How monopoly in liquor distribution is filling the coffers of Government of Karnataka

Karnataka State Beverages Corporation Limited (KSBCL) is a Government of Karnataka Undertaking established on June 02, 2003 registered under the Companies Act, 1956. The Corporation is solely engaged in channelization of Liquor and Spirit in the State of Karnataka. Under the present Excise Policy of Government of Karnataka, all the Manufacturers, Suppliers / Importers who want to sell the Liquor or Beer in the State whether produced in or outside Karnataka, must channelize the same through the Corporation and the Retailers have to purchase the Liquor and Beer only from the Corporation for re-sale in the Karnataka State.

In simple words, KSBCL holds the license to distribute liquor in the entire State of Karnataka.

KSBCL’s sources of revenue

a) Sale of Liquor and Rectified Spirits
b) Sale of services

Sale of Liquor and Rectified Spirits

Indian Made Liquor (IML): Manufacturers/Suppliers of IML supply goods to the Corporation. In turn, the corporation on including a margin of 0.60%, sells the stocks to retail licensees.

Rectified Spirit (Potable Spirit): The Spirit manufacturers in the state should sell their entire Potable Spirit Production to the Corporation. In turn, the Corporation on including its Margin of Rs. 20 per Bulk Litre, sells the stock to its Buyers.

Sale of services

These include –
· Liquor Trade Data charges
· Authorization charges
· Penalty for Non-Utilization of Escorts
· Order for Supply (OFS) Cancellation
· Cold Storage Fees
· Penalty for Slow Moving Stock

Gross Margin of KSBCL

According to the statement of profit and loss for the FY 2022-23, the revenue from sale of liquor/spirit is INR 38,443 Crores and the expenses incurred with respect to purchase of stock in trade is INR 38,219 Crores. The gross margin is INR 224 Crores being 0.60% of the revenue from sale of liquor/spirit. This states that KSBCL has earned an income of INR 224 Crores in the state of Karnataka by procuring liquor and spirit from manufacturers and distributing it to retail outlets by adding a margin of 0.60%.

Let us consider the example of Hindustan Unilever Limited (HUL). According to screener, the turnover of HUL for the FY 2022-23 is INR 60, 580 Crores. If HUL had set-up its own distribution company by which would procure FMCG from HUL and distribute it to retail outlets by adding a margin of 0.60%, then such distribution company would have earned a gross margin of INR 363 Crores by procuring FMCG worth INR 60,580 Crores from HUL and distributing it to retail stores.

However, the distribution company set up by HUL would have to undertake responsibility of distributing to the whole of India whereas KSBCL would have to undertake the responsibility of distributing to just one state – Karnataka.

Just by operating in the state of Karnataka, KSBCL is able to earn a gross margin (in value terms) being 62% that of the distribution company set up by HUL which would need to operate whole India.

The Government of Karnataka has received INR 46 Cores from KSBCL (FY 2022-23) !

Privilege Fee

KSBCL like any other distribution entity incurs expense such as Employee Benefit Expenses, Finance Costs, Rent, Depreciation & Amortization Expenses and Other Expenses. However, an expense of INR 18 Crores caught my attention. KSBCL is liable to pay privilege fee to Government of Karnataka.

Table showing amount of privilege fee being paid to Government of Karnataka

Dividend

KSBCL has only one class of shares referred to as equity shares The entire share capital is held by the Government of Karnataka. Up to FY 2019-20, KSBCL was declaring dividend at 20% on the Share Capital for each Financial year, amounting to INR 2.4 Cores. However, during FY 2020-21, the Corporation received a Circular from the Government of Karnataka which directed KSBCL to consider dividend at 30% of the Net Profit. The Board took note of the same and recommended for payment INR 17.32 Crores as dividend being 30% of the Net Profit of 57.20 Crores for FY 2020-21.

Table showing amount of dividend being paid to Government of Karnataka

Conclusion -

In the absence of KSBCL, manufacturers and retailers would have established the distribution system in Karnataka just like how FMCG companies have their own distribution system facilitating movement of goods from the place of manufacturing to the shelf of the retailer. Liquor is just like FMCG, the only differences being the sector over regulated and consumption being injurious to health.

Liquor and Bangalore go hand in hand. If you have any doubts in this regard I request you to visit Brigade Road in Bangalore on December 31.The Government of Karnataka by facilitating the distribution system through KSBCL is able to take part in the revenue that the liquor industry earns in the state of Karnataka. The revenue from the excise duty being levied on liquor is a different ball game that will be dealt separately in our next blog.

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