Reckless borrowing, unholy redemption

On 24 January, while hearing a petition filed by Janpath Hotel Employees’ Provident Fund Management Trust, challenging Sardar Sarovar Narmada Nigam Limited’s (SSNNL) unilateral decision to go for a compulsory early redemption of Deep Discount Bonds [DDBs], the Supreme Court posted the matter to 23 February. The provident fund was an investor in the bonds and they filed a petition in the Supreme Court in early January, against SSNNL's move to force a unilateral and compulsory redemption.

A bench headed by justice K G Balakrishnan tagged the two petitions filed by Janpath Hotel Employees’ Provident Fund Management Trust and SSNL Investors Grievance Forum with the Gujarat government's plea seeking transfer of all the related cases from Maharashtra to Gujarat.

Earlier when the Janpath petition came for hearing on January 8th, justice Balakrishnan denied to grant any relief and posted it for hearing on January 16th. The petition also challenged validity of SSNNL’s notice issued on November 3rd, 2008 informing investors about the early redemption of the bonds at a face value of Rs.50,000 on Jan 10, 2009, and the payment of money through the electronic clearing system, since it was contrary to the prospectus issued in 1993.

There have been several similar petitions filed before Gujarat High Court and Maharashtra high Court challenging SSNNL’s move to thrust early redemption of DDBs, and while they are being heard courts have not stayed the decision so far. The Gujarat High Court said that in the event the SSNNL (Conferment of Powers to redeem bonds) Act, 2008 is struck down, the bondholders will get their dues, as detailed in the prospectus.

Advocate for the petitioners against the early redemption Krishnakant Vakhariya took a nuanced legal line in his argument. He said that the Conferment of Powers to Redeem Bonds Act was passed by Gujarat Assembly, while the DDBs have been issued under the negotiable instruments law, a union law.

On December 25th, Pamkaj Kumar, joint MD [finance] SSNNL claimed that 3.29 lakh bonds have been surrendered for early redemption, adding that as high as 60,000 notices were lying undelivered for the change in address.

SEBI action

On January 2nd, capital markets regulator Securities Exchange Board of India (SEBI) issued SSNNL a public notice – signed by J Rangnayakulu, executive director (law) – asking it to inform all bondholders individually the approach followed to arrive at the redemption price and justification of the said price. SEBI also took notice of the fact that there have been several petitions challenging the said move and asked SSNNL to inform all the bondholders individually about the substance of the petitions and observations of the Gujarat High Court.

In the same notice, SEBI reminded SSNNL of its failed efforts to seek bondholders’ consent of early redemption of bonds during May 2004, the advise issued then dated May 19, 2004. SEBI noted that the latest move has been pursuant to SSNNL (Conferment of Powers to redeem bonds) Act, 2008 passed in Gujarat assembly with a view to modify the prospectus under which the DDBs were issued on September 29, 1993. SEBI has further pronounced its view that neither bondholders’ nor SEBI’s consent has been sought either for modification of prospectus and or such redemption pursuant to that modification.

On 6 January, SEBI issued a second notice – signed by R K Nair, executive director - when SSNNL failed to appear in person to clarify the issue. This notice asserted that “the SSNNL (Conferment of Powers to redeem bonds) Act, 2008 sets the floor price for redemption and the prospectus indicates the price for voluntary surrender (put option) of bonds. These do not indicate price to be paid on compulsory premature redemption of bonds. Therefore, the redemption price needs to be justified to investors keeping in view the various factors including the investment risk for primary holders of bonds and the price risk (capital loss) for purchasers in the secondary market.”

A history of repetitive excesses

The recent developments are not a first in SSNNL’s history. The convoluted tale of SSNNL’s indiscriminate market borrowing dates back to 1993. Even as World Bank appointed Morse review recommended Bank to “step back”, SSNNL was mulling over banking on the euphoria amidst Gujarati diaspora to mobilize financial resources. While its effort to float an NRI issue met with intense criticism and protests, SSNNL still hobnobbed with merchant bankers. On November 1st, 1993 SSNNL’s Rs.300 crore public issue opened and it raised Rs.375 crores through market borrowing.

Bonds were issued at a discounted price of Rs.3600, with a promise to yield an investor Rs.1,11,000 at maturity after passage of 20 years, i.e. in 2014. While the bondholders were given the right to pre-redeem the bonds [put option], SSNNL did not insert the right to unilaterally redeem bonds prior to maturity [call option].

