Centre defaults on PSU bond obligation

The Centre has failed to meet its obligations in regard to the Rs 35-crore bond issue of Instrumentation Ltd to which it stood as a guarantor.

The Western India Trustee & Executor Company, trustees to the bond issue, invoked the government guarantee in December 2004 when the public sector undertaking failed to pay interest (Rs 3.36 crore) on the bonds.

This is the first time that the Centre has defaulted in meeting its payment obligations.

"It amounts to a sovereign default," said Amit Gopal, vice president India Life Capital, referring to the default of Instrumentation Ltd. One of his clients has invested in both the bond issue.

The Western India Trustee & Executor Company today held a meeting in Mumbai with trustees of provident funds "" which have invested in the issue "" to decide the next course of action.

Some of the provident fund trustees felt that they ought to take the government to court since the guarantee has already been invoked.

Under the bond scheme, the company was suppose to deposit the necessary funds 45-60 days in advance into an escrow account.

On its inability to do so, the government guarantee was invoked and the Centre was required to make payment three days ahead of the due date. The government had failed to do as it was reportedly busy with tsunami operations.

The Centre has also stood guarantee to the 8.5 per cent HMT bond issue, which has failed to pay the full overdue interest. In a letter sent to bond holders, the HMT management stated that the balance 50 per cent of the interest (which it could not pay) will be arranged shortly.

Both these PSUs come under the heavy industries ministry. A letter of the Western India Trustee to PF trustees of the bond issue, said "..in spite of our continuous follow up with them (the company) and the ministry of heavy industries..." the company has failed to make the interest payment due on December 31.