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The voice of the investor became loud and clear – on October 29– with Railways having to roll back its decision to collect half of convenience fee collected by Indian Railway Catering and Tourism Corporation (IRCTC). As the IRCTC stock went on a downward spiral on Friday morning losing over 27 percent on the bourses, Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kant Pandey quickly took to Twitter to announce that the Ministry of Railways has decided to withdraw the decision on IRCTC convenience fee.
On October 28 afternoon, IRCTC informed the stock exchanges about the Railway Ministry’s decision to restore revenue sharing of “convenience fee”. The decision brings forth the issue of autonomy of a public sector enterprise, pressure on an administrative ministry (Railways) to shore up revenues, and the need for the government (read DIPAM) to look at stock valuation at a time when it is looking to shore up revenues through disinvestment. In this context, we demystify the convenience fee saga of IRCTC.
What is a convenience fee or service charge levied by IRCTC?
It is the amount charged by IRCTC, the sole online train ticket booking platform authorised by Indian Railways, from passengers who book tickets digitally. It is similar to what passengers pay for booking airline tickets on online platforms, the only difference being that in the railways space, IRCTC is a monopoly and when opting for online booking consumers have no choice other than IRCTC or other online platforms that in turn have arrangements with IRCTC.
IRCTC imposes a convenience fee on every ticket that you book on its platform. In the railway-ticketing space, about 80 percent of total reserved tickets are booked online — through the IRCTC platform.
Who decides whether service charge has to be imposed and what should be the amount?
Traditionally, the railway ministry, which is the concerned administrative ministry for IRCTC, has been responsible for decisions on whether a convenience fee should be levied and how much that should be.
However, according to the latest annual report of IRCTC for the financial year 2021, the Ministry of Railways had authorised the management of IRCTC to take a decision on the imposition or restoration of convenience fee and the quantum to be levied.
While the date of this is not specified in the annual report, it is likely to be sometime in 2019, when IRCTC resumed levying of service charge after a break of two years seven months post demonetisation. After demonetisation in 2016, IRCTC had stopped charging convenience fee on online booking of tickets to promote digital transactions.
IRCTC’s understanding was: it was free to decide the quantum of convenience fee and it did not have to pay any revenue share.
What has been the quantum of service charge per ticket?
The amount IRCTC charges as convenience fee varies across categories of tickets, depending on whether you are travelling AC or Non-AC class. Excluding GST, IRCTC charges Rs 15 as convenience fee per ticket in the Non-AC category and Rs 30 per ticket in the AC class tickets. This has been the rate since it resumed levying convenience fee from September 2019. For those using the government Unified Payment Interface (UPI), BHIM, IRCTC gives a discount on the convenience fee charging them only Rs 10 for Non-AC per ticket and Rs 20 per ticket for AC Classes. These prices are exclusive of GST.
Till November 22, 2016, IRCTC was levying a higher convenience fee of Rs 20 excluding service tax per ticket for Non-AC class of train travel and Rs 40 for AC classes, on the reserved rail tickets. Convenience fee as a proportion of train tickets prices booked are low — they range between 1.2 (2014-15) percent and 2.2 percent (fiscal 2019-20), shows IRCTC’s data. This metric can vary basis the tickets booked – for AC, non-AC segment, passengers per ticket among others.
In comparison to what IRCTC charges for train passengers, the convenience fee for flight ticket booking is much higher,
Why was the imposition of convenience fee suspended and resumed, later?
Levy of IRCTC’s convenience fees was suspended due to an order from the Ministry of Finance, according to its annual report of 2020. The decision to suspend convenience fee for two years and nine months between November 23, 2016, to August 31, 2019, was endorsed by the railway ministry to promote digital transactions. Later IRCTC reached out to the Railways for recovering losses on account of the decision and had been partially compensated. Subsequently, IRCTC was allowed to decide on reimposing the levy and its quantum.
What is the arrangement of revenue-sharing on convenience fee charged to passengers for online ticket booking between Railways and IRCTC? When did it start?
Prior to 2014, there was no sharing of service charge (or the convenience fee) between IRCTC and Railways; though the quantum of service charge was decided by Indian Railways.
Revenue share started in 2014, with Railways taking 20 per cent of revenue while IRCTC pocketed 80 per cent. In the year 2015, Railways started taking half of the service charge IRCTC collected. It was the year, when the amount of service charge levied had been doubled from Rs 10 to Rs 20 for Non-AC classes and from Rs 20 to Rs 40 for AC Classes. A year later, post-demonetisation, service charge was completely withdrawn by the Government through a decision taken by Indian Railways.
Since reimposition of the convenience fee in 2019, IRCTC was not sharing any part of the convenience fee it collected from the passengers with the Railways. On Wednesday, the Ministry of Railways issued an order suggesting that IRCTC would start sharing half of its revenue earned from convenience fee with the parent ministry starting November 1. On Friday, IRCTC share price crashed over 27 percent at NSE after it informed the stock exchanges of the decision. Within hours of the stock’s free-fall on Friday, the decision has been withdrawn by the government.
Why were the IRCTC stocks so sensitive to a decision on convenience fee? How important is service charge for IRCTC’s business?
Convenience fee charged on internet tickets are the biggest contributor to profits and an important revenue earning stream for IRCTC. In fiscal 2021, the year when passenger train operations were marred by COVID-19, internet ticketing was the only segment that booked profits (of Rs 353.22 crore), with other segments like catering, rail neer (branded water of IRCTC), tourism, booking losses. In fiscal 2020, which was the year when IRCTC resumed charging convenience fee mid-year, the profits from internet ticketing was at Rs 492.68 crore – over 4.5 times the next profitable segment — catering.
In terms of revenues, in the pandemic year of FY 2021 – an aberration, revenue from internet ticketing was the biggest chunk of IRCTC’s total operational revenue — accounting for 57 percent. In the pre-pandemic year of FY 2019-20, revenue from internet ticketing was the biggest chunk of IRCTC’s total operational revenue was at a much lower level of 27 per cent.
Another perspective on what could have spooked investors. In the pandemic year of FY2021, the proportion operating profit from internet ticketing segment was at Rs 352 crore, which was 1.85 times IRCTC’s total net profit (as other segments were in losses). In the pre-pandemic year of 2019-20, when IRCTC started imposing convenience fee from mid-year, the proportion of operating profit from internet ticketing segment was at Rs 495 crore, which was 95 per cent of IRCTC’s total net profit.
Does the investor need to worry about the spectre of convenience fee revenue-sharing arrangement between railways and IRCTC in future?
The decision to withdraw the revenue sharing announcement came on Twitter first, from the secretary of DIPAM, and seemed like a knee-jerk response to the stock hammering that IRCTC suffered in early trade on Friday. Taking back the decision today doesn’t rule out the future possibility of it being reimposed in a different form or arrangement, according to sources. They also told Moneycontrol that a decision on raising convenience fee in future cannot be ruled out either. It remains to be seen whether Indian Railways in its hunt for revenue streams spares the IRCTC and its investors.
