Oil companies dump bonds at a discount

LIC sole taker for oil bonds.

What is the connection between oil subsidies and the Life Insurance Corporation (LIC)?

Well, LIC, the government-owned insurer, is bailing out the financially-strapped oil marketing companies by buying up the oil bonds issued to them by the government, though at a discount.

"LIC is pretty much the sole buyer of these bonds," confirmed a senior official of Indian Oil Corporation (IOC), the largest government-owned marketing company.

Other financial institutions together buy a minuscule amount of the bonds on sale by IOC and the other two oil marketing companies "" Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL).

These bonds are issued by the oil marketing companies to compensate for charging consumers less than market price on petroleum products like fuel, LPG and kerosene.

In the current year, 42.7 per cent of the under-recoveries (read retail losses) of oil companies "" estimated at Rs 54,935 crore "" will be met by oil bonds.

The amount of bonds on sale each year is huge. This year, about Rs 23,458 crore worth of bonds are slated to be issued. This is likely to be revised upwards with global crude oil prices hovering close to the $100 a barrel mark.

Since the oil companies are losing Rs 240 crore a day, they monetise the bonds as soon as possible to meet their working capital needs.

"From selling these bonds at a premium, we have now moved to monetising them at a discount of almost 5 per cent of the face value," said the official.

This financial year IOC has sold around Rs 6,000 crore worth of oil bonds already, from which it has managed to realise only around Rs 5,700 crore. HPCL has realised around Rs 1,728 crore from the Rs 1,800 crore worth of oil bonds it has sold so far this financial year.

The amount of bonds that these oil companies can sell in a quarter is also capped at 25 per cent of the total bonds in their portfolio.

These companies have, therefore, seen a sharp rise in borrowings. IOC has already borrowed close to Rs 28,000 crore so far this financial year compared with around Rs 27,000 crore in the whole of the last financial year.

"I don't want paper (bonds). I want cash," said IOC Chairman Sarthak Behuria recently.

This view is echoed by other oil companies. "We need cash to meet our project costs and daily expenses," said a senior official of HPCL.

The company's board has recently approved an increase in the annual borrowing limit to Rs 17,500 crore against Rs 13,000 crore earlier.

The bonds usually have a face value of either Rs 100 or Rs 1,000. The bonds are released by the government in three tranches during a financial year. They come with a maturity period of over five years, which can go up to 10 years. The interest rate on the bonds is usually around 8 per cent.

ILLIQUID ASSETS IN AN ILLIQUID MARKET

Oil bonds are issued by the government to partially compensate oil marketing companies "" IOC, BPCL and HPCL "" for selling petroleum products at subsidised prices.
They are:

mostly bought by Life Insurance Corporation (LIC)

being sold at a discount by oil companies since they are desperate for cash

not reflected in Budget, separately approved by Parliament

not popular with oil companies