India to pay 1.5% interest on $6.5-bn oil dues to Iran

India has agreed to pay interest of 1.5 per cent per annum on the $6.5 billion that Indian refineries owe to Iran in past oil dues, to make up for changes in exchange rates. The decision was taken after a meeting between India's minister of petroleum and natural gas Dharmendra Pradhan and Iranian central bank governor Valiollah Seif in Tehran early last month.

Indian refiners, including Essar Oil and Mangalore Refinery (MRPL) had piled up huge payment dues on oil bought from Iran during the US embargo imposed on the Middle East country. During this period there were no options other than rupee payment for imports from Iran.

Iran had sought an interest rate of Libor-plus 75 basis points on the $6.5-billion that Indian refiners owe it, in order to make up for the foreign exchange losses.

If refiners had kept apart dollar equivalent for their purchase in separate account they could have readily paid Iran now. For a barrel of oil bought in February 2013 at $80, the refiners will now have to pay Rs5,360 instead of Rs4,400 then.

Iran wants dollar equivalent of the dues that were then calculated in euros. Also the country wants all payments, past and present, cleared through Asian Clearing Union (ACU) mechanism.

The Central Bank of Iran has requested the Reserve Bank of India (RBI) for bringing these payments under ACU mechanism. RBI in turn has sought concurrence from the Department of Economic Affairs.

"Settling payment through ACU mechanism hinges on availability of international banking channels to make euro settlements. We are still awaiting that to happen," government officials said.

Technically, however, the delay in payment was due to Iran's inability to accept payments in dollars.

"Although we believe there is no interest due, but as a goodwill gesture oil companies have agreed to pay the interest rate," a Finance Ministry official said. "Seven days US Libor plus 75 basis points equals to an interest rate of about 1.5 per cent."

Iran sold oil to refiners like Essar Oil and Mangalore Refinery and Petrochemicals Ltd (MRPL) priced in US dollar per barrel abut actual payments for around 45 per cent of the oil bill was paid in rupees in a UCO Bank account while the rest 55 per cent was to be cleared whenever banking channels open.

Now that the sanctions are lifted, Iran wants Essar Oil and other refiners to pay Iran at the then prevalent exchange rates.

Refiners also stand to lose as rupee to a US dollar was under 55 in February 2013 when the 45:55 payment system became operational, where as the rupee is nearing 67 to a US dollar.