Financial Daily from THE HINDU group of publications
Friday, Jul 18, 2003
Financial Daily from THE HINDU group of publications Friday, Jul 18, 2003 |
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Money & Banking
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Govt Bonds Buyback of high-cost debts tomorrow Our Bureau
Mumbai , July 17 THE Government has finalised the scheme to buy back high-cost debts from banks and financial institutions (FIs). The buyback will be done through a multi-security auction on July 19. A scheme has been formulated wherein which banks and FIs will have to bid with a minimum discount of 7.5 per cent below the market price in order to participate in the auction, the Reserve Bank of India (RBI) said in a release on Thursday. The minimum discount rate, which is perceived as a fairly high price to pay, will be uniform across securities offered for the buyback. For securities sold from the held-to-maturity category, the profit on sale of securities will be appropriated to the bank's free reserves, adding to its strength. This one-time measure permitted specifically for this buyback programme will help banks enjoy tax exemption in this case. They will also enjoy tax exemption to the extent to which they utilise the income for NPA provisioning. The response to the scheme seems rather tepid as the minimum discount is quite high. The treasury head of a nationalised bank said: "The discount to the average market price pegged at 7.5 per cent is fairly high. Although there will probably be a good response to the buyback scheme, banks may not bid very aggressively unless they have NPA-ridden balance sheets. We will do a cost-benefit analysis and decide to what extent we should bid.'' The scheme will be structured as a switch, with the Government of India offering to buy back a list of 19 illiquid, high-yielding securities with a total outstanding amount of Rs 1,00,438 crore. However, the premium amount that will be offered will not be announced before the auction, the RBI said. The cut-off discount at the auction will be arrived at on the basis of the target premium payable set by the Government for the buyback auction. The Government, however, retains the right to accept offers with a discount below the cut-off level (and pay a premium larger than the target level) at its discretion. The repurchase of securities will be through an auction process while the reissue of fresh securities in lieu of the auctioned securities will be at a pre-announced fixed price. The prices of these fresh securities will be announced on the day of auction. The Government will reissue the existing securities (6.65 per cent Government Stock 2009, 6.72 per cent Government Stock 2014, 7.46 per cent Government Stock 2017 and 6.25 per cent Government Stock 2018) in lieu of the repurchased ones for equivalent face value.
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