1. Government of India (GOI), by its letters dated 2nd May, 2012, 14th November, 2013, 10th July, 2014 and 3rd June 2016 has communicated that it proposes to disallow certain costs which the Production Sharing Contract (PSC), relating to Block KG-DWN-98/3 entitles the Company to recover. Based on legal advice received, the Company continues to maintain that a Contractor is entitled to recover all of its costs under the terms of the PSC and there are no provisions that entitle the Government to disallow the recovery of any Contract Cost as defined in the PSC. The Company has already referred the issue to arbitration and already communicated the same to GOI for resolution of disputes. Pending decision of the arbitration, the demand from the GOI of $ 148 million (for Rs, 961 crore) being the Company''''s Share (total demand $ 247 million) towards additional Profit Petroleum has been considered as contingent liability.
2. (a) The Government has made a claim of about $ 1.55 billion against the KGD6 Contractor parties in respect of gas said to have migrated from neighboring blocks. In carrying out petroleum operations, the Contractor has worked within the boundaries of the block awarded to it and has complied with all applicable regulations and provisions of the Production Sharing Contract ("PSC"). The Company has already invoked the dispute resolution mechanism in the PSC and issued a Notice of Arbitration to the Government on 11th November, 2016. The Company remains convinced of being able to fully justify and vindicate its position that the Government''''s claim is not sustainable.
(b) In supersession of the Ministry''''s Gazette notification no. 22011/3/2012-ONG.D.V. dated 10th January, 2014, the GoI notified the New Domestic Natural Gas Pricing Guidelines, 2014, on 26th October 2014. Consequent to the aforesaid dispute referred to under 31.3 above which has been referred to arbitration, the GoI has directed the Company to instruct customers to deposit differential revenue on gas sales from D1D3 field on account of the prices determined under the above guidelines converted to NCV basis and the prevailing price prior to 1st November 2014 ($ 4.205 per MMBTU) to be credited to the gas pool account maintained by GAIL (India) Limited. The amount so deposited by customers to Gas Pool Account is Rs, 295 crore (net) as at 31st March 2017 and is disclosed under Other Non-Current Assets. Revenue has been recognized at the GoI notified prices in respect of gas quantities sold.
(c) In December 2010, the Company and BG Exploration and Production India Limited (together, the ''''Claimants'''') referred a number of disputes, differences and claims arising under two Production Sharing Contracts entered into in 1994 among the Claimants, Oil and Natural Gas Corporation Limited (ONGC) and the Government (the ''''PSCs'''') to arbitration. The disputes relate to, among other things, the limits of cost recovery, profit sharing and audit and accounting provisions of the PSCs. the Tribunal by majority issued a final partial award ("FPA"), and separately, two dissenting opinions in the matter on 12 October 2016. Claimants have challenged certain parts of the FPA before the English Court and the English court has initiated steps to effect service of the Challenge proceedings upon the Government.
(d) NTPC had filed a suit for specific performance of a contract for supply of natural gas by RIL before the Hon''''ble Bombay High Court. The main issue in dispute is whether a valid, concluded and binding contract exists between the parties for supply of Natural Gas of 132 Trillion BTU annually for a period of 17 years. The matter is presently sub judice and RIL is of the view that NTPC''''s claim lacks merit and no binding contract for supply of gas was executed between NTPC and RIL."
(e) Considering the complexity of above issues, the Company is of the view that any attempt for quantification of possible exposure to the Company will have an effect of prejudicing Company''''s legal position in the ongoing arbitration/litigations.
3 Exploration for and Evaluation of Oil and Gas Resources
The following financial information represents the amounts included in Intangible Assets under Development relating to activity associated with the exploration for and evaluation of oil and gas resources.
* The Company has been advised that the demand is likely to be either deleted or substantially reduced and accordingly no provision is considered necessary.
(iii) The Income -Tax Assessments of the Company have been completed up to Assessment Year 2013-14. The total outstanding demand up to Assessment Year 2013-14 is Rs, 2,257 crore as on date (i.e 31st March 2017). Based on the decisions of the Appellate authorities and the interpretations of other relevant provisions, the Company has been legally advised that the additional demand raised is likely to be either deleted or substantially reduced and accordingly no provision is considered necessary.
(IV) The Securities and Exchange Board of India has passed an Order under section 11B of the Securities and Exchange Board of India Act, 1992 on 24th March 2017 in the matter concerning trading in RPL shares by the Company in the year 2007, directing (i) disgorgement of Rs, 447 crores along with interest calculated at 12% per annum from 29th November 2007 till date of payment and (ii) prohibiting RIL from dealing in equity derivatives in the Futures and Options segment of the stock exchanges, directly or indirectly for a period of one year from 24th March 2017.The Company has been legally advised that the Order is based on surmises, conjectures and untenable reasoning. The Company is in the process of filing an appeal against the said Order before the Securities Appellate Tribunal.
