Petrol Pump Scam — Oil Is Not Well

-- Girish Ghildiyal

Early this month all hell broke loose when a national daily exposed a Rs.2,500 crore scam in the allotment of petrol pumps. The BJP leadership ran for cover in the face of a volley of charges from the opposition. Next day the issue was raised vociferously by the entire opposition in parliament but the no proceedings could take place.

DSB — A Tale that didn’t wag

Oil Selection Board system (OSBS) was introduced in 1983 for selecting Dealers for oil companies. Prior to that oil companies used to select the dealers themselves. To start with there were 4 OSBS’ with a retired High Court judge as chairman and another member. By 1990 there were 6 boards and a “member of public importance” included in each board. Boards increased to 18 by 1993 having a retired HC Judge as chairman, an SC/ST representative and a prominent public figure. In March ’97, all the boards were abolished and a fresh system introduced. A retired HC judge was to head the Dealer Selection Board (DSB) and two members of oil companies were to be members. By January 2001, the number of DSB’s had increased to 59.

During Ram Naik’s two-and-a-half-year tenure, the DSB’s decided the cases of 2,983 petrol pumps, 3,593 LPG distributorships and 414 other outlets. Out of these, the DSB’s issued 3,158 letters of intent.

The appointment of judges is for a two-year period. But they can be sacked at any time without assigning any reason. Further, the retired judges are the ones who wield veto power — they have 200 points whereas Oil company representatives have 100 points each. — The person securing highest points gets the allotment.

In an emergency meeting held to contain the damage there was this persuasive view that nothing unusual had happened and any party in power would anyway have done the same thing. There were suggestions that the party should brazen it out. However, probably the fact that one of the relatives of prime minister had given his official address in the application for allotment of petrol pump weighed heavily, and, in the end, the leadership took the decision to cancel the allotment of all petrol pumps since January 2000. Feeling confident about its damage control, the BJP did not waste much time in sinking the debate to lower depths. Next day its muck brigade countered the attack by coming out with the names of the opposition party leaders who had sent in requests for favour of allotment. With names of its leading luminaries in the list Congress spokesman whined about being blackmailed. Other parties gave equally sordid explanations. A nonplussed nation watched the shenanigans since then with ennui.

This is not the first time that petrol pump allotments have raised a stink. Somehow petrol pumps always tend to attract the wheeler-dealers and crooks of all orders. During the tenure of now infamous Satish Sharma, the Supreme Court had to intervene to cancel the some of the allotments. That case pertained to misuse of discretionary quota by the minister. The investigations into the less known Rs.800 crore Baroda solvent case (where the petrol pump owners mixed a much cheaper Solvent with petrol) has yet to be concluded.

What happened this time?

The modus operandi this time was different. Instead of using the discretionary quota the Dealer Selection Board (DSBs) were constituted in such a way that the outcome of their deliberations could be determined beforehand (See box). The chairman of the DSB is a retired high court judge but his terms of appointment states that he can be dismissed at any time without any reasons being given. This ensures that the chairman remains pliant. In addition to it the chairman has 200 points and the other two members have 100 points each. In case of a tie the chairman has veto powers. Therefore, the other two members, who belong to oil companies, cannot determine the outcome.

According to the reports, initially there was some modicum of independence in the functioning of the boards. However, soon there were murmurs in the ranks of the BJP and their allies that there was not enough being done to reward their supporters. Representations were made to senior leaders — and a new system was worked out. The DSBs which did not fall in line were disbanded and reconstituted. The message was clear — fall in line or perish.


Owning a petrol pump is one of the most lucrative businesses in the country (see box). All the dirty work related to acquisition of land, setting up of facilities etc. is done by the state owned oil companies. The oil is delivered at the petrol pumps by oil company tankers and the dealers are paid handsomely for the selling the oil. In the absence of effective quality control checks adulteration is rampant. Electronic meters have marginally brought down the fudging. Risks are minimum for the owner. No wonder there is such a clamour for getting petrol pumps. In all states petroleum dealers have very strong associations with strong political links. The portfolio of the assets of an upcoming party supporter is rarely complete without a petrol pump.

The irony is that all this is done in the name of helping either the weaker sections of society or supporting the families of those who laid down life serving the country. There are reservations for scheduled caste and tribes, for war widows, for ex-servicemen and for freedom fighters. However, the near and dear ones of those in power corner most of the dealerships in the open category. Even in the reserved category most of the pumps are run by benami owners. You might find the owner whose name is on official records actually filling petrol or cleaning cars quite oblivious of his rights.

Why is there such a liking for Petrol Pumps?

Petrol pumps happen to be a most profitable business.

The oil company issues a Letter of Intent (LOI) to those cleared by the Dealer Selection Board (DSB). Meanwhile the company is doing the dirty job of setting up pumps, buying/leasing land, earth filling, erecting boundary walls and cabins, getting power connections, digging tube wells, building driveways, approach roads, dispensing pumps, taking out advertisements etc. All this costs anything between Rs.60 lakhs to 1 crore. Once the pump is ready a dealership agreement is entered. On the basis of this agreement banks allow a loan for purchase of stocks.

The dealer gets a commission of 63 paise on every litre of petrol sold. On diesel, he earns a commission of 35 paise. The commission on different lubricants used for cars, motorcycles and trucks ranges from Rs.6 to Rs.7. Besides, more money can be made by running service stations as a side business. Extra space can be used to run stores, travel agencies or rent it out to automobile mechanics.

On an average, a good petrol pump sells around 200 kilolitres of petrol and 100 kilolitres of diesel per month. Besides, it earns an average income of Rs.20,000 from the sale of lubricants and Rs.25,000 from the service stations. Thus, an amount of Rs.184,000 is the net profit.

On the expense side — the pump employs 15 people at an average salary of Rs.2,500 per month so the total salary comes to Rs.37,500. If four more people are employed at the service station, their total salary will add another Rs.10,000. The accountant will charge Rs.8,000 and his assistant will earn Rs.3,000. The electricity bill comes up to another Rs.20,000.

Even if the total expenditure averages out to Rs.78,000 a month plus 20,000 as interest to the bank, the net income on a petrol pump doing good business will average over Rs.80,000 per month.

A dealer earns this amount honestly by investing a couple of lakhs without taking any risk. The petrol pumps are allotted for a period of 15 years with option of renewal.

The real income comes from the sale of adulterated gasoline. The petrol sold in India is always mixed with 20 per cent naphtha/solvent (at some places it goes up to 50%). Naphtha costs Rs.18 per litre, while petrol costs approximately Rs.30 per litre; so you can imagine the killing a pump can make by selling adulterated petrol. Another way of making money is by fudging the meter.