UDAY bonds find flavour with life insurers

UDAY provides for financial turnaround and revival of DISCOMs, and ensures a sustainable permanent solution to the problem

Ujwal DISCOM Assurance Yojana (UDAY) bonds have found favour with the life insurance companies, as instruments of such longer maturities are scarce in India.

Life insurance companies, because of the nature of their business, invest in long-term bonds, the maturity periods for which are usually above 10 years, as insurance contracts even go up to 20 to 30 years.

In November 2015, the Union Cabinet gave its approval to UDAY, to enable the renewal of state power distribution companies. S P Prabhu, head, fixed income, IDBI Federal Life Insurance, said, “Insurers are looking at investing in UDAY bonds, particularly in maturities beyond 10 years, where regular state development loans are not available.”

The Cabinet, in a meeting on Wednesday, has allowed an extension for taking over 50 per cent of the outstanding debt of power distribution companies, as on September 30, 2015, by the states under UDAY.  The time limits have now been extended by one year from the earlier stipulated date of March 31.  

With the Cabinet decision, the states will take over 75 per cent of discoms’ debt as on by March 31, 2017 by issuing bonds. In a release, the government said this intervention will lower the interest burden of the debts and allow the states, which could not avail of the opportunity to join UDAY earlier, to put reforms on accelerated path.

Though UDAY is optional, several states have joined, or agreed to join the scheme demonstrating its necessity and appeal.  The government also said some states were unable to join the scheme because of time constraints in completing the processes.

As stated, under UDAY, so far 20 states and union territories have given their consent to join, of which 12 states have already signed MOUs with the central government. In the year 2015-16, bonds worth Rs 99,541 crore were floated by the participating states to clear 50% of the outstanding debt of states and outstanding CPSU dues in Jharkhand and Jammu & Kashmir.

Further, DISCOM bonds worth Rs 11,524 crore were floated. In the year 2016-17, bonds worth Rs 48,391 crore have been floated by Rajasthan, Uttar Pradesh and Punjab.

AK Sridhar, chief investment officer, IndiaFirst Life Insurance said that UDAY bonds have been giving better yields than government securities by atleast 30-40 basis points. He added that with the huge volume, it is also tradeable and hence an attractive instrument.