Key Facts on Oil Bonds

April 18, 2022

The government issues oil bonds to compensate the oil marketing companies (OMCs) to offset the losses that are suffered by them with the aim of shielding consumers from rising crude oil prices. These bonds were issued by the government mainly from 2005 to 2010.

Reasons for the issuance of oil bonds

In lieu of cash, these bonds were issued to the OMCs at a time when the government of India used to fix diesel and petrol prices.
The prices of diesel and petrol were fixed by the central government so that the price shocks of costly international crude oil do not spill over to the consumers.
For example, if the price of crude oil was high, the oil marketing and refining companies would sell diesel and petrol at a loss to the retail outlets. However, the central government compensated the oil companies by issuing long-term bonds that could be redeemed by the companies at a later date, typically ranging from 15 to 20 years.
Due to the recession in 2008 and high crude prices, the fiduciary pressure on the central government increased. By raising capital through the issuance of these bonds, payments could be made in installments without causing major price escalations, thus shielding the customers.
The oil bonds are promissory notes for the government’s deferred payment of subsidies owed to oil marketing companies. Because the government did not subsidize these companies upfront, these payments did not appear in budget documents until the principal or interest components were repaid.
These off-budget items are also referred to as under-recoveries of oil companies did not show up in the fiscal deficit numbers that are disclosed during the annual budget of the country.
Only after the repayment of the interest and the principal started to take place, years after the bonds were issued, they were factored by the fiscal deficit.

About Under Recoveries

Under recoveries are revenues that are foregone by the state-run refiners for selling their fuel below cost. Doing this keeps the diesel and petrol prices under control. Between 2005 to 2009, Rs 1.4 lakh crore worth of oil bonds were issued. This was done to compensate the OMCs partially for recoveries that amounted to Rs 2.9 lakh crore. The difference between purchasing cost of crude oil in the international market and the selling price of petroleum products in the domestic market is known as under-recoveries. After the recession, the OMCs faced large under-recoveries. This caused a dilemma for the government of ensuring the financial stability of the state-owned OMCs while also considering the political ramifications of fuel price rise. Thus, oil bonds were considered to mitigate the pressure on the OMCs while keeping the oil prices in check.

Oil Bonds in the news

Nirmala Sitharaman, Finance Minister had said that the central government is paying off dues to the OMCs for the oil bonds that were issued during the Manmohan Singh-led UPA government and this is factoring into the rising price of diesel and petrol.

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