SAIL looks to shed sovereign tag

PFs oppose steel major's move to opt for SBI guarantee for bonds instead of central guarantee.

The Steel Authority of India Ltd (SAIL) has sought the permission of bond holders to replace the Government of India guarantee for its non-convertible bonds with the State Bank of India (SBI) guarantee. Following this, SAIL can cut the guarantee fee by 60 per cent.

In its letter to bond holders, SAIL's secretary, Devinder Kumar said this move is to reduce expenses on the guarantee fee. "The guarantee fee being paid to the Government of India is 100 basis points as against 40 basis points charged by the SBI", he pointed out, in his letter dated February 15.

Bond holders have four more days to respond to this proposal as the deadline expires on February 25. SAIL had during 1999-2000 and 2002-03 issued 18 series of bonds, aggregating Rs 1,975 crore.

Apart from the interest rate, it has been paying 1 per cent extra to the Centre as guarantee fee on the outstanding amount on the bonds.

Many provident funds, which are bond holders, have expressed anxiety over the proposal.Trustees of provident funds question the move as they have nothing to gain by the same.

"We subscribed to SAIL bonds on the back of sovereign guarantee," said a senior executive of a superannuation fund belonging to a leading chemical manufacturer.

"When the bonds were issued, they were backed by an unconditional and irrevocable guarantee of the Central government. What recourse do we have should SAIL not be able to meet payment of interest or principal? Would we be able to revoke the guarantee issued on SBI," questioned Amit Gopal, vice president, India Life, which manages over 150 PFs.

"There is no change in the interest rate on the bonds. When a sovereign guarantee is attached, naturally the coupon rate would be lower than in the case of a non-sovereign backing. What additional are we getting to compensate for the risk," said the trustee of a provident fund of a leading private sector bank.

Trusts are apprehensive that the creation of charge on SBI will not be an effective substitute to the sovereign guarantee.

"Today the steel industry is doing well. But the scenario may change as after all steel is a cyclical business," said Gopal. Some trusts have also sought an increase in the coupon rate to compensate for the credit risk in the absence of GoI guarantee.

Sources at SAIL however, said that with the the coupon rate already high at 12-13 per cent, the terms and conditions of the bond series will remain unchanged.

Rating agency ICRA has further confirmed to retain the triple A (AAA) rating on the bonds, stated SAIL, in its letter to bond holders.

It may be recalled that in late 2004, SAIL has sought permission of bond holder to substitute GoI guarantee with a charge on the assets. This proposal to offer the security of assets at SAIL's Durgapur steel plant was shot down by the investors.