The development is seen as a move by the RBI to curtail the incidents of state governments' defaults on servicing of gurantees offered by them to state undertakings. The new mechanism essntially seeks to ensure that state governments are in a position to meet the redemption pressure as and when it occurs. For the first time, the West Bengal Infrastructure Development Finance Corporation (WBIDFC) has entered the debt market armed with a state government guarantee to raise funds under the new mechanism.

WBIDFC director and joint secretaryin the government of West Bengal NK Maity told The Financial Express that the WBIDFC would also create a sinking fund with the West Bengal State Co-operative Bank where it would contribute Rs 6 crore per month for seven years.

This is in addition to the current account state government contribution that the RBI will credit every month. The West Bengal government's account with the RBI will be debited to the extent of Rs 6 crore every month. In a letter to Maity, the RBI said: "WBIDFC could open a current account with any public sector bank with the mandate to be given to the government of West Bengal, authorising RBI to debit government account with the agreed amount of installment and credit to the bank's account for onward credit to the account of WBIDFC with that bank." The communication was sent by the chief general manager of the department of government and bank accounts in the central bank.

According to Maity, the company is seeking to raise Rs 500 crore through the private placement route.The entire amount is backed by a guarantee from the West Bengal guarantee. The issue, slated to close on October 15, carries a coupon of 13.60 per cent (interest payable semi-annually) with the annualised yield working out to be 14.06 per cent. The bonds carry a tenure of seven years with a call and put option after five years. The company which has so far made cumulative sanctions of Rs 1,148.56 crore since its inception in 1997 has no non-performing asset on its books.

According to Maity, the WBIDFC is planning to raise at least Rs 1,000 crore during 1999-2000 through the debt placement route. Under the new mechanism, the state government has agreed to take over the liability of loans disbursed to any borrowing agency in the event the latter fails to repay the dues according to the schedule. The merchant bankers to the issue include SBI Capital Markets, ICICI Securities, DSP Merrill Lynch, SREI Capital and Darashaw and company.

INSIGHT
Old school of thoughtThe technical committee onstate guarantees had suggested that whenever there is a default, the RBI could be authorised to pre-empt a portion of the new loans towards arrears in payment of interest and principal on bonds. The mechanism now mooted is similar in as much as it also seeks to pre-empt state government funds for honouring guarantees.

Manas Chakravarty