Was it known to Nigam and Gujarat government that there existed a design error since only bondholders were given the right to pre-redeem the DDBs at the end of 7th, 11th or 15th year and the NCBs at the end of 5th year?
“Regarding the statement that the state or central governments did not guarantee the bonds, it is opportune to enlighten all concerned that the investor’s security has not been jeopardized at any point of time. On the contrary, concern for investor has been displaced by the Nigam (i.e. SSNNL), by entering into a tripartite agreement with the government of Gujarat and ICICI to cover the bonds. As per the terms of agreement, if there are insufficient funds available with SSNNL 45 days before the due date for payment of interest, principal or premium on the bonds, the ICICI will issue a notice to the state government which will be bound to make good the payment seven days before the due date. While a guarantee can be invoked only in case of a default, the Nigam, through its tripartite agreement has ensured that the government’s assistance is available well in advance to avoid any contingency or default. What better security can one ask for that this?”
Was it known to SSNNL and Government of Gujarat that there existed a design error since only bondholders were given the right to pre-redeem the DDBs at the end of 7th, 11th or 15th year and the NCBs at the end of 5th year? In January 1994, when SSNNL made allotment on the issue, 7,13,619 DDBs worth Rs256.90 crore and 2,36,194 NCBs worth Rs118.10 crore at face value were issued. Deep discount bonds had a face value of Rs3,600 and promised to yield investors Rs1.11 lakh at the end of 20 years, whereas non-convertible bonds had a face value of Rs5,000 and promised to yield investors 17.5% interest payable half-yearly with a premium of 5% payable at the time of redemption at the end of 9th year.
It has been argued by Himanshu Thakkar in an article, ‘Ominous Figures of SSP’ (Economic Times dated 29 December 1995) that there existed a confidential study conducted for Government of Gujarat that indicated resorting to market borrowing as an unviable option. Quoting from the report, the article stressed that “the trend clearly indicates SSNNL’s ability to raise funds through this source (i.e. bonds marketed with tri-partite agreement) on a sustained basis is doubtful”.
A policy document titled Gujarat Infrastructure Agenda Vision 2010 (released in 1999) had asked SSNNL and Gujarat Government to tread cautiously and stressed that, “the required borrowing for the Sardar Sarovar Project in the 9th Five Year Plan period is Rs9,876 crore (taking into account debt obligation), as against the projected Rs5,596 crore”.
The document’s calculation for such an argument showed SSNNL’s interest expenditure to rise to Rs1,294 crore in 2001-02 from Rs229 crore in 1997-98 and its outstanding debt to rise to Rs10,496 crore as on 31 March 2002 from Rs2,000 crore as on 31 March 1998. (For detailed discussion see Shah, Rajiv (1999) 'SSP Cost Escalation to have fall out on State Finances', The Times of India, 7 July 1999)
While it is not known, how many investors holding NCBs came forward to surrender and pre-redeem their bonds at the end of 5th year, it has been documented that in September 2001, when the first pre-redemption option came, SSNNL wrote letters to bondholders asking them to opt for pre-redemption. However, this move met with a very cold response, as only 5.96% bondholders came forward for early redemption and they were paid an interest amounting to Rs37.89 crore. A CAG audit report for FY2001 stated that on the remaining DDBs, SSNNL will have to shell out Rs7,448 crore in FY2013-14. This CAG audit report calculated the debt liability of SSNNL as on 31 March 2002 as Rs12,282 crore
Again at the end of 11th year, SSNNL announced through newspapers in the first week of May 2004, its willingness to pre-redeem the bonds by calling for an extra ordinary meeting of bondholders at Gandhinagar on 28 May 2004 with a view to seek consent from bondholders for the same. On 19 May 2004, investors from Delhi and Mumbai field petitions against this move. Surprisingly, the very next day, i.e. on 20th May, SSNNL issued a press release stating that in the wake of communication it received from Securities and Exchange Board of India (SEBI) and Bombay Stock Exchange (BSE), it had cancelled the said meeting. A news release by IANS dated 6 July 2004 claimed that SSNNL was harbouring thoughts of bringing in a legislation in Gujarat assembly that enables it to pre-redeem bonds unilaterally.
Even as next round of legalese start on the issue of deep discount bonds, shouldn’t citizens ask questions about the institutions that failed to carry out due diligence in 1993 and that neglected to pay any heed to sane advice by CAG in its report for the year ending 31 March 2001?
(Himanshu Upadhyaya works with Azim Premji University. Opinions expressed in this article are personal.)