Question

RCTC - Indian Railway Catering and Tourism Corporation Ltd, the rush for the IPO and the subsequent spectacular performance of its share

The government had hoped to raise ₹645 crore from the IPO of IRCTC. But it was flooded with subscription amounting to a cool ₹72,195 crore!

Why the mad investors rush for IRCTC?

• Imagine a company that is a monopoly in issuing online tickets for the Railways. Though online ticketing accounts for just over 12% of total revenues, it accounts for over a third of profits before tax. With the re-entry of service charges in the form of ‘convenience fee’, IRCTC’s revenues will rise; importantly, its profit will soar because unlike earlier, the convenience fee will not be shared with the Railways and will go through straight to the company’s bottom-line.

• Second, IRCTC is the chosen vehicle for the Railways’ experiment with ‘private trains’. IT is operating Tejas trains for the Indian Railways and there is promise of more to come. The company has the freedom to set fares on these trains and will pay a license fee to the Railways for use of its infrastructure. IRCTC can hope to grow its revenues and earnings significantly from this business if it can maintain quality and punctuality of its trains.

• Third, IRCTC has almost a monopoly share of on-rail food catering which it does on over 350 trains. It also has outlets in over 500 stations apart from food courts. A little more than half its revenue and about 28% of its profits come from catering and travel segments.

A. Why is IRCTC a monopoly? Explain in terms of the sources of monopoly power.
B. How a company can use its monopolistic position to set prices? Does the Government need to control a firm’s monopolistic powers to maximize consumer welfare?

Answer 1