As these bonds are longterm bonds. What will happen at the time when these bonds get matured for payment.

from where govt is going to raise money for paymet of these bonds.

Now these bonds have been monetiesed by the oil compaies by selling them in secondary market there by
utilising investible surplus of the economy for paying the crude oil bill which was not born by the real users of the product.

This has restricted your capital formation and slowing down of the growth rate of the economy.

Regards

Quarter-3 results of three OMCs make one believe that these companies came out with robust profit, except HPCL that even after that mystry returned loss of Rs 418 crores PBT. And the share prices of these companies are continuously on upswing after their Q3 results.

But the story of the profits of these companies is something else and it is surprising that market has completely given a blind eye and indulged into joy ride as the way the share prices of these companies are going up and up.

In the quarter three, these three companies got excess support by about Rs 8581 Crores from upstream companies and the Govt. oil bonds.

For this quarter total under recovery of these three companies were about Rs 13522 crores only. But against that, they got reimbursement of Rs 22103 crores, being Rs 6066 crores from upstream companies and Rs 16037 crores oil bonds. Thus they were given excess reimbursement by Rs 8581 crores and that went about Rs 1750 crores to HPCL, Rs 2098 crores to BPCL and Rs 4733 crores to IOC.

The declared PBT of these companies were Rs (-)418 crores HPCL , Rs 803 crores BPCL and Rs 2967 Crores IOC.

Without the excess reimbursement of the said Rs 8581 crores, normal PBT for the quarter would have been Rs (-) 2168 crores HPCL, Rs (-)1295 crores BPCL and Rs (-)1766 crores IOC.

So it is very surprising to see the run in the share prices of these companies after the kind of results they have actually given.

Another baffling fact is that, HPCL has logged out the worst performance but the share price of this company has run the most of all.

I was wondering if the GOI was bailing out the state oil companies why not the private ones also after all they have also invested money and want to sell the product in the market

look at all the wasted investment laying around

I dont understand the oil bonds but would my father loan me money knowing full well that its going down the drain?????

We have excellent money managers in the government but i guess votes count more than the country???

with the left out of the government now will everyone wake up?????

if you are giving out money to the oil SOBS why not me? my hands are also opened wide

This is the way Indian government deals with losses for subsidizing petrol price.

It works like this.

Let us say the actual petrol price/cost is Rs50 but The government controlled oil companies are forced by the government to sell petrol at Rs40.

Who will cover the loss of Rs10 – If it continues for a few months the companies will go broke and bankrupt.

The government steps in and issues a bond (Borrows/loans from the market)Investor attracted by the guaranteed interest buy the bonds.

The government pays the interest on the loan/bond.

At some stage the (Some) government has to repay the loan.

It is called sweeping the dirt under the carpet.
It is no different from drawing cash from one credit card to pay the other credit card.

One day it will blow up,but at that time it the problem of the next goverment.

My commonsense says it is not a good Idea to use this sytem commonly.

This system can be used scarcely for short time in small amount while the price is adjusted to reflect real world oil price.

I studied the financial statements of IOC for 2007-08 and here is what I understood.

IOC makes a loss selling petroleum product due to govt. restrictions on pricing (i.e. administered price regime). The govt. of India “compensates” this loss by issuing special oil bonds.

IOC shows these bonds as income on its P&L (the IOC P&L statement for 2007 – 2008 shows an income of Rs.13,943 CR this way). Hence, immediately the loss is converted to a profit!

IOC also shows these bonds as investment on its balance sheet (Schedule G of IOC balance sheet for 2007 – 2008 shows investment worth Rs. 14,308 in these GOI special bonds). This is instructive. This means that without paying a penny for these bonds, IOC invested in these GOI bonds! If you think about it, the real investment is the losses IOC incurred to oblige the govt.

Now, if IOC just sits on these bonds, it will get a cash flow (around 7% – 8%) from GOI by way of interest payment on these bonds. Also upon maturity, the GOI will actually have to redeem these bonds from IOC (maturity periods are anywhere from 2009 to 2026 as per Schedule G). i.e. upon maturity the GOI has to actually cough up cash compensation for the losses IOC has incurred in 2007 – 2008!

Instead, what IOC does is, it sells these bonds in the secondary bond market to mutual funds, LIC and other such financial institutions. Thus, the bonds are converted into hard cash (Schedule G says IOC made Rs. 6,503 Cr this way in 2007- 2008). This is how IOC gets hard cash to compensate for its losses immediately. (Of course, upon maturity the GOI has to still pay cash to whoever holds these bonds at that time).

I hear IOC sells these bonds at a loss (http://www.thehindubusinessline.com/2008/05/02/stories/2008050250780600.htm).
I also hear that RBI in stepping in to buy these bonds at full value (
http://economictimes.indiatimes.com/Opinion/Todays_Features/Money__Banking/Oil_bonds_may_provide_just_a_temporary_relief/articleshow/3139208.cms). Not clear what the implication of all these is.

The ugly part is this: GOI has issues bonds without actually borrowing from anybody. This goes against the definition of a bond. More specifically the GOI has issued bonds to IOC without directly borrowing any money from IOC. The borrowing is indirect – IOC made a loss to oblige the government and that is akin to the GOI borrowing from IOC and hence the GOI issues these bonds to IOC. This is the crux of the matter.

Bottom line is, the oil bond is a GOI bond and hence is a govt. debt which has to be repaid some day. I hear that this debt stays off-budget and hence does not reflect in the revenue or fiscal deficit (http://www.business-standard.com/common/news_article.php?leftnm=10&bKeyFlag=BO&autono=323750). I haven’t figured that out yet.

At least, this is my understanding. I hope and believe I got most of it right.

Govt. OMCs viz., IOC, HPCL and BPCL need about 2 Million Barrel Oil daily. Their combined under recovery for rise in each dollar of crude price is $2 Million or Rs 8 crore.

At the current selling prices of their finished products, there is no under recovery for Crude at about 51 $ per Barrel.

In H-1 2007-08, the average price of Indian basket was about $69 per barrel thus resulting into daily under recovery of Rs 144 crores and total under recovery of about Rs 26208 crores.

The daily under recovery for the given prices of Indian basket in H-2 comes out to be as under:

Under Recovery
Crude Per Daily Total-H2 Total-H1 Total-07-08 Barrel
$ 80 232 Crore 42224 Crore 26208 Crore 68432 Crore
$ 85 272 Crore 49504 Crore 26208 Crore 75712 Crore
$ 90 312 Crore 56784 Crore 26208 Crore 82992 crore
$ 95 352 Crore 64064 Crore 26208 Crore 90272 crore

The estimated under recovery of about 55000 crores as estimated by the Govt. for the year of 20007-08 is based on Crude prices of 70$ per Barrel for the entire year of 2007-08.

Currently when the Indian basket is ruling around $90 per barrel, the daily under recovery of OMCs is about 312 Crores.

Your comments are welcome to Bharatpitti@hotmail.com