State-issued bonds to attract 0.5% premium over issue price

Written by feBureau | New Delhi | Updated: Apr 6 2013, 08:20am hrs
To make the debt-recast plan attractive for investors, the government on Friday announced that state-issued bonds will attract 0.5% premium over the issue price. However, the issue price of the bond will be determined at a later date based on the prevailing benchmark gilt rates.

After an inter-ministerial meeting, the government extended the deadline to finalise the guidelines for the Rs 1.9-lakh-crore debt-recast plan of ailing power distribution companies to July 31.

There would be a premium of 45 bps on the bonds -- a 25-bps compensation for non-SLR and another 20-bps incremental return.

"We have decided to extend the date for FRP (financial restructuring package) from March 31 to July 31," power secretary P Uma Shankar told reporters on Friday. The power ministry, in consultation with other ministries, has finalised the guidelines for calculating the rate of interest on bonds to be issued by states and they will be guaranteed by the Centre, he added.

"The states will now factor in these guidelines in their proposals and come back to the government," said Shankar. According to the new guidelines or transitional finance mechanism, the government will provide five-year security and state development loan backed by it.

Statutory Liquidity Ratio (SLR) refers to the amount that all banks require to maintain in the form of cash or other approved securities before providing credit to customers. At present, SLR is fixed by RBI at 23%.

Although eight states, including Uttar Pradesh, Rajasthan, Haryana, Punjab and Tamil Nadu, have expressed interest in tapping the Rs1.9-lakh-crore lifeline thrown by the Centre to the state electricity boards (SEBs), only three has submitted their proposals so far.

Moreover, state governments are required to take over half of their SEBs debts, which is not easy, given that they also have to comply with their fiscal discipline targets.

According to the scheme approved by the Cabinet Committee on Economic Affairs, 50% of the short-term outstanding liabilities would be taken over by the state governments. The remaining 50% loans would be restructured by providing moratorium on principal and best possible terms for repayments. This would be converted into bonds to be issued by discoms to the lenders, duly packed by the state government's guarantee. The states will start feeling the pinch in 2013-14 when they start paying interest on the bonds. It is reckoned that the states will be able to afford the package.

The key difference between the Centre's package and the bilateral schemes entered into by the three states is that the former involves sharing of the debt burden by the state governments as it is stipulated that they have to take over half of the outstanding short-term liabilities of discoms as of March 31, 2012.

The Centre has approved the debt-restructuring scheme on recommendations of the Shunglu committee set up to study factors impacting SEBS financial health. The committee recommended overhaul of the selection process for senior officials of state electricity commissions to prevent state governments from interfering in their functioning.