Sabarmati pays the price for being too friendly

Vol 20, PW 15 (20 Apr 17) People & Policy

You might be tempted to get friendly with your customers and allow them to take liberties but it's worth considering the sad example of Sabarmati Gas to see why this is not advisable.

North Gujarat gas retailer Sabarmati, promoted by BPCL, GSPC and Gujarat State Petronet, is struggling to recover Rs4.72cr ($709,000) after it was too relaxed in enforcing a Gas Sales Agreement (GSA) with BSE-listed stainless steel manufacturer Shah Alloys. It seems Shah was casually drawing more than 105% of its Daily Contracted Quantity (DCQ) of gas from June 2008 to August 2012 for its Kalol steel mill.

"Under the GSA Sabarmati should have imposed a Rs92 lakh ($142,700) penalty on Shah," says a source. "But it never did.

Sabarmati should not have permitted any variation from the DCQ exceeding 5%." Sabarmati signed a 10-year GSA for 10,000 cm/d with Shah on May 30, 2008 and later increased this to 25,000 cm/d by January 2010. Then suddenly, on August 31, 2010, Shah was declared financially unsound or 'sick' - where a company's accumulated losses equal or exceed its net worth.

But even then Sabarmati did nothing until April 2012 when it drafted a proposal to stop gas supplies to Shah as unpaid bills piled up. Only in August 2012 did it turn off the gas tap completely when the outstanding amount hit Rs7.7cr ($1.20m).

"Sabarmati showed a lack of coordination," we hear.