No Takers For State-Backed Bonds

Failure on the part of state government corporations in meeting previous liabilities and delays in payment of interest, has resulted in the lacklustre demand for state guaranteed bonds.

The latest case in point has been the private placement of the Rs 100-crore bond issue of Punjab State Industrial Development Corporation Ltd (PSIDC).

PSIDC has received poor response to its issue despite it offering 11.7 per cent for a five-year paper, with a three-year put and call option. Arrangers to the issue said that Rs 42 crore has been mobilised to date primarily from small investors and few provident funds.

There has been increasing interest in bond paper issued by public sector undertakings -- National Highway Authority of India, Housing and Urban Development Corporation, Rural Electrification Corporation and National Thermal Power Corporation -- which have recently raised funds from the market.

State government guaranteed bond issues have not fared as well. "There is not too much appetite for this paper due to default," H R Khan, general manager of the Reserve Bank of India said earlier in a seminar on debt investors.

PSIDC has also failed to meet the redemption of its earlier bond issue of 1997, which fell due on June 15, 2002. Investors have not got back their principle or interest, and have been told that the corporation is "in the process of arranging necessary funds for the redemption of the bonds along with the delayed interest".

Even as provident funds have been approached by the arrangers to the issue to roll-over their investment, trustees of many provident funds have decided against subscribing to the issue.

Said one trustee: "It is not worth taking the risk investing in such a paper even if it has state government guarantee of the Punjab government. After all, the guarantee did little to safeguard our previous investment, and there has already been a delay of nearly two months in our getting back the principle amount, let alone the interest".

Provident funds are becoming more cautious when investing in state guaranteed bonds. "Provident funds have in the past invested in such paper based on sovereign guarantee, but these days, such guarantees have failed to attract future investment by provident funds," said India Life Hewitt assistant vice president Amit Gopal.

The high rate of returns from state guaranteed bonds and their using the state government guarantees as a major selling point had attracted provident funds. Provident funds are forced to look for "so-called" safety as well as high returns as they need to pay the employees contributing to the fund a return of 9.5 per cent set by the government.

In a letter addressed to a provident fund, HB Portfolio Ltd which is one of the arrangers to the PSIDC's current bond issue, stated it to be a "very good reinvestment opportunity for the matured bond investment.....(considering) the strong possibility of improvements in financial position of the corporation in the near future due to reported moves of disinvestments in companies like Punjab Tractors".

PSIDC holds 23.5 per cent share in Punjab Tractors, which is reportedly on the divestment block.