Special status for power bailout bonds sought

Dec 07 2012, 01:33 IST
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SummaryPower ministry & DFS in favour while DEA asserts it will impact government borrowings.

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 R1.9-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 to FE 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 a lot 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 governments 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

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