Oil Bonds

Oil Bonds are issued by Government of India in lieu of the payment due from them to the government owned oil companies. Normally the oil is sold at subsidy to the public. In other words government undertakes to pay a portion of the cost on behalf of the public. However, the government is not cash rich to make such a huge payment upfront. Hence, it issues "Oil Bonds" to the companies in lieu of cash. Oil Bonds are issued with varying maturity periods and has a coupon rate associated with it. So, in real terms Oil Bonds are debts in government's balance sheet.

The government is expected to issue oil bonds worth around Rs 40,000 crore to Indian Oil, Bharat Petroleum and Hindustan Petroleum in 2007-08 to compensate them for under- recoveries on sale of fuel on subsidised rates. Of this, bonds worth about Rs 11,000 crore have already been issued (till Feb 2008) by the Finance Ministry. In 2006-07, oil bonds worth Rs 24,121 crore were issued.

Oil Bonds can be traded in the secondary market which enables the oil companies owning the bonds to sell them off to the public/bank to raise cash. However these bonds are not liquid enough and the companies owning them find it difficult to liquidate them. Finance Ministry has agreed to give SLR status to oil bonds this fiscal. The Petroleum Ministry, while negotiating the terms for the oil bonds, had conveyed to the Finance Ministry that oil companies were facing difficulties in disposing the existing bonds due to their non-SLR status and long tenures. The SLR status would make the bonds more liquid and have more buyers for the bonds. Vivek Srinivasan 08:37, 8 July 2008 (UTC)

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