The Hindu Business Line : Oil bonds: A sticky problem for accountants

When the Government raised the price of petrol and diesel a few weeks back, it also announced that bonds would be issued, to save oil PSUs from "certain bankruptcy."

The so-called `oil bonds' are to be for Rs 28,000 crore, as the current level of prices is not commensurate with international trends. The first tranche of bonds, for Rs 7,000 crore, was due this week.

Bonds are not new to oil companies. For instance, the Government had issued oil bonds with a maturity of seven years, amounting to Rs 9,000 crore, in March 2002. In September 2005, `seven per cent Oil Companies of India Special Bonds 2012' were issued for about Rs 5,800 crore.

It's interesting to know that the recipients do not hold these bonds forever. IOC, for example, "successfully liquidated" 7.07 per cent oil bonds worth Rs 835 crore maturing in March 2009 in the secondary market trade, as per a press release on www.prdomain.com dated May 7.

These bonds had been issued in "March 2006 in lieu of the under-recoveries suffered by the oil companies on the sale of LPG and kerosene," the company said. Bonds worth Rs 860 crore "in the three-year and nine-year category" had similarly been liquidated in April 2006, "successfully."

Oil bonds have made a visible difference to the bottomline of companies, as one finds from data collected by the Pune-based Global Data Services of India from published financial statements.

Consider the case of HPCL. In the notes at the end of the abridged financial statements for the year ended March 31, the company stated: "Oil bonds issued by the Government of India towards under-recoveries suffered by OMCs (oil marketing companies) on sale of sensitive products during 2005-06 for Rs 2344.86 crore (2004-05: Nil) have been accounted under `Sales/Income from Operations'."

The media had reported how, armed with oil bonds, HPCL could clock a four-fold increase in net profit for the quarter ended March 31, 2006. But for the oil bonds, the company's profitability would have been severely impacted, it was highlighted.

HPCL's net profit for the year ended March 31 was Rs 406 crore, while net profit during the fourth quarter was Rs 2,013 crore. Another example is that of BPCL, which reported that oil bonds worth Rs 2,163 crore received from the Government in March 2006 have been included in sales.

The issuance of oil bonds raises "some fiscal concerns," alerted the Committee on Pricing and Taxation of Petroleum Products, headed by Dr C. Rangarajan, in its February 2006 report.

"The practice of issuing oil bonds is strictly inadvisable as it does not resolve the problem; it only postpones the resolution while compounding the economic and financial costs," cautioned the Committee.

A different problem that accountants highlight is that of taking credit for bonds under sales. Should it go under `other income,' they wonder.

The question of how oil companies should account for oil bonds may, therefore, be a fit case for the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India.