The first corporatised railway system in the country, Konkan Railway Corporation Limited, is likely to be merged with Indian Railways.

The railway board has directed KRCL to submit a merger proposal. The deadline for the merger is June, 2005, as per a shareholders' agreement.

"The railway board has asked us to submit a proposal for merging the corporation with the Indian Railways, which we would do by the end of the month," B Rajaram, KRCL managing director said.

A ministry official explained the Railways' stand. "The KRCL has been a drain on the Railways' resources, with the latter giving about Rs 300 crore (Rs 3 billion) annually, to retire KRCL's debts," the official said.

Once KRCL is taken over, the Railways would have better control over the finances and would be able to check any wasteful expenditure, he added. The KRCL owed Indian Railways about Rs 2,000 crore (Rs 20 billion) as on March, 2004.

The KRCL, which was set up in 1989 is suffering losses due to its debts. The accumulated losses for the year 2003-04 was Rs 2,350 crore (Rs 23.50 billion), 18 per cent higher than what it was the previous year.

Even if the merger happens, the Railways may not be able to get rid of the debt liabilities of the KRCL. The shareholder agreement has said that the merger can take place only if all the debts are retired. The Railways, therefore, can take control of the KRCL only if its debt liabilities are taken over.

Rajaram said that the KRCL had proposed last year that the debt be converted to equity in such a way that the Railways; equity would go up to 75 per cent from the present 51 per cent.

Another proposal that had been put forward was that the debt be converted to preferential equity, which would reduce the burden. The Railways, however, has not taken any decision on this matter and has asked the KRCL to submit a merger proposal instead.

This is when the board of directors for the company has recommended that the KRCL be allowed to continue and the debt be converted to Railways' equity.