Oldest PSU fails interest payment to bondholders
Posted online: Apr 13, 2009 at 0854 hrs
New DelhiEven as the government is concerned about its long-term sovereign rating outlook being downgraded from ‘stable’ to ‘negative’ by Standard & Poor’s, rating agencies are closely watching the developments at Indian Telephone Industries (ITI) Limited — the first PSU set up in independent India.
A monopoly producer of telecom equipment till 1991, ITI had raised Rs 332 crore through two series of bonds in 2004 — months before it turned sick — on the strength of an ‘unconditional and irrevocable’ guarantee from the Centre. However, ITI bondholders haven’t yet received the interest payment, which was due on March 31, 2008.
Incidentally, bonds worth Rs 94 crore were due for redemption on March 31, 2009. In another four months, the remaining bonds worth Rs 238 crore will also be up for redemption.
“If investors don’t get money on time, it’s a worry as timely payment of dues is important. If it was a private sector firm, we would have put it in junk grade immediately. But since it’s backed by a sovereign guarantee, we don’t have the right to classify it as a default,” said Soumendra Dash, chief economist at rating agency CARE Limited, which tracks ITI. It has, however, downgraded ITI from AAA to D grade.
A Singapore-based S&P economist who tracks India’s sovereign rating told FE, “It can’t be considered a sovereign default as we need to understand the conditions under which the guarantee was extended to ITI. But it’s an interesting case to watch.”
Central government guarantees, like the one extended to ITI, are off-balancesheet liabilities. As per latest RBI data, outstanding guarantees by the Centre stand at Rs 1,09,826 crore (through 466 guarantees). This adds up to 2.6% of GDP.
“The FRBM Act lays down a target of 0.5% of GDP for government guarantees. That’s about Rs 32,000 crore. The administrative ministry should be working on paying investors as soon as possible,” a senior government official said.
“Several state governments keep defaulting on bond payments backed by them, even when they have money in the coffers. But if the Centre’s promise is not sacrosanct, then government guarantees are worse than election promises,” said Amit Gopal, vice-president of India Life Asset Management Company, many of whose clients have invested in ITI.
“It’s not just the ability to pay, but also the willingness to pay that matters,” Dash pointed out.
Though Maharashtra’s finances are better than Gujarat’s, the latter has been assigned a better credit rating by CARE as its track record on honouring bond guarantees is better than Maharashtra.
Last August, ITI’s debenture trustee, Canara Bank, held a meeting with bondholders to consider a proposal to sell some of the company’s surplus land to ensure interest payments. But the idea was turned down by bondholders, as they wanted a fresh valuation of the land in question.
In January 2009, ITI officials wrote to investors and said since the bonds are guaranteed by the government, they have written to the nodal ministry (telecom ministry) for assistance to service the interest.
The firm also pointed out that its request to the Centre for a comprehensive revival package of Rs 3,700 crore includes bond liabilities, and is being considered by the Board of Reconstruction of Public Sector Enterprises (BRPSE).
“Kindly bear with us till the grant against revival package is released by the ministry to ITI for servicing of interest,” ITI wrote. As of February this year, the BRPSE was seeking to get state-owned BSNL to take over ITI, but Bharat Sanchar Nigam Limited hasn’t evinced any interest so far.
Meanwhile, investors are getting restive and want the debenture trustee to invoke the guarantee. But the debenture trustees for government-backed bonds are usually public sector banks and financial institutions and don’t like confronting their owner— the government.
“It is tough for the common investor to take action in such cases as filing a case against the state is often futile
. Debenture trustees need to act in a tough manner against defaults to avoid such experiences. The policies governing debt issues need a relook,” Dash concluded.