It started with the World Bank withdrawing and dropping its $300 million funding to Amaravati Sustainable Infrastructure and Institutional Development Project. This was followed by Asian Infrastructure Investment Bank (AIIB) which has withdrawn its $200 million facility to the Amaravati project. With the change of regime in Andhra Pradesh, questions are being raised on the future of the Amaravati city project. Meanwhile, investors are wondering why mutual funds (MFs) would invest investors’ money in Amaravati Bonds 2018 issued by the Andhra Pradesh Capital Region Development Authority (APCRDA). In addition, due to the five-year moratorium clause in the bonds, MFs will not be able to even redeem the principal amount.
Data from Mutual Funds India shows that Franklin Templeton Asset Management (India) Pvt Ltd has invested Rs1,023 crore while Aditya Birla Sun Life Asset Management Co Ltd (ABSL) has invested Rs297 crore in Amaravati Bonds as on end June 2019. The Bonds were rated on the higher side by three rating agencies based on an unconditional guarantee from the Andhra Pradesh government.
Amravati Bonds were issued last year by APCRDA and were oversubscribed 1.53 times. Ratings agencies CRISIL, Brickwork Ratings and Acuité Ratings & Research Ltd (erstwhile SMERA Ratings Ltd) have rated the non-convertible debenture (NCDs) worth Rs2,000 crore issued by ARCRDA. The Amaravati Bonds have a tenure of 10 years with a five-year moratorium on the principal and an equal amortising profile thereafter.
In May 2018, Brickwork has assigned Prov BWR an AA- (structured obligation-SO) rating with a stable outlook for the Bonds. It had said, “The ratings assigned takes into account the priority accorded to the development of Amaravati as a capital city by GoAP, strong financial and operational support from the government of Andhra Pradesh and government of India, authority members of APCRDA, 90%of land procurement being already completed under the land pooling scheme, collaborations/ MOUs for infrastructure development and 1260 acres already being allotted to 54 institutions enabling economic and demographic development in the capital city. The rating is further strengthened due to the credit enhancement from the structured payment mechanism and the guarantee provided for the payment of principal and interest by the government of Andhra Pradesh.”
CRISIL had also assigned its provisional A+ (SO) rating with stable outlook for the Rs2,000 crore Bonds. While assigning the A+ ratings, the agency had noted the presence of a guarantee from GoAP along with a strong payment structure, strong support from GoAP due to APCRDA's critical role, and good economic management by the state government. It also considered primary cash flows for debt-servicing through land sale as a strength while pointing out challenges like timely monetisation.
Acuité had assigned the long-term rating of ‘AA-(SO)’ on the Rs2,000 crore proposed bonds APCRDA with a ‘Stable’ outlook. The ratings agency too considered unconditional and irrevocable guarantee from GoAP, along with a structured payment mechanism as a strength while assigning the AA- rating to Amaravati Bonds.
However, this does not explain why mutual funds, especially Franklin Templeton AMC and ABSL should invest huge amounts of money in Amaravati bonds. Especially, the Bonds offered fixed interest rate of 10.332%pa (per annum) (paid quarterly) with a five-year moratorium on principal payment which could be redeemed on a yearly basis for next five years at 20% every year.
Unfortunately, none of the rating agencies considered political scenarios that would have hampered the future of developments in and around Amaravati capital city. While the Bonds were being issued the N Chandrababu government in Andhra Pradesh was at loggerheads with the Narendra Modi government in the Centre citing lack of support. In the recently held assembly elections, Mr Naidu failed to impress voters and had to hand over the regime to YS Jagan Mohan Reddy.
Irrespective of the change in the regime, development works are expected to continue in any democratic set up. Unfortunately, this does not seems to happen in Indian states, especially southern states, where the leaders, when in power, often thrust themselves into almost everything. Andhra Pradesh is not an exception.
The new YS Jagan Mohan Reddy government in Andhra Pradesh has decided to institute a judicial review of all projects in the state valued at over Rs100 crore. The Andhra Pradesh Infrastructure (Transparency through Judicial Preview) Bill, 2019 presented in the state assembly, provides for a sitting or retired high court judge to head the commission which will review all projects including public private partnership (PPP) projects valued at over Rs100 crore to ensure conformity in procedure rules and guidelines.
During the debate on the Bill, state finance minister B Rajendranath Reddy alleged that there was corruption and irregularities in awarding contracts by the previous Telugu Desam Party (TDP) government headed by N Chandrababu Naidu. The finance minister alleged that the previous government resorted to corruption in the name of Swiss Challenge.
Coming back to the World Bank, which in a statement
says, "On 15 July 2019, the government of India (GoI) withdrew its request to the World Bank for financing the proposed Amaravati Sustainable Infrastructure and Institutional Development Project. The World Bank’s board of executive directors has been informed that the proposed project is no longer under preparation following the government’s decision."
The next statement from the World Bank tries to indicate the changed regime in the state. It says, “As the new government sets its development priorities, we stand ready to provide whatever support the state and the government of India might request.”
Beijing-based AIBB was expected to provide $200 million in funding to the Amaravati project estimated at $715 million. Both the World Bank and AIBB were expected to give $500 million, with the balance being borne by the Andhra Pradesh government.
Our emails sent to Franklin Templeton AMC and ABSL remained unanswered till the writing this report. We will update this article as and when we receive any response from them.