Monday, 16 May 2016

High-yield UDAY bonds find many takers in cash-rich institutions like Kotak MF, LIC and others

For those who had doubts about who would buy the state-backed bonds sold in lieu of loan of cash-strapped state electricity boards, the answer is — Kotak Mutual Fund, Reliance Mutual Fund, UTI MF and the Life Insurance Corp of India, among a dozen investors.

Many mutual funds and the Employees' Provident Fund Organisation which are flush with funds and are looking at long-term investment opportunities gobbled up these bonds which yield about a percentage point more than government bonds.

The bonds backed by the state governments such as Jharkhand, Chattisgarh, Punjab and Haryana yield about 30-40 basis points more than the states' own securities despite the fact that both of them carry equal credit risk.

"UDAY bond rates were quite attractive with little chance for default. It is a prudent investment," said one fund manager who did not wish to be named.

Institutional investors could not be contacted for comments.

For example, the Reserve Bank of India sold Jharkhand bonds worth of Rs 5,000 crore, and EPFO alone grabbed about Rs 1,500-2,000 crore of the lot.

The central government and the Reserve Bank of India in consultation with the banks came up with the structure of state-backed bonds. These state-run power distribution companies together owed Rs 4 lakh crore to banks. This could also help these distribution firms restart on a clean slate to buy more power and supply at commercial rates to their customers.

Since Monday, the Reserve Bank of India had opened a subscription window that allowed investors to buy those securities through the private placement route. Those bonds are of different maturities ranging from three to 15-16 years. Rates were in the range of 8.30-8.53 per cent.

So far, Rs 30,000 crore UDAY bonds have been sold either via RBI's private placement or respective state governments selling it directly to investors.

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