IOC asks govt to compensate for interest on borrowings

State-owned Indian Oil Corp (IOC) has asked the government to compensate it for the interest it has to pay on loans taken due to delay in payment of fuel subsidy.

IOC in 2012-13 had to shell out Rs 3,420 crore in interests on loans it took to bridge the delay in payment of subsidy on diesel, cooking gas (LPG) and kerosene.

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The company has written to the Oil Ministry saying there was "no established mechanism in respect of timing and quantum of under-recovery compensation to oil marketing companies (OMCs) by the Government. As a result, the OMCs face serious liquidity constraints even for meeting revenue expenditure and have to resort to heavy borrowings, which in turn lead to high interest burden to the OMCs."

State-owned fuel retailers sell diesel, domestic LPG and kerosene at government controlled rates which are way below the cost. The difference is met through a combination of assistance from upstream firms like ONGC and government cash subsidy.

While upstream firms pay compensation every quarter, there is no schedule for payment of government's cash subsidy which forces oil companies to borrow money to meet their working capital needs, sources said.

IOC shelled out Rs 3,420 crore in interest in 2012-13 while Bharat Petroleum Corp Ltd (BPCL) paid Rs 1,562 crore in interest on loans it took. Hindustan Petroleum Corp Ltd (HPCL) paid Rs 1,512 crore interest. This was on top of Rs 5,792 crore interest the three firms had paid in 2011-12.

The current pricing methodology for sensitive products does not provide for any interest costs on delayed compensation, leaving the costs incurred on this account to be borne by the OMCs.

Sources said considering the weak financial health of OMCs due to high oil prices, deteriorating Rupee-USD exchange rate, weak product cracks, inability to increase domestic prices etc, additional burden of interest cost due to delayed compensation for under-recovery (revenue loss on fuel sales) is having a severe adverse impact on their profitability.

The interest burden is on top of uncompensated under- recovery of Rs 20,861 crore of 2011-12.

It is estimated that there was an average delay of around 180 days between the incurrence of under-recovery and receipt of compensation by government through budgetary support during 2012-13.

"The total compensation outstanding as on March 31, 2013 was Rs 23,710 crores for the IOC, which comprised a significant 30 per cent of the Corporation's loan book of Rs 80,894 crore as at year end," IOC wrote.