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Delay in subsidy reimbursement hits oil PSUs

Delay in subsidy reimbursement hits oil PSUs

The long delay by the finance ministry in reimbursing the government's share of the subsidy on petroleum products is increasing the financial burden of public sector oil companies.

The long delay by the finance ministry in reimbursing the government's share of the subsidy on petroleum products is increasing the financial burden of public sector oil companies as they are being forced to borrow at increasingly high rates of interest to import costly crude for running their operations.

With domestic commercial banks raising their base rates again the outgo on interest payments is expected to go up even further. Both the State Bank of India (SBI) and ICICI Bank, for instance, went in for another 0.5 per cent hike last week to raise their base rate or minimum lending rate by 0.5 per cent to 10 per cent.

Indian Oil Corp (IOC) chairman R.S. Butola said that the interest burden on the company had gone up by Rs 467 crore during the first quarter (April-June) of the current financial year compared with the same quarter of the previous year. Butola lamented that the government's share of the subsidy bill on kerosene, LPG and diesel for the January-March quarter of 2010-11 was reimbursed to the oil companies only in July this year. IOC's director (finance) said the company has been deftly managing its loan portfolio by a mix of overseas borrowings at low rates of interest. The average cost of loans for IOC in the first quarter worked out to 6.5 per cent.

However, when any company increases its borrowing further the debt:equity ratio goes up and banks start charging higher rates for giving more loans. Though the finance ministry has decided to reimburse Rs 15,000 crore as the government's share of the subsidy bill to IOC, Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) for the first quarter of the current fiscal it has issued only a comfort letter to these companies expressing its intent.

This has enabled oil companies to show the amounts expected from the government on their books to reduce their losses but they have not actually received the cash. Industry officials are of the view that the finance ministry in its attempt to show a lower fiscal deficit holds back cash from the oil companies but this adds to their loss in revenue as their interest payments go up on higher borrowings. As the high outgo on the subsidy for petroleum products is not shown in the Union budget, separate approval has to be obtained later from Parliament through a supplementary demand for grants, which is very time consuming.

Butola is of the view that the finance ministry must put in place a system for paying the subsidy to the oil companies every month so that the cash flows are not hit. Upstream oil companies ONGC and Oil India Ltd (OIL), which foot roughly one-third of the petro products subsidy bill, are the only saving grace as their reimbursement comes through in time as discounts on domestic crude sold to the PSU oil refining and marketing companies IOC, BPCL and HPCL.

Courtesy: Mail Today