The Government had appointed SBI Capital Markets (SBI Caps) to privately place these bonds. The bonds, with a face value of Rs 100 each, carry a coupon rate of 14.5 per cent on which interest is payable semi-annually. Based on redemptions, which will be made in the fourth, fifth and sixth year, the yield to maturity works out to 15.02 per cent.

These bonds were sold at Rs 100 plus accrued interest which is at a discount to the current market price. Similar papers are changing hands in the secondary debt market at 13 per cent. In fact, on March 19, Citibank placed unrated bonds maturing after seven years and three months on a private placement basis at 13 per cent. In the case of Citibank, too, the interest on the bonds is payable semi-annually. Its YTM works out to 13.32 per cent perannum.

Nalco is one of the low-cost manufacturers of aluminium in the world and has an extremely enviable track record of profitability and cash flow. In fact, Nalco bonds have been rated as "AAA" (read triple A) by Crisil and LAAA by CARE. Debt market experts are of the opinion that with Nalco's credibility and scarcity of instruments in the market, these bonds could have been easily placed at the rate of Citibank issue, which is at a premium of 6.5% over the face value of Rs 100. This is the extent of loss (Rs 36 crore) that the Governnment will have to incur.

SBI Caps, the lead manager to the issue, could have opted for auction pricing or book-building to get a better price to benefit the Government. Instead, it decided to place the paper privately. Interestingly, the major subscribers to the bonds, to the tune of Rs 360 crore, have been SBI group banks, LIC and UTI. The balance has been placed with 40 other investors like mutual funds, other banks and financial institutions. Incidentally, some ofthese interested parties had applied for bonds worth more than Rs 100 crore but were allotted just Rs 5 crore worth of bonds.

HN Verma of SBI Caps is not ready to reveal the names of the investors in the debt paper. The merchant banker has, by selling the instrument at a cheaper rate, capitalised on the urgency of the Government to reduce the fiscal deficit in this financial year.

Sources from the mutual funds industry state that SBI Caps had not cared to provide the information about the issue to all the potential investors and the allotment was not done on the basis of the amount of subscription. Earlier, as part of the financial restructuring plan, 50 per cent of the Rs 1,288.44-crore equity of Nalco was converted into debt. Of the total equity, 87 per cent is held by the Government. The face value of the equity shares has now come down to Rs 5. This will be converted into Rs 10 by merging two shares into one at a later date.