Another major income stream for the government is under stress. Dividends from public sector companies that provide 45% of the Rs 95,785 crore of non-tax revenue to the exchequer will be cut back sharply this fiscal.

The shortfall is likely to push the government to borrow more from the markets by a similar tranche, on top of the additional Rs 45,000 crore that it has already planned to go in for. The gross market borrrowing by the finance ministry from the debt market in this fiscal is Rs 1,90,000 crore.

The largest of the dividend payers to the government, the oil marketing companies?Indian Oil, Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd are unlikely to declare any dividend during 2008-09. The more serious concern is their plea to the ministry to rework the rules for declaring dividend.

The largest of them, Indian Oil Corporation (IOC) has already written to the finance ministry that the financial position of the corporation does not permit it to declare any dividend for 2008-09. IOC has also said that given the liquidity crunch and reduced internal accruals, the corporation may not even declare any interim dividend during 2009-10.

Considering the erosion in profitability and liquidity of the downstream oil PSUs at large and the planned capex requirements, IOC has also asked the finance ministry to reconsider the guidelines to pay a 30% dividend to the government as the largest shareholder from their net profit. The revised dividend pay out guidelines were issued by the finance ministry on October 5, 2007 which stated that oil PSUs have to pay 30%. Other PSUs pay dividend at the rate of 20% to the government.

?The profitability position of the corporation for the quarter October-December 2008 has got severely affected due to further appreciation of dollar versus rupee compared to September 2008, inventory valuation losses due to falling crude oil prices and very substantial interest costs due to severe liquidity crunch caused by non-release of oil bonds. Under these circumstances, the corporation is unlikely to report any profits for the current financial year, unless the burden sharing mechanism is reviewed and additional bonds are issued for the third quarter,? said IOC in a recent letter to the finance ministry.

Senior petroleum ministry officials said that HPCL and BPCL are also expected to follow the same line on payment of dividends. IOC reported a net loss of Rs 6,632 crore during the half year ended September 30 as compared to a net profit of Rs 5286.16 crore during the corresponding period of the previous year.

The company has told the finance ministry that it is quiet difficult to project the profit or loss for the current financial year at this stage, given the volatility in crude oil prices. The corporation may also have a substantial carry over loss of 2008-09 in the financial year 2009-10 if additional bonds are not issued by the finance ministry, IOC said adding that even if additional bonds are issued and the company is able to post marginal profits during the year, the corporation may still not be in a position to declare any dividend for 2008-09 considering high levels of borrowings and huge capital expenditure.

The borrowings of IOC have increased from Rs 35,523.17 crore as on March 31, 2008 to Rs 60,136.42 crore as on September 30, 2008 to Rs 66,000 crore so far this year. This is resulting in substantial interests costs to the company, which because of negative internal accruals has to borrow for meeting its CAPEX requirements and its operations on a day-to-day basis. The corporation has a capex planned projects for approximately Rs 11,000 crore during the year

In the fiscal 2007, IOC alone had paid Rs 2,251 crore which was nearly 10% of the total dividend paid by the 57 public sector undertakings.

However, in fiscal 2008 following high crude oil prices, IOC could pay only Rs 655.81 crore. HPCL paid Rs 611crore in fiscal 2007 but could pay only Rs 101.59 crore in fiscal 2008. Similarly BPCL paid Rs 144.62 crore in fiscal 2008 as against Rs 578.66 crore in fiscal 2007.