SSNL redemption draws Sebi ire

Written by Markets Bureau | Mumbai | Updated: Jan 4 2009, 06:08am hrs
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In what could emerge as yet another issue in corporate governance and investor protection, market regulator Securities & Exchange Board of India has issued a missive to Sardar Sarovar Nardama Ltd, asking the Gujarat government-backed company to justify the redemption price for its move to compulsorily redeem deep discount bonds on January 10.

SSNL had raised Rs 300 crore in 1993 to fund its project after the World Bank pullout. Issued at a deep discount of Rs 3,600 at 17% interest rate, these bonds could be redeemed at different intervals of 7, 11, 15 and 20 years. Investors would get Rs 50,000 per bond after 15 years and Rs 1,11,000 after 20 years. When issued, the prospectus mentioned that the bonds could not be called back unilaterally.

However, with interest rates coming down sharply, the state government last year passed a legislation which allowed it to prematurely redeem the bonds.

Earlier too in 2004, the company had made futile attempts to redeem the costly issuance. However, this proposal was withdrawn. Even then the Sebi had advised it to hold a meeting with bond holders to obtain their consent. It appears that SSNL did not do so and shelved the proposal, says the note sent by Sebi executive director (law) J Ranganayakulu.

The CAG report for the year ending March 31, 2001 had also rapped the state government saying, The company borrowed in an ad hoc manner and cash flow was not worked out accurately. The company needs to take immediate steps to revise cost estimates of the project, plan and coordinate resources of funds in the most economical manner and avoid unnecessary losses. The report mentioned the company would have to provide around Rs 7,448.41 crore towards redemption payments.

Changes in the SSNNL (Conferment of Power to Redeem Bonds) Act, 2008 empowered the company to redeem the bonds at an early stage and retrospective changes were made in the prospectus. Even here, Sebi notes that the consent of bond holders and the regulator was not taken. Even in the matter of the redemption price, no consent was taken though it is in line with the initial offer.

After the decision to redeem the bonds was taken on November 3, 2008, several petitions were made by organisations like SAIL, ITDC Employee Provident Fund, IOC and Maharashtra-based Kalyan Janta Sahakari Bank in the Gujarat and Mumbai High Courts. The Gujarat HC, while declining to grant a stay, mentioned in case the Act was stuck down, the company would have to allow investors to remain invested in the bonds.

According to unconfirmed reports, the company has around 6.69 lakh bonds outstanding and the outflow, if these were held till maturity, would be around Rs 7,400 crore. And at the moment if the bonds are pulled back, the company would have to shell out Rs 3,300 crore. Investors who had planned to hold the bonds till maturity could be losing out on a fantastic opportunity as these had a yield of around 19% if held till 2014. Also redemptions would mean that investors would have to pay the applicable tax rate. But selling in the capital market would mean that they would get indexation benefits as well. Several institutions had picked up this paper as the returns were attractive and had the state government backing.

Sebi has now directed the company to justify the redemption price and inform all bond holders of this justification not later than January 7, 2009.