Power bailout bonds look for special status

Under pressure from banks and the finance ministry, the Reserve Bank of India may give ‘special security’ status to bonds issued by state governments to clear the debt of their distribution utilities as part of the Rs 1.9 lakh-crore power sector debt restructuring package finalised by the Centre recently. The move would make it easier for banks, which had earlier expressed their reluctance to buy these instruments citing the state governments’ weak financial position, to subscribe to the bonds.

Power secretary P Uma Shankar confirmed that the bonds to be issued by state governments would carry special security status to address the banks’ concerns. “We are given to understand this would eliminate lots of doubts in the mind of banks and allow easier subscription of bonds,” he said. The power ministry and department of financial services (DFS) had earlier proposed that these bonds be given the coveted statutory liquidity ratio (SLR) status — which make them fully tradeable and can be liquidated. However, the department of economic affairs expressed its reservations citing its impact on the government’s borrowing programme.

The demand for SLR status for these bonds was revived recently by the DFS following apprehensions raised by public sector banks. The banking regulator currently mandates SLR holding at a minimum of 23% of net demand and time liabilities invested in government and other approved securities. It is understood that special security status would largely address the apprehensions of the banks.

Special securities are long-dated securities and can be relatively easily liquidated as these have coupon (interest rates) with a spread of around 20-25 basis points more than the yield of long-term government securities of similar maturity. Though these securities do not have SLR status, they can be used as collateral for money market repurchase agreement or repo transactions in securities. The beneficiary companies can raise much-needed cash by trading these securities in the secondary market to banks and insurance companies.

In repo transactions, these securities are sold by their holders to investors by giving an undertaking to repurchase at a date and rate that are predetermined. Other special securities like these power bonds include fertiliser bonds, oil bonds and Food Corporation of India bonds. The government has used the status frequently in the past to push its subsidy plans.

Top bankers, on condition of anonymity, maintained that they will be comfortable in subscribing to these bonds only if they have SLR status. Owing to the slowdown in the economy and burgeoning non-performing assets in their accounts, banks have turned risk-averse, preferring SLR bonds. As per the Centre’s debt restructuring package, states will bear half the liability of distribution companies or state electricity boards in a phased manner in two to five years by issuing bonds, while the balance will be restructured by banks by extending the repayment period from three to five years. State governments have two options: repay debt or adopt the debt recast plan and issue bonds.

Banks have indicated that if state governments — especially those that have already breached their Fiscal Responsibility and Budget Management (FRBM) Act target of three percent of gross state domestic product or are near to it — choose to issue bonds, they would find it difficult to subscribe to them. The package was planned keeping in mind the FRBM target, which means states, must bring down their overall borrowings.

Meanwhile, the DFS has also approached the RBI seeking a special dispensation to help state governments align their respective restructuring packages with the one formulated by the Centre. Currently, the package for a state such as Uttar Pradesh is slightly different from that of the Centre. “We have asked the RBI to treat this alignment process under a special dispensation and not a ‘second restructuring exercise’ to avoid any complications,” an official said.

About eight states have so far come up with their restructuring plan and now they will sit with banks to finalise the terms of restructuring as per the one approved by the Centre. Uma Shankar said the process has started and if states ask for more time later, they would consider extending the application of the restructuring scheme that ends on December 31.

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