Gujarat model's anti-investor face

The government of Gujarat is a pioneer in wooing of investments. Its Vibrant Gujarat Summit has spawned clones across the country. This business-friendly development model, fostered during the regime of Narendra Modi, was his calling card when he became a prime ministerial candidate. The famed 'Gujarat model' was seen as the way ahead for the nation. However, behind this beautiful face is buried the dark story of some 400,000 investors duped blatantly by an Act of the state.

On November 26, 2008, when Ajmal Kasab and his friends landed on the shores of Mumbai to unleash a bloodbath, a notice of premature redemption was also sent out by Sardar Sarovar Narmada Nigam (SSNNL), turning many portfolios red. The Sardar Sarovar Narmada Nigam Ltd (Conferment of Power to Redeem Bonds) Act, 2008, enacted in March that year, made it possible. A 2004 attempt foiled by the bondholders inspired the legislative route. The bonds, nearly 670,000 in number at that point, were to be redeemed at Rs 50,000 each, at less than half their maturity value of Rs 111,000.

In one stroke, the retrospective provision (arguably much worse than the one Modi's colleagues are often fond of ridiculing) shrank the liabilities of the Gujarat government, which had guaranteed these bonds. The original redemption price would have cost the state Rs 7,400 crore. It now had to pay only Rs 3,350 crore. Economists who swear by the 'Gujarat model' could shed light on whether it would have shone as bright without this Rs 4,000-odd crore bonanza.

The Securities and Exchange Board of India (Sebi), which had cleared the SSNNL prospectus 14 years earlier, protested vehemently before judicial forums. It insisted the government was prohibited by the rule of estoppel "to resile from their representation made in the prospectus". It argued the Act was 'arbitrary in nature', 'distorts level playing field' and 'shatters confidence of investors'. Long-term investors such as pensions and provident funds, today wooed to participate in the securities market, were among the worst hit, it said.

Street Food gathered that there was a racket on at the time on these bonds on the exchanges. Since trading was very thin, prices could be artificially held at certain levels. Based on these prices, a bustling parallel market flourished. Savvy brokers bought these bonds from their retail holders and placed it with private provident funds and trusts, hungry for high-yield paper. Even based on the prices on the exchanges, the yield worked out to 9-9.5 per cent. Not many papers could offer such yields. There is also talk of kickbacks to fund managers.

However, these were no excuses for the Gujarat government to break its promises. Another excuse was that interest rates had fallen considerably since the time Chimanbhai Patel floated the instruments in 1993-94, with the help of the erstwhile Industrial Credit and Investment Corp of India. But, then, without a 18.92 per cent return plus a government guarantee, the bonds would not have sold.

As the legal process dragged on, SSNNL went ahead and executed the redemption unilaterally, sometimes without even intimating the bondholder. Not a great advertisement for investor friendliness.

Last month's decision by the Gujarat high court in declaring the 2008 Act illegal has dug these skeletons out. As investors get ready for a fresh battle, the Anandiben Patel government in Gujarat has its hands full. Modi seems to have successfully lobbed the fiscal time bomb set by one Patel to another. But, can his government, always busy dressing up to woo investors, afford the stench from the skeletons?