The Company adheres to a robust Capital Management framework which is underpinned by the following guiding principles;
a) Maintain financial strength to ensure AAA ratings domestically and investment grade ratings internationally.
b) Ensure financial flexibility and diversify sources of financing and their maturities to minimize liquidity risk while meeting investment requirements.
c) Proactively manage group exposure in forex, interest and commodities to mitigate risk to earnings.
d) Leverage optimally in order to maximize shareholder returns while maintaining strength and flexibility of the Balance sheet.
This framework is adjusted based on underlying macro-economic factors affecting business environment, financial market conditions and interest rates environment.
All financial instruments are initially recognized and subsequently re-measured at fair value as described below:
a) The fair value of investment in quoted Equity Shares, Bonds, Government Securities, Treasury Bills and Mutual Funds is measured at quoted price or NAV.
b) The fair value of Interest Rate Swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.
c) The fair value of Forward Foreign Exchange contracts and Currency Swaps is determined using forward exchange rates and yield curves at the balance sheet date.
d) The fair value of Foreign Currency Option contracts is determined using the Black Scholes valuation model.
e) Commodity derivative contracts are valued using readily available information in markets and quotations from exchange, brokers and price index developers
f) The fair value of the remaining financial instruments is determined using discounted cash flow analysis.
g) All foreign currency denominated assets and liabilities are translated using exchange rate at reporting date.
The company has a prudent and conservative process for managing its credit risk arising in the course of its business activities. Sales made to customers on credit are generally secured through Letters of Credit, Bank Guarantees, Parent Company Guarantees, advance payments and factoring & forfaiting without recourse to RIL.
Liquidity risk arises from the Company''''s inability to meet its cash flow commitments on time. Prudent liquidity risk management implies maintaining sufficient stock of cash and marketable securities (Rs, 69,337 crores as on 31st March 2017; Rs, 79,507 crores as on 31st March 2016) and maintaining availability of standby funding through an adequate line up of committed credit facilities (Rs, 21,831 crores as on 31st March 2017; Rs, 43,498 crores as on 31st March 2016). Company accesses global financial markets to meet its liquidity requirements.
It uses a range of products and a mix of currencies to ensure efficient funding from across well-diversified markets and investor pools. Treasury monitors rolling forecasts of the company''''s cash flow position and ensures that the company is able to meet its financial obligation at all times including contingencies.
The company''''s liquidity is managed centrally with operating units forecasting their cash and liquidity requirements. Treasury pools the cash surpluses from across the different operating units and then arranges to either fund the net deficit or invest the net surplus in the market.
The company''''s business objective includes safe-guarding its hydrocarbon earnings against adverse price movements of crude oil and other feedstock, refined products, freight costs as well as foreign exchange and interest rates. Reliance has adopted a structured risk management policy to hedge all these risks within an acceptable risk limit and an approved hedge accounting framework which allows for Fair Value and Cash Flow hedges. Hedging instruments include exchange traded futures and options, OTC swaps, forward and options as well as no derivative instruments to achieve this objective. The table below shows the position of hedging instruments and hedged items as of the balance sheet date.
* Including Share Application Money pending for allotment.
I Change in accounting policy for Oil & Gas Activity - From Full cost method (FCM) to Successful Efforts Method (SEM):
The impact on account of change in accounting policy from FCM to SEM is recognized in the Opening Reserves on the date of transition and consequential impact of depletion and write offs is recognized in the Statement of Profit and Loss.
Major differences impacting such change of accounting policy are in the areas of;
- Expenditure on surrendered blocks, unproved wells and abandoned wells, which has been expensed under SEM.
- Depletion on producing property in SEM is calculated using Proved Developed Reserve, as against Proved Reserve in FCM.
II Fair valuation as deemed cost for Property, Plant and Equipment:
The Company have considered fair value for property, viz land admeasuring over 30,000 acres, situated in India, with impact of '''' 41,292 crore in accordance with stipulations of Ind AS 101 with the resultant impact being accounted for in the reserves.
III Fair valuation for Financial Assets:
The Company has valued financial assets (other than Investment in subsidiaries, associate and joint ventures which are accounted at cost), at fair value. Impact of fair value changes as on the date of transition, is recognized in opening reserves and changes thereafter are recognized in Statement of Profit and Loss or Other Comprehensive Income, as the case may be.
IV Deferred Tax:
The impact of transition adjustments together with Ind AS mandate of using balance sheet approach (against profit and loss approach in the previous GAAP) for computation of deferred taxes has resulted in charge to the Reserves, on the date of transition, with consequential impact to the Statement of Profit and Loss for the subsequent periods.
Other adjustments primarily comprise of :
a. Attributing time value of money to Assets Retirement Obligation: Under Ind AS, such obligation is recognized and measured at present value. Under previous Indian GAAP it was recorded at cost. The impact for the periods subsequent to the date of transition is reflected in the Statement of Profit and Loss.
b. Loan processing fees / transaction cost: Under Ind AS such expenditure are considered for calculating effective interest rate. The impact for the periods subsequent to the date of transition is reflected in the Statement of Profit and Loss.