RBI calls market players to buy UDAY bonds

With bonds issued under the power distribution companies' (discoms) loan package - Ujwal Discom Assurance Yojana (UDAY) - not scheduled to hit the market, the Reserve Bank of India's (RBI) unusual communique on market participants interested in buying the bonds through private placement almost amounts to the same.

Six state governments - Bihar, Haryana, Jammu & Kashmir, Jharkhand, Punjab and Rajasthan - will issue special securities under UDAY and investors interested will have to get in touch with the central bank by March 30, RBI said on its website on Monday. While the release did not mention when the investments can be done, it is anticipated that the bonds have to be purchased before the end of this financial year. It is not yet clear if RBI will share the details on the pricing, as it is a private placement.
 
The interest paid on these bonds will be capped at 75 basis points above 10-year government bond yield, which closed at 7.51 per cent on Tuesday, up from 7.50 per cent on Monday. Hence, technically, the bonds can be issued at 8.25 per cent, which is higher than the cut-off of 8.1 per cent witnessed by the state governments on the state development loan auctions last week. Hence, market players say there would be demand for the privately placed bonds. Earlier, the plan was to allow only banks to swap the discom companies' debts into bonds.

The investment will compete with other bond issuances of the government and state governments as the investor base remains the same. However, allowing all kinds of market players in the private placement is good for the discoms as it will help unload the bonds faster.

"It will help to conclude the entire UDAY scheme, where insurance and pension funds could be the major subscribers," said Soumyajit Niyogi, associate director, credit & market research group at India Ratings (Ind-Ra).

Under UDAY, 75 per cent of the outstanding debt of the discoms, estimated at Rs 4 lakh crore, will be taken over by state governments, which, in turn, will sell the bonds through private placements. Rajasthan has already sold Rs 28,500 crore worth of bonds to banks.

The bond market was under pressure on uncertainties about UDAY bonds as their issuance in the market could have pushed government bond yields. But, RBI last month clarified that UDAY bonds would be privately placed, a decision that the market cheered.

However, with the latest move, the same concerns are back in the market even as these bonds are private placements. They would be subscribed by the same set of investors.

"This will impact appetite for other bonds - especially SDLs (state development loans) and government securities, which are already facing anaemic demands," said Niyogi of Ind-Ra.

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PRIVATELY PLACED UDAY BONDS

• RBI seeks market players to buy UDAY bonds
   
• Earlier, only banks were allowed
   
• Traders say UDAY bonds will exert pressure on yields
   
• Technically, UDAY bonds can have coupons of 8.25%
   
• Average cut-off of state bonds were at 8.1%
  

 

Hence, the private placements could see good response