InvestorQ : What happened to oil companies like HPCL and BPCL being allowed to raise foreign fund and what are the implications?
Sam Eswaran made post

What happened to oil companies like HPCL and BPCL being allowed to raise foreign fund and what are the implications?

swati Bakhda answered.
2 years ago

In the second half of 2018, the government of India allowed state oil marketing firms like IOCL, BPCL and HPCL to raise $10 billion in overseas loans to help them deal with a sharp rise in crude oil prices and a falling rupee currency. This had become a big challenge for the OMCs as they did not benefit from the rising crude oil prices, unlike the oil extractors, but they had to pay a higher price for the crude. This was creating a funds crisis for oil marketing companies.

To address this liquidity shortfall, the RBI relaxed the ECB policy to allow oil companies to raise external debt for working capital purposes. RBI also lifted individual borrowing limit which was set at $750 million. The slightly outdated limit of $750 million for OMCs now stands enhanced to realistic levels of $10 billion for OMCs.

How will this help the OMC

Firstly, the move will substantially help oil companies to raise as much as $10 billion for maturity periods ranging from three to five years. To understand the impact of this move, one needs to look at the perspective of how the crude prices and rupee value have moved. The rupee lost as much as 13 percent to the dollar since the beginning of the year 2018 and this added to the oil import bill. Let us understand how this will empower the oil marketing companies like HPCL, IOCL and BPCL?

These downstream OMCs have been tapping local markets to raise short-term funds to meet working capital needs. This is mainly to pay for oil imports billed in dollars. This has created a problem when the yields in the Indian market have move up as happened in 2018 when the benchmark yields moved up by nearly 200 bps. This had led to a rise in the short term and long term borrowing costs by more than 150 basis points in a short span of time, increasing the cost of credit for these oil market companies. This had in turn pushed up demand for dollars in the local market, piling the pressure on falling rupee. In other words, it was working like a vicious cycle with the oil imports and the rupee value playing on each other. That kind of situation can be effectively avoided by allowing these OMCs to raise funds in dollars since it will automatically give them a hedge when they have to pay in dollars for their oil requirements.