SSNL bond closure plan hits segment trading

The proposal of Sardar Sarovar Nigam Ltd (SSNL) for a premature redemption of its deep discount bonds has virtually stalled trading in similar bonds.

Other deep discount bonds available in the market are that of the Industrial Development Bank of India (IDBI), Power Finance corporation, Maharashtra State Road Development Corporation and Maharashtra Krishna Valley Development Corporation.

However, the board of SSNL at a meeting in Gandhinagar on Friday decided to withdraw the notice for convening a bondholders' meeting on May 28. The decision was taken after considering representations from the Bombay Stock Exchange and the Securities and Exchange Board of India.

The nigam managing director has been authorised to issue a advertisement inform bondholders about the withdrawal of the notice.

Further, prior to issuing a fresh notice for holding the meeting, a record date/book closure will be fixed for determining to which bondholders fresh notices have to be issued.

A section of SSNL bond holders are, however, obtaining a court stay on the meeting, which aims at inserting a call option for early redemption of the bonds.

According to bond dealers, most investors are apprehensive about their investments in such bonds following SSNL's intention.

Such fears do not arise in the case of other deep discount bonds which usually do not carry any call option and ensure a lump sum payment at the end of maturity as they carry a high coupon. This is because no regular interest is paid to bond holders as in case of regular bonds.

Therefore when an issuer calls back such an instrument prematurely, investors stand to lose as there are regular interest payments in the case of bonds.

Bondholders have been irked by the fact that the company has asked for an early redemption even after promising about an 18 per cent return for 20 years.

For deep discount bonds payments will be made at the end of 20 years and the original prospectus did not provide for any such option.

Considering the yield to maturity at 9.25 per cent for nine years, bondholders are of the view that investors will lose above Rs 20,000 crore on today's rate and this being the difference in the redemption price of Rs 25,000 and the expected market price of Rs 50,000.

Dealers said normally these bonds are not much traded as investors keep them as long-term investments to realise the high yield.

Usually, long-term retail investors and provident funds invest in such bonds and the daily average trades range between Rs 50 crore and Rs 200 crore.