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Unsecured Long-Term Bonds for Oil PSUs in the Works

Ministry proposes new funding route for projects

  • The petroleum ministry has proposed new funding routes that would help state-run oil companies mop up funds for laying natural gas, crude oil and LPG pipelines during the 12th five-year plan beginning April 2012.Currently, the financial status of state-run oil marketing companies such as IOC, HPCL and BPCL, are not stable due to rising under-recovery on sale of regulated products below market cost.In order to help companies mop up funds, oil ministry has proposed various new funding options. This are to be cleared by finance ministry, said an oil ministry official, requesting anonymity.
  • The nodal ministry has suggested that oil companies may be allowed to issue long-term rupee bonds ‘without security’. These would be listed bonds. And subscription by banks of long-term bonds issued by oil companies may be excluded from single borrower limit of banks, oil ministry has proposed.Generally, OMCs borrow funds without security for five years. Long-term loans without security will help to improve balance sheet. Moreover, at present, a bank goes for syndication for higher loans because they cannot take the risk individually. If single borrower limit is raised, the funding process would become easy and fast, said a finance director of state-owned company, who did not wish to be named.
  • The oil ministry has also asked the finance ministry to allow oil companies issue ‘automatically’ tax-free bonds up to Rs 1,000 crore per annum for spending to erect pipeline and RLNG-related infrastructure facilities. This means companies can issue bonds within this limit without seeking nod from the nodal ministry.“Tax-free bonds have always got a better response from subscribers on account of the yield they provide compared with other taxable instruments,” said Kalpana Jain, senior director at Deloitte Touche Tohmatsu India.
  • Oil companies, both private and government-run, are envisaged to spend Rs 71,123 crore to expand oil and gas pipeline network in the country between 2012 and 2017. This is 34.6 per cent higher than Rs 52,829 crore spent by these companies during the 11th plan, said an oil ministry official, who did not wish to be named.According to the plan charted by the oil ministry, companies would invest Rs 3,933 crore for crude pipelines and another Rs 6,412 crore for laying product pipelines. A chunk of investment, Rs 60,778 crore, would go for expansion of gas pipeline network, oil ministry told the planning commission last month.
  • State-run companies such as ONGC, OIL, IOC, GAIL, BPCL and HPCL would contribute about 54 per cent of this investment target. Other firms such as Cairn India, Reliance Gas Transportation Infrastructure, Assam Gas Company and Gujarat State Petronet will spend the remaining.Oil minister S Jaipal Reddy has proposed to finance minister Pranab Mukherjee to offer pipelines the ‘infrastructure industry’ status in the Union Budget 2012-13.
  • Gas and LPG pipelines, RLNG terminals and related facilities may be defined under infrastructure sector as per RBI ECB guidelines. Limit of automatic route and trade credit limit for infrastructure sector may be enhanced, oil ministry told finance ministry in its budget wish list. At the same time, it has also asked for relaxation of ‘all in cost ceiling’ for infrastructure projects.If the finance ministry gives infrastructure status to pipeline industry, the companies can enjoy income tax benefit under Section 80IA. Currently, this provision is available for power sector, roads, airports and railways, among others.At the same time, the oil ministry has asked the finance ministry for declared good status to natural gas and RLNG under the Central Sales Tax Act, 1956 and linking of VAT rate to that of proposed rate of CST.

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