The move is likely to help India's state-run oil refining and marketing companies - such as Indian Oil, Hindustan Petroleum and Bharat Petroleum that jointly lost about $7.1 billion in revenues on selling diesel, domestic LPG and kerosene below imported cost - show profit for the July-September quarter, according to sources.

"We have asked the government for 50 percent (of revenue losses) as compensation which amounts to about $3.36 billion. They've already released $2.24 billion," said said India's Oil Secretary S. Sundareshan. 

He said the upstream companies have contributed one-third of the revenue losses, about $2.24 billion, and the oil ministry has asked the finance ministry to release more funds.

"Cash compensation will be released once the Indian Parliament approves supplementary demands for grant in the coming winter session of the House," Sundareshan added.

A part of the subsidy will be paid by government-owned oil producing companies ONGC and Oil India. India's finance ministry will pay its share of subsidy compensation in cash.

Upstream firms - Oil and Natural Gas Corp (ONGC), Oil India and GAIL India - will bear about $2.47 billion and the remaining revenue loss would be borne the fuel retailers. ONGC is estimated to see its fuel subsidy bill climb by nearly 15 percent to $678.73 million in the July-September quarter.

The compensation - which is lower than $3.55 billion, or roughly half of the revenue loss, that oil ministry was seeking -will help firms sell their products at state-set prices in a bid to control inflation.

While the subsidy outgo of ONGC will be $591.27 million in the second quarter, much higher than the corresponding period in the last fiscal year, Oil India will pay $89 million and Gail $77.7 million.

In June, India's federal government raised fuel prices and lifted state control on gasoline, allowing oil retailers to fix gasoline prices at market rates. This is also expected to benefit oil companies from the second quarter onwards.

The Indian government was also expected to deregulate diesel prices, but did not specify the time.

In 2009-10, the government agreed to bear only $5.84 billion of the total under recovery of $10.35 billion. Subsidies, referred to as under recoveries in industry parlance, is equivalent to the loss suffered by the oil marketing companies for selling fuel at government controlled prices.

The total subsidy bill is estimated to be in the region of $11.91 billion this year, higher by almost $1.57 billion from last fiscal year, due to higher crude prices.

Despite a partial decontrol of fuel prices, whereby oil companies are allowed to fix petrol prices, the bulk of the losses still remains as diesel, cooking gas and Kerosene continue to be sold at a loss.

Diesel, which constitutes almost 45 percent of the total fuel consumption, accounts for a large portion of the losses.