The union cabinet has approved the issue of oil bonds to the PSU oil marketing companies. Bonds for a total value of Rs5,750 crore would be issued to Indian Oil, HPCL and BPCL. The share of each company has not been given.

Out of the Rs5750 crore, two sets of Rs2,000 crore each would have maturities of three years and six years. The balance Rs1,750 crore would have a maturity period of nine years. The instruments would be tradable.

A government press release said the bonds would carry fixed interest rates to be determined on the basis of prevailing market rate for interest on central government securities with comparable residual maturities. The interest would be payable on a half-yearly basis.

However, the oil bonds would not be eligible for Statutory Liquidity Ratio (SLR) status. SLR is the percentage of liabilities or deposits commercial banks have to park in approved instruments. SLR-eligible instruments like normal government bonds carry lower interest rates.

The oil bonds are being issued to improve the financial position of the oil marketing companies which are in a bad condition because of the under recovery in retail sales of petroleum products. Because of political pressures, the government has not allowed the marketing companies to raise retail prices in line with the increase in international crude prices.

Through the issue of oil bonds the central government is transferring part of the amount of under-recoveries in petroleum sales from oil companies to itself. Instead of taking a hit in the current year, the government is merely deferring the expense by issuing bonds which will mature in future. C Rangarajan, chairman of the prime minister's economic advisory council who headed the committee which recently submitted a report on oil pricing, had termed oil bonds as being 'not effective'.

The government would come out with another bond issue of Rs5,750 crore in future. Though the date has not been specified, it is expected during the first half of the next financial year.

Oil marketing companies had reported dismal results for the December 2005 quarter. While both HPCL and BPCL reported net losses in excess of Rs1,000 crore each for the quarter, Indian Oil also slipped into the red.

In the absence of any cash flows from operations, all three companies have been struggling to find enough resources to fund capital investment. All three have lined up expansion programmes for refining and other areas.

Indian Oil, the largest oil company and, which has global aspirations, was planning to sell a part of its holdings in ONGC and Gail during this financial year itself, to fund its expansion and investment plans. However as the bond issue has been finalised by the government, the company is likely to defer the sale to next financial year.