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States allowed to refinance maturing bonds
P Vaidyanathan Iyer in New Delhi |
September 12, 2003 09:33 IST
In an attempt to prevent a Unit Trust of India-like fiasco, where interests of small investors were jeopardised, the finance ministry has decided to allow states to borrow from the open market to meet the redemption pressure on guaranteed bonds subscribed by individuals and provident funds during the next three years.
According to finance ministry officials, individual and provident fund subscriptions to state-guaranteed bonds, due to mature in the next three years, was to the tune of Rs 4,600 crore (Rs 46 billion).
Fortunately, retail investors and provident funds subscribed only to bonds issued by Maharashtra and Gujarat, they said.
The officials said about Rs 15,800 crore (Rs 158 billion) was due to mature during this fiscal and the next two years.
While individuals and provident funds accounted for almost 30 per cent of this, the balance was subscribed to by public sector banks, co-operative banks and financial institutions. "The additional open market borrowings will essentially lend states some breathing space in meeting the redemptions," said an official.
That state finances were precariously placed was highlighted by credit rating agency Crisil's report last year, which estimated that Rs 44,000 crore (Rs 440 billion) bonds were due to mature in the following five years.
A reality check by the finance ministry on the Crisil report, however, revealed that bonds worth only Rs 15,800 crore (Rs 158 billion) were due to mature between 2003 and 2005.
Since defaults by states could have a negative bearing on sovereign credit ratings, a committee headed by additional secretary in the finance ministry B P Mishra, set up in March this year, recommended a two-pronged strategy to prevent any adverse fallout when such state-government guaranteed bonds matured in the ensuing three years.
The ministry has decided to allow states to issue redemption bonds to banks and financial institutions that had subscribed to state-guaranteed bonds. These bonds will carry the prevalent rate of interest, significantly lower than their existing coupon rates.
The ministry has simultaneously cleared a proposal to set up a sinking fund, to which the Centre will initially contribute Rs 1,000 crore (Rs 10 billion). States will earmark 5 per cent of their net small savings towards this fund.