Group No-9

Members Scarlette Almeida (04)

Mihir Bhammar (05)

Sumitra Cardoz (09)

Anshul Chadha (10)

Sandip Saha(50)

Road Map Purpose of SDL Issuance & Characteristics Risk related to SDL Auction procedure Difference of SDL & Govt Securities Recent Trends Case Study Maharastra SDL Recommendation

Purpose ? Over the years, the gross fiscal deficit of state governments has been on the rise.

Nearly 60 per cent of the deficit is on account of revenue deficits arising mainly due to expenditure over returns.

State government Loan represent the market borrowings used in financing this deficit.

Issuances of SDLs SDLs are issued by the Reserve Bank of India (RBI) on behalf of

State Governments to meet their funding requirements RBI coordinates the actual process of selling of these

securities through the auction process. Each state is allowed to issue securities up to a certain limit

each year which is determined by the planning commission in consultation with the respective state governments.

The auctions for State Government securities are held electronically on Public Debt Office-cum-Negotiated Dealing System (PDO-NDS) module.

The Public Debt Act, 1944, provides the framework under which government securities are issued and serviced.

Characteristics of SDLs State Development Loans are eligible securities for Liquidity

Adjustment Facility (LAF) – Schedule Commercial Banks (excluding RRBs) and Primary Dealers

The Securities may be held in any of the three forms viz:(a) Physical scrip form, (b) Subsidiary General Ledger (SGL) Account and (c) in a dematerialized account with depositories (NSDL/CDSL, NSCCL)

The coupon rates on State Development Loans are fixed and marginally higher than those of GOI-Secs issued at the same time.

The tenor of state government securities is normally ten years.

The states have the option to manage their own market borrowings to the extent of 35 per cent of total market borrowings.

Risk Related to SDL Maturity Risk

Redemption risk– Straight default. – Compulsory renewal

Auctions

Competitive bidding

Non- competitive bidding

Competitive bidding

Mainly by banks, financial institutions, primary dealers, mutual funds and insurance companies.

Minimum amount is Rs 10,000 and its multiples thereafter.

Normally bids are of above Rs 2 crore. Multiple bidding is also allowed.

Non-Competitive bidding Objective

– To encouraging wider participation and retail holding of Government securities

Eligibility– Open to any person including firms, companies, corporate

bodies, institutions, provident funds, trusts, and any other entity as may be prescribed by RBI

Procedure– Under the Scheme, up to 10 percent of the notified

amount of SDLs will be allotted to eligible individuals and institutions subject to a maximum of one percent of the notified amount for a single bid per stock

Difference between SDL & G-Secs

• Unlike GoI Securities (G-Secs), SDL issuances are not structured and don’t have any auction calendar.

• A new security is issued almost every month, some times even twice or thrice in a month and no re- issuance of the same security

• A minimal or no secondary market activity in the previously issued securities, only the recently issued securities are traded the most

• SDLs are generally issued for a maximum tenor of 10-years

Recent trends

All States barring West Bengal offered plain-vanilla SDLs.

West Bengal has offered banks early exit options(put option) on State Development Loans (SDL) to make the borrowings attractive.

Though several States had also planned to make such early exit option into their bonds to take advantage of low short-term rates, only few have managed to do so.

Mutual funds have shown a renewed interest in SDLs; the total mutual fund investment in SDLs, as on May 31, 2009 was Rs. 9.33 bn.

Recent trends

A CRISIL study shows that the exposure to SDLs, as a percent of the assets under management (AUM) of gilt funds was 7.54 per cent (Rs 4.15 bn), as on May 31, 2009, up from 0.15 per cent as on December 31, 2008.

Considering only gilt funds with investments in SDLs, this accounts for a 35 per cent of the portfolios

At the State Development Loan (SDL) auctions, where 7 States raised Rs 5824 crore, the weighted average yield on the SDLs was 8.33 per cent.

States’ borrowing limits raised to 4 per cent of their GDP to allow them to undertake high expenditure as part of the fiscal stimulus.

Only a handful of States have taken advantage of the enhanced limit.

Recent trends Restraint on borrowing in expectation of higher Central allocations in the

form of grants.

States are reluctant for SDL as it escalates their revenue expenditure through interest costs.

Besides banks that were the largest investors in SDLs in the past preferred to stay invested in short-term securities.

Several banks are parking funds in Treasury Bills as short-term treasury management.

14 Major State Development Loan(SDL) issuances (Rs crore)

Maharashtra State Development Loans The rating agency said over the years, the state’s fiscal position

has deteriorated significantly From a primary revenue surplus of Rs 1,446 crore during 1996 to a deficit of Rs 2,579 crore during 2001. with progressively diminishing primary revenue balance,

The government resorted to high cost borrowings to part-finance its revenue deficits and its capital expenditure programmes.

Increased overall debt burden of the state-run corporations

Off budget borrowings by providing guarantees to various corporations like: the irrigation corporation, cotton monopoly scheme, electricity board etc. As several of these corporations are commercially non-viable, a large proportion of their debt servicing burden would fall on the state

Maharashtra State Development Loans

ICRA Ltd has downgraded the rating assigned to the borrowing of Maharashtra from LAA (-) to LA (-)

Result of deteriorating fiscal performance of the state over the past few years and some delays in meeting its guaranteed obligations.

Maharashtra, however, cleared the payments and compensated the investors with overdue interest for the delay.

The state has also initiated steps to ensure that such procedural delays in meeting debt obligations are prevented in future.

The state delayed its payment to corporations like 1. Maharashtra Krishna Valley Development Corporation and2. Konkan Irrigation Development Corporation,

Consequence - entities delayed the interest payment to bondholders.

Maharashtra State Development Loans The ICRA downgrading, however, will impact the ratings assigned

to:

Various bond programmes of Maharashtra State Electricity Board,

Godavari Marathwada Irrigation Corporation, Maharashtra Jeevan Pradhikaran, Tapi Irrigation Development Corporation, Vidarbha Irrigation Development Corporation, Maharashtra Vikrikar Rokhe Pradhikaran, and Maharashtra Film, Stage and Cultural Development Corporation.

The agency argued, “the ratings of these bonds are based on the budgetary support provided by the state and since the bond issuers are unlikely to generate adequate revenues for debt servicing, these ratings are reflective of the credit quality of the state”.

Market Capitalization of WDM Segment in 2009

Security Type No. of Mkt Percentage

  Securities Capitalization of Total

    (Rs. Mn.)  

Govt Securities 128 19793385.00 63.24

PSU Bonds 801 1559270.04 4.98

State Loans 1307 5097215.11 16.29

Treasury Bills 53 1343882.65 4.3

Local Bodies 20 26433.28 0.08

Fin Inst. 282 670839.97 2.14

Bank Bonds 508 1580471.59 5.05

Supranational Bonds 1 3912.22 0.01

Corporate Bonds 941 1222058.63 3.91

Total 4041 31297468.49 100

Recommendation Greater Awareness to be created in the primary market Mandatory Rating for SDLs Broaden the Investor Base Develop Strong Securities Market Primary Dealers should give 2 way quotes on SDLs so as to increase

transparency Secondary Market Trading Tax benefit for small investors (Compared to NSC, PPF, etc.) Better exit options to increases liquidity- For the last three rounds of market

borrowings, West Bengal had offered put option (giving investors the right, not the obligation, for premature redemption) on all their SDL issues.

References http://wealth.moneycontrol.com http://www.sbidfhi.com www.thehindubusinessline.com www.ccilindia.com www.bseindia.com www.nseindia.com www.google.com www.rbi.org.in www.crisil.com