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Rediff.com  » Business » Pay bonds upfront, says Oil Ministry

Pay bonds upfront, says Oil Ministry

By Siddharth Zarabi & Rakteem Katakey in New Delhi
August 06, 2008 01:56 IST
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With state-owned oil marketing companies strapped for cash on account of selling products at subsidised rates, the Oil Ministry last week approached the Finance Ministry seeking oil bonds in advance for the second and third quarters of the current fiscal 2008-09.

The Oil Ministry has suggested that the second and third quarter oil bonds be issued on the basis of the actual under-recoveries in the first quarter (April-June) of the fiscal.

The ministry has also sought to front-load the budgetary provision for these bonds in the first supplementary demand for grants due to be presented in the upcoming monsoon session of Parliament instead of staggering it over four demands raised through the year, thereby reducing the need for frequent Parliamentary approval.

Under-recoveries for oil marketing companies in the first quarter of 2008-09 are estimated at over Rs 52,000 crore. The government has already decided to issue bonds worth Rs 24,500 crore for the first quarter, although the physical delivery has not yet taken place.

The average price of the Indian basket of crude oil during the first quarter was pegged at $118.8 per barrel, with the price of US crude reaching a high of $144 per barrel. The total projected under-recovery for fiscal 2008-09 is estimated at Rs 205,000 crore.

The Oil Ministry's demand comes at a time when risk rating agency Moody's has downgraded IndianOil, the country's largest oil marketing firm, which has made it difficult for the company to raise additional funds from banks. As of July end this year, the company's borrowing stood at Rs 42,500 crore and is projected to rise to Rs 58,000 crore by September.

The issue of real and reported under-recoveries of state-owned oil marketing companies is being examined by a committee headed by Planning Commission member BK Chaturvedi. Its recommendations are not yet public.

The Oil Ministry has also asked its finance counterpart to advise the Reserve Bank of India to continue the special marketing operations, which were discontinued from July 31. Under this, the central bank used to buy the oil bonds directly from the companies and pay them the equivalent amount in dollars, allowing them to buy supplies.

This had other benefits. The bonds were sold at face value or at a profit, and not at a discount as was the case before the RBI started the operations. Companies were also being insulated to some extent from exchange rate fluctuations.

The Finance Ministry has also been asked to intervene and enhance the credit limits of HPCL (by an additional Rs 2,500 crore) and BPCL (by an additional Rs 3,000 crore) to enable them to sustain their operations till September end this year.

The Oil Ministry has also requested that the consortium of banks lending to Indian Oil's Paradeep Refinery project exclude the lending limit of Rs 20,000 crore from the single borrower limit of 25-30 per cent.

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Siddharth Zarabi & Rakteem Katakey in New Delhi
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