P&SB recapitalisation: Centre issues Rs 5,500 cr worth of zero-coupon bonds

P&SB to park investment in HTM category; raises concern

The Centre, in a first move of its kind, has issued Rs 5,500 crore in zero-coupon bonds for recapitalising Punjab and Sind Bank (P&SB) and allowed it to park the paper in its held-to-maturity (HTM) category at face value rather than the discounted market rate.

Zero-coupon bonds do not bear any interest and are traded at a discount to the face value.

The move is seen as raising concern in the accounting fraternity and bank auditors though the banking regulator, the Reserve Bank of India (RBI), has cleared it for now after much internal deliberation.

According to the government’s gazette notification, five non-interest-bearing securities -- each of 15 years, maturing on December 14 between 2030 and 2035 -- have been issued to P&SB Bank, which is unlisted. These do not qualify as statutory liquidity ratio (SLR) eligible papers as in the past.

In recapitalisation, the Centre subscribes to a state-run bank’s preferential capital, and the proceeds are invested by the bank in interest-bearing bonds in a cash-neutral transaction and the entries are matched.

It was pointed out that in the case of P&SB’s zero-coupon bond recapitalisation, the bank gets to have Rs 5,500 crore only on the maturity of the bonds.

The gazette notification said: “The special securities shall be repayable at par on the date of maturity as indicated against each security. The special securities shall be non-interest bearing and no interest shall be payable on issue of the securities.”

A top source said: “The decision to allow the bank to show it as investment worth Rs 5,550 crore is not right from an accounting standpoint. It has to be shown at a discount (much less than Rs 5,550 crore), in which case you also can’t state the equity infused into the bank as being Rs 5,500 crore as entries have to match.”

Another source at an auditing firm said: “It amounts to taking unrealised gains on investment upfront.”

Recapitalisation bonds issued to date have been interest-bearing securities and while the RBI had allowed banks (which were recapitalised) to hold them in the HTM category, the true value of the investment could be ascertained from government securities (G-Secs) of a similar profile – that is zero-coupon. Furthermore, in P&SB’s case the discount on the zero-coupon bonds has to factor in their illiquidity as well.

As of now, there are no zero-coupon bonds issued by the government even under its annual borrowing programme though such instruments had been issued in the 1990s. Banks are barred from investing in zero-coupon bonds issued by companies.

It is surmised that the government may have wanted to reduce the interest outgo on recapitalisation bonds.

Over Rs 2.5trillion has been infused into state-run banks through recapitalisation bonds over the past three years -- it was Rs 80,106 crore in 2017-18, Rs 1.06 trillion in2018-19, and Rs 65,443 crore in 2019-20. The coupon rate on these bonds ranged between 6.55 per cent and 8.11 per cent. At an average interest rate of 7 per cent, the annual payout worked out to Rs 17,570 crore.