Mysore Sugar NCD holders left in lurch

The state company had failed to meet the interest payment to debenture holders of its Rs 15-crore non-convertible debenture (NCD) issue due in March 2005.

Trustees to the issue are yet to invoke the guarantee even as the interest payment has exceeded three months.

In a letter to the Board for Industrial and Financial Reconstruction (BIFR), the trustee "" Canara Bank "" has asked "leave to invoke the unconditional and irrevocable guarantee issued by the government of Karnataka Department of Commerce & Industries, Bangalore" for the recovery of dues of the debenture holders.

Senior trustees said as Mysore Sugar was in BIFR net, special permission under section 22 (1) of Sick Industrial Companies (Special Provision) Act, 1985 was required to invoke the guarantee.

Debenture holders, on the other hand, pointed out that they had invested in the NCDs on the back of the "unconditional and irrevocable guarantee".

Other trustees further said that immaterial of whether or not Mysore Sugar is a BIFR case, the state government was obliged to pay up the dues, and that Canara Bank should have invoked the guarantee at the earliest.

Till June, the Reserve Bank of India (RBI) used to ask banks to classify and make necessary provision for state government guaranteed papers only on the invocation of the government guarantees.

In its recent circular, the RBI stated that defaulting state government papers even with state government guarantees will be classified as non-performing assets (NPAs) if interest or principal payment remains pending for more than 180 days. This has came into effect from the current fiscal.

From the next financial year, state government guaranteed securities would attract asset classification and provisioning norms when interest and/ or installment of principal or any other amount due remain overdue for more than 90 days, stated the RBI circular.

With rising cases of default in state government guaranteed papers, the central bank has decided, in the interest of banks investing in state government guaranteed papers, that asset classification norms ought to be applied in stages.

This means the Rs 15-crore bond issue of Mysore Sugar Company, backed "by an unconditional and irrevocable guarantee from the government of Karnataka" is now an NPA.

While the RBI has brought state government guaranteed papers on par with any other debt asset, it has, however, refrained from applying the same arithmetic to central government guaranteed papers.

It might be recalled that the Centre had defaulted in meeting its obligations to the central government guaranteed bonds of HMT and Instrumentation in December last year, thereby inviting the wrath of investors.