Wednesday, September 16, 2009

OVER CAPITALISATION - AMORTISATION

OVER CAPITALISATION AND AMORTIZATION
The term "Overcaptialisation" refers to fictitous capital representing intangible assets. "Amortization" means setting apart amount from revenue surplus to write-off/write down the fictitious capital.
The question of assessing the element of overcapitalization and its amortization has been discussed by various Railway Convention Committees and it is more than twenty years since the Capital structure of the Indian Railways was subjected to a scrutiny by an Expert Group. Since then various changes have taken place in the functioning of the Railways and in the financial relationship between Railways and General finances. Indian Railway's survival is being threatened by the mounting 'dividend' liabilities exceeding the budgetary support causing a reverse Flow of funds to the general revenues
To avoid falling with a 'debt trap’ and for improving the financial health of Indian Railways it is imperative on the part of Railways to institute an amortization fund.
To assess the element of over capitalization, the entire capital structure of Indian Railways is to be examined and analyzed and should not be confined to 'Capital-at-Charge' alone. The Capital-at-charge represents loan capital whereas capital structure covers the entire range of capital investment, irrespective of the fact whether financed from loan from General Revenues, Railways revenues or from Railway's own funds.
In the initial stages, the intangible assets covered the following;
(i) Premium paid on purchase of old guaranteed Railways.
(ii) Difference in exchange between the rates at which the sterling payments were converted into Rupees
(iii) Interest paid by the Companies during construction
(iv) Loss in working during construction.
The historical evolution of the capital-at-charge of the Indian Railways point to the conclusion that over-capitalization, at least in the initial stages, was inherent in the scheme of things. Overcapitalization to the tune of Rs 122.54 Crores was written off without financial adjustment as recommended by RCC 1971. The then expert group was also convinced that amortization by setting apart from Revenue surplus would
remain a laudable but an unattainable proposition.
Waiting until eternity for the financial position to become comfortable to take steps to gradually amortize is not a wise policy especially when interest payments continue in perpetuity. Indian Railways cannot go on indefinitely borrowing from general exchequer Capital-at-charge with perpetual interest liability and at the same time maintain financial viability. A start has to be made along with pressing for other methods of restructuring of capital for writing off some portions of Capital-at-charge.
The problem has therefore, to be faced squarely before it is too late. The following points need consideration for reducing the over-capitalization of both past and future.
Dividend liability:
Railways are in a serious situation as the net inflow under budgetary support has become negative. The dividend payable in Genera] avenue for l995-96 is Rs 1370 Crores whereas the budgetary support for 1995-96 is Rs 1150 Crores.
It is necessary to write off some portion of capital-at-charge on which, dividend has been paid for more than 30 years. The scope of exemption from Dividend payments should be increased taking into account the huge amount booked to Development Fund over 40 years.
Lease charges to IRFC:
Lease charges to IRFC is paid 14.5 % on the assets (Rolling Stock) leased to Railways. The Railways have retained option to buyback the assets at the end of the lease period at a nominal price or continue the lease arrangement by reducing the leasing charges. The lease charges inflate expenses under Demand No-9 unduly. The issue regarding buy back at otherwise of the assets at the end of the Primary lease period of 10 years should be solved immediately.
Lease charges include 5 percent as contribution towards amortization. This is over a very short period of ten years whereas based on the life of the asset it should have been spread over a longer period so that the Revenue Demand No. 9 need not be overburdened.

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