India prepares to pay Iran $1.4 billion in oil dues

Indian refiners have been told to prepare to pay Iran $1.4 billion in oil dues, two sources with knowledge of the issue said, in one of the first signs that last month's nuclear deal is helping Tehran unlock frozen funds.

The landmark nuclear deal between Iran and six major world powers was struck on July 14 and sanctions could begin to be removed later this year if U.N. inspectors confirm Tehran is complying with its provisions.

Indian Finance Secretary Rajiv Mehrishi asked refiners this month to prepare to pay Tehran two instalments of $700 million, part of the money owed for oil imports, said the sources, who declined to be identified due to the sensitivity of the issue. Head of finance at Indian Oil Corp A.K. Sharma said the first instalment could be made this month although the finance ministry has yet to instruct refiners on the specific timeline for payments.

"Some payment may happen this month. We are waiting for instruction (from the finance ministry)," Sharma told reporters. He did not specify the size of the first instalment but estimated his company's share in the initial tranche would be $60-$70 million, in proportion with IOC's share of more than $6.5 billion in Iranian oil revenue stuck with local refiners. Iran is desperate for funds and investment to help its economy, crippled by decades of sanctions.

Mehrishi last month led a delegation of officials from the Reserve Bank of India and state-run UCO Bank to Tehran to discuss oil payments. The exact timing of the payments is unclear since the finance ministry is seeking clearance from the Office of Foreign Assets Control (OFAC) of the U.S. Department of treasury to go ahead, one of the sources said. The office of India's finance secretary did not respond to a request for comment.

The U.S. Treasury said it did not comment specifically on countries or institutions involved in payments. But in a statement said: "the U.S. government has committed to render non-sanctionable the release in instalments of certain Iranian restricted funds held overseas in an amount consistent with instalments provided under previous JPOA relief periods."

JPOA, or Joint Plan of Action, refers to an interim nuclear pact that has been extended until Implementation Day, when International Atomic Energy Agency verifies that Iran has complied with nuclear related measures. The Indian payments are likely to be conducted using a mechanism based on a series of back-to-back transactions in different currencies that are initially channelled through the Reserve Bank of India, the sources said. Iran would eventually get the payments in dirhams from the United Arab Emirates' central bank.

Sharma said Indian refiners would make dollar payments to the RBI, which will further transmit the funds.

India is Iran's biggest oil client after China, though New Delhi has reduced purchases under pressure from sanctions and Tehran has slipped to the seventh biggest supplier from the second before sanctions.

As on June 30, Essar Oil owes $3.34 billion, Mangalore Refinery and Petrochemicals Ltd $2.49 billion, followed by $581 million owed by Indian Oil Corp. HPCL-Mittal Energy Ltd (HMEL) owes $97 million and Hindustan Petroleum Corp has to pay $29 million.

Indian refiners together owe Iran over half of the bill for crude bought since February 2013, when a route to pay for Iranian oil through Turkey's Halkbank was stopped. Under an interim nuclear deal in November 2013, some of Iran's blocked funds were released by Asian buyers, including India.