Oil bond liquidation to help cash-starved OMCs

Written by Anupama Airy | New Delhi, Oct 16 | Updated: Oct 18 2008, 05:16am hrs
The Reserve Bank of Indias assurance that the Special Market Operations (SMO) facility will be resumed once the oil bonds become available to the oil marketing companies (OMCs) has come as a big relief for the cash-starved oil companies as it will ease the tremendous liquidity pressure being faced by the oil companies for meeting their crude oil import payment obligations. SMO facility is an institutional mechanism for liquidation of the oil bonds and purchase of foreign currency by OMCs through the designated banks.

Resumption of the SMO facility will ensure that the OMCs can at least liquidate the oil bonds, to be issued to them shortly, at par rather than booking losses. Due to the discounts on bonds and the variations in G-sec rates, the oil companies have been booking losses on the sale of oil bonds. While HPCLs reported losses on sale of oil bonds during the first quarter stood at Rs 315 crore, BPCL has booked losses close to Rs 700 crores on sale of oil bonds concluded during the year so far. Industry leader-IOC, too, has suffered losses close to Rs 750 crore on sale of oil bonds so far.

These losses on sale of bonds coupled with the high interest costs had affected the profitability of the three state-owned OMCsIndian Oil, HPCL and BPCLduring the first quarter of the current fiscal. The combined losses of the OMCs in the first quarter of 2008-08 stood at Rs 1,539.69 crores even after taking into account the oil bonds for Rs 24,408 crore sanctioned for the period. The numbers for the second quarter (July-September period) are also expected to be bad. The OMCs have already sounded the petroleum ministry on this account.

In the current grim situation prevailing in the money and forex markets, RBI assurance that it will institute a similar facility when oil bonds become available is being considered as a big positive by the oil industry.

The finance ministry is expected to issue oil bonds worth Rs 60,000 crore by the months end, after seeking the Parliaments approval after October 17. The oil bonds to be issued include Rs 14,956 crore for the fourth quarter of 2007-08 and Rs 24,408 crore for the first quarter of 2008-09. The petroleum ministry has also asked the ministry to issue oil bonds for the second quarter besides taking the Parliamentary approval for the third quarter.

The petroleum ministry has already secured a cabinet approval for meeting at least 50% of the under-recoveries of the oil companies through oil bonds. At current prices, the under-recoveries of the OMCs for the year 2008-09 are estimated at Rs 1,65,748 crores. Out of this, at least Rs 45,000 crores is expected to come as the contribution from the upstream companies while the OMCs will have to absorb around Rs 20,000 crores. Therefore, the balance under-recovery which the petroleum ministry has projected to be met by way of oil bonds stands at Rs 1,00,748 crore.