FCI to raise Rs 5000 cr via bonds

The Food Corporation of India (FCI) has got the government's approval for raising Rs 5,000 crore from the financial market by issuing bonds, to restructure its debt and reduce the interest burden.

The FCI will study the market conditions and coupon rates to decide whether to raise the entire sum at one go or split it into shorter issues. The entire process is proposed to be completed by March 31, 2006.

FCI chairman and managing director VK Malhotra told Business Standard the corporation is also planning to go in for "interest rate swapping" through negotiations with commercial banks.

These measures are part of the FCI's efforts to bring down the overall food subsidy by reducing the interest paid on the borrowed funds. The new bonds issue would help save about Rs 100 crore on the interest cost, he said.

With this, the FCI would achieve the target of raising Rs 10,000 crore from the market in the current financial year at rates lower than those paid to the consortium of banks from whom it had been borrowing funds, traditionally.

A sum of Rs 5,000 crore had been raised through this route earlier this year, which resulted in saving nearly Rs 100 crore, he said.

Under the proposed interest rate swapping, the FCI would negotiate with individual bank to determine a benchmark interest and then pay a fixed percentage above that benchmark. This would help arrive at a floating rate of interest for the borrowings. The corporation believes that this exercise could result in saving from Rs 10 crore to Rs 15 crore annually.

Earlier, the FCI had been borrowing money only from a consortium of banks, led by the State Bank of India, which used to charge interest rates higher than the ruling market rates. By taking the bond route to raise funds from the market, the corporation has managed to cut down the debt servicing costs.

Elaborating on it, FCI executive directive (finance) P Raghavendra Rao said the average interest payable on Rs 5,000 raised through bonds earlier this year came to only around 7.1 per cent, against approximately 8.5 per cent charged by the consortium of banks.

"In fact, the actual interest paid to the consortium worked out to something like 9 per cent because the FCI also had to pay penal charges for the money which the rural development ministry owed to the FCI for the foodgrains procured from it for its welfare schemes", he said.

The FCI had a total sanctioned fund borrowing entitlement for this year of Rs 38,100 crore, including the Rs 33,100 crore CCL (cash credit limit) and Rs 5,000 crore through bonds route. It has so far actually drawn between Rs 28,000 crore and Rs 29,000 crore out of the CCL and Rs 5,000 crore from the bonds.

The next bonds issue of Rs 5,000 would replace the funds already borrowed under the CCL. Thus, the total borrowing would still remain almost the same, Rao explained.

All bond issues floated by the FCI so far have been over-subscribed several times within short periods though the corporation has retained only the targeted amount.