With merely 6 per cent bondholders coming forward to pre-redeem the bonds at the end of 7 years [2001], and SSNNL’s attempts to hold an extra ordinary General Body Meeting to take consent of more than 75 per cent of bondholders to pre-redeem all the outstanding bonds compulsory at the end of 11 years [May 2004] meeting with failure, these bonds have turned out to be Deeply Distressing Bonds for SSNNL today. As per calculations reported in the Comptroller and Auditors General’s report for the year ending March 31, 2001, in the year 2014, SSNNL will have to shell out Rs.7448 crores as redemption payment on the outstanding DDBs worth Rs.241 crores.

In April 2006, debating controversy around the raise of height of Narmada Dam to 122 metres, Congress chief whip Balwantsinh Rajput quoted figures on how much the SSNNL has spent during last three years on interest payments and debt servicing: Rs.717 crores, Rs.944 crores and Rs.766 crores respectively for year 2002-'03, 2003-'04 and 2004-'05. He put forth on the floor of the house the cumulative figure of SSNNL having spent Rs.2428 crores in three years and invented the familiar stick to beat the critics of SSP with, by shouting, "Honourable Speaker sir, our state is loosing Rs.2.22 crores (per day) on interest payments. We must not allow the Union Water Resources Minister review the decision of raising the dam height. As delay on the dam construction adds to huge erosion of state exchequer due to interest payments".

Such remarks from an opposition party must leader must have helped SSNNL and ruling party heave a sigh of relief. One needs to examine these remarks in the backdrop of the Comptroller and Auditor Generals's (CAG) detailed audit of SSNNL’s finance mobilisation for 2000-2001 which was tabled in the Gujarat assembly in 2002. As early as then, CAG had underlined the reasons for huge erosion of state exchequer as indiscriminate market borrowing rather than delay on the dam construction.

CAG made a detailed indictment

CAG launched a scathing critique of SSNNL for having spent a whopping Rs.2413.98 crores – i.e. 22 per cent - on debt servicing and interest payments out of Rs.10978.65 crores of total expenditure incurred on SSP as on March 31, 2001. CAG had also examined SSNNL’s outstanding debt liability and underlined that its average annual debt liability stood at Rs.944.77 crores.

The CAG had already reported that SSNNL, “without any systematic plan for redemption of bonds, went on borrowing for redemption of earlier debts, which resulted in abnormal increase in the expenditure on servicing the debt”.

In its report, the CAG showed that compared to a similar long term bond issue floated by Small Industries Development Bank of India in February 1993, SSNNL offered on Deep Discount Bonds at 1.90 to 3.25 per cent higher interest payments. After the controversial public issue of Deep Discount Bonds, SSNNL embarked on an unabated series of indiscriminate borrowing through private placement of bonds. These subsequent issues were also marred by similar deficiencies.

For instance, while Non-Convertible Bonds in November 1993 were issued at 17.5 per cent interest, Non convertible Bonds issued in February 1996 were bearing the interest rate of 18 per cent, suggesting a 0.5 per cent upwards swing! In 2002, the CAG said, “SSNNL had issued above NCBs at 18% rate of interest whereas co-arrangers of the said issue Kotak Mahindra finance Limited had specified 16.25% interest rate for a similar issue (October 1995) of Nuclear Power Corporation.” Yet again, SSNNL floated bonds (April 1997) bearing an interest rate of 17%, while as noticed by CAG, “Industrial Finance Corporation of India, one of the merchant bankers of this issue had recommended (February 1997) fixation of rate of interest between 15.5 and 16%.”

Why did SSNNL not insert a suitable call option that would have allowed it to unilaterally call back the bonds prior to maturation, asked the CAG. SSNNL had replied in July 2001 thus: “The loss pointed out in audit was notional since introduction of call option would mean that the long tenure is not assured to the investors which itself would become disincentive to invest in the bond issue.” The response itself suggested that the design error in Deep Discount Bonds was akin to Hamletian “method in the madness”. Within a span of three years, in May 2004 SSNNL had staged a turnaround dispelling its long held belief in “long tenure as an incentive to investors”.

Four years later, we witness SSNNL bypassing SEBI’s advice and not replying to the regulators notices on time. Is the turnaround due to the realisation of magnitude of actual and not the notional loss on the maturity of the bonds in 2013-’14 or is a yet another attempt to fleece the public while keeping the bondholders happy?

SSNNL owes answers to these questions.