The country's oil marketing companies may not get oil bonds in advance as the finance ministry is of the view that a sudden rush of a large quantum of these bonds in the credit market would impact their demand prospects.

The petroleum ministry has demanded that the bonds for the second and third quarters of the current fiscal be issued in advance on the basis of the actual first quarter under-recoveries of Rs 52,000 crore (See: Pay bonds upfront, says Oil Ministry).

"As much as the oil companies want to go to the market and get bonds, at the same time, we also have to take into account the credit markets. If you put too many bonds in the markets, it will have an impact," a senior finance ministry official told Business Standard.

The government allows the oil companies to sell only a quarter of the total quantum of bonds they hold at any time during a quarter, so as to ensure that the market is not flooded with oil bonds.

The government has not yet decided on how the subsidy burden will be shared across stakeholders, how much of the subsidy from the government account will be given in cash and how much in the form of bonds, the official added.

The finance ministry has also consulted with the Reserve Bank on the closure of the special window through which the central bank bought the oil bonds and paid the companies an equivalent amount in dollars.

"According to them (the RBI), it is a one-time operation. Continuing that is not a good practice. It is not in the interest of maintaining healthy financial markets," the official added.

The three oil marketing companies sold all their bonds before the window closed July-end, getting $4.2 billion in exchange from the RBI.

Demand for the oil bonds has not been good as they have not been granted the statutory liquidity ratio (SLR) status, the minimum percentage of funds that a bank has to maintain in cash, gold or approved securities.

As a result, the bonds are not attractive enough for banks to invest in. Oil companies have thus been forced to sell the bonds at a discount with the only takers being government-owned entities like LIC [Get Quote]. However, the finance ministry says the RBI window for oil bonds is not a cost less option.

"The cost in the first instance is borne by the RBI. But once removed, it is borne by the government," the official said, adding the biggest policy challenge was to identify who should bear the cost. "There is no cost less option. There is no free lunch. To shore up the oil bonds, someone somewhere has to pay the cost."