Straddled with oil bonds worth over Rs 56,000 crore (Rs 560 billion), the cash-crunched public oil marketing companies have made a request to the Reserve Bank of India [Get Quote] to resume special market operations for oil bonds.

The first phase of SMOs was undertaken by RBI in June last year. The second phase, which began in November 2008, ended in the first week of January this year.

Under the arrangement, RBI bought oil bonds from these companies and issued them dollars to import oil. Other than the RBI, the Life Insurance Corporation of India is another major subscriber to such bonds and certain quantities are also traded in the market.

"We have requested RBI to re-start SMOs," said a senior official at Indian Oil Corporation [Get Quote], which holds Rs 30,000-crore (Rs 300 billion) worth oil bonds. Hindustan Petroleum Corporation [Get Quote] and Bharat Petroleum Corporation [Get Quote] together hold bonds worth around Rs 26,000 crore (Rs 260 billion).

In case of SMOs, OMCs do not suffer heavy losses on the face value of bonds since trading takes place through designated banks and not in the market, explained an industry official.

In the current financial year, OMCs are estimated to have suffered losses of around Rs 1,700 crore (Rs 17 billion) on the sale of bonds owing to high discounts. The average discounts on the face value of bonds this year was as high as 4 per cent as compared to 2 per cent in the last financial year.

The sale of oil bonds is also affected by excess supply situation. In addition to the OMCs, government has issued bonds to Food Corporation of India and several fertiliser companies, which also liquidate such bonds from time to time.

The government has been issuing oil bonds of various tenures to the OMCs from time to time since September 2005. These bonds are issued by government to the OMCs to compensate the under-recoveries they incur on the sale of fuels.

OMCs are estimated to close the fiscal with under recoveries of Rs 1,03,908 crore (Rs 1,039.08 billion). Of this Rs 60,967 crore (Rs 609.67 billion) has been compensated by the issue of bonds while another Rs 32,000 crore (Rs 320 billion) has been absorbed by the upstream companies.