States will be compelled to offer higher interest rates to attract banks, financial institutions
‘Discom’ bonds to be issued by States may not be all that attractive for investors.
This is because the Centre has dropped a proposal to back such bonds with statutory liquidity ratio (SLR) status.
The proposal is to restructure Rs 1.20 lakh crore of short-term debt in the books of discoms. Of this, 50 per cent load is to be borne by States by issuing bonds in phases.
The bonds issue is part of the restructuring package for the sick electricity distribution utilities. Absence of SLR status would compel States to offer higher interest rates on such bonds to attract banks and financial institutions to buy them, say bankers.
This means, the coupon rate on the bonds has to be raised by the issuer (States) to offset the absence of SLR status. Banks prefer bonds with SLR status as they are more liquid compared to other securities without such privilege.
“Ultimately, the strength of the State Government and returns offered would be the deciding factor for banks to buy these bonds or not,” said a senior official of a public sector bank.
SLR status, mooted by the Power Ministry and the Planning Commission, would have made the bailout package sail through.
The Power Secretary, P. Uma Shankar, told Business Line that his Ministry would take the bailout proposal to the Cabinet. But this does not mean it will be mandatory for the States to comply with.
Madhya Pradesh has already indicated to the Power Ministry that it would not like to participate in the bailout scheme. The State has nearly Rs 5,000 crore of bad loans in the books of its electricity distribution utilities.
Financial institutions fear that some States may not back up the debt recast proposal as they do not have the room under the Fiscal Responsibility and Budget Management Act.
Oil bonds proposal
In 2008, when P. Chidambaram was Finance Minister, a similar proposal was mooted to offer SLR status to oil bonds issued to public sector oil-marketing companies. The proposal did not see the light of the day.
In that year, oil bonds worth Rs 24,000 crore were issued to oil marketing companies and the Petroleum Ministry pushed for granting SLR status that would have make them competitive against other government securities.
In the past two years, the then Finance Minister Pranab Mukherjee decided to discontinue issue of oil bonds and started compensating companies in cash.