Gujarat To Be Selective In Giving Default Cover To Psus
The Gujarat government has informed credit ratings agencies that it will no longer extend default guarantee cover to all state government companies.
Gujarat is the first state government to take such a step.
It has said that all default guarantees would henceforth be restricted only to certain specific companies, where the state government has a direct interest like the Sardar Sarovar project.
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The agencies have been told that the kind of guarantees that would be extended to the creditors of these public sector undertaking or special purpose vehicles would be more in the nature of loss guarantees.
This would mean that creditors would be given the right to possess the asset in the event of the guarantee being invoked.
Sources say that the change in the guarantee methodology could completely alter the bankability of projects in the state. Financial institutions are reviewing the power projects in the state sans the guarantees.
This step by Gujarat is a trendsetter and other states, particularly Rajasthan, Maharashtra, Karnataka and Tamil Nadu are expected to shortly follow suite, sources said.
Default guarantees allows the creditors to have a charge on the cash flows of the project or company in the form of budgetary provisions.
This allows the state government sufficient flexibility for extending guarantee cover. In the case of loss guarantees, the state government need not confine its limits to the consolidated fund, as prescribed in Article 293(1) of the Constitution.
The state government has already linked the default guarantee limit to its tax revenues.
The operating limit fixed by the state government for providing guarantees is Rs 8000 crore for 1997-98. This has been fixed on the basis of its revenue receipts and could be raised next year depending on its revenue flows.
The state government has turned down independent power producers, barring Torrent power project, for extending guarantees on the escrow cover given by the Gujarat State Electricity Board.
Approximately 4000 mega watts of generating capacity is proposed to be set up in the state.
It has taken this step following Housing and Urban Development Corporation (Hudco) invoking a guarantee against the Gujarat Slum Clearance Board.
The board had been defaulting on repayments for over three years.