has seriously eroded the retail investors’ wealth. Sebi, which is so bent on preaching CG and the role of independent directors to protect small shareholders, has turned a blind eye to this large scale cheating by none other than the govt.

Why is freezing the domestic prices bad for the economy?

• The oil companies are the biggest tax payers in the country, and keeping them in red implies less money in the government corpus and less money for social schemes


• There is no motivation for the companies and the people to adopt efficient technologies. Brazil long suffered from oil shocks, adopted ethanol run engines and has reduced its dependence on oil