Masala bond: Oppn still carries misgivings

Subsuming petrol, diesel into GST could affect KIIFB revenue

THIRUVANANTHAPURAM: The masala bond issue once again took the centre stage at the Assembly on Tuesday expending about three hours of its precious time debating issues such as the ‘high rate’ KIIFB had to commit as coupon, the question whether bonds were sold through public issue or private placement and more importantly, the involvement of CDPQ as the major investor in the bond by the virtue of its close to 20 per cent stake in the infamous SNC-Lavalin.

The day KIIFB’s medium term note (MTN) programme received BB rating from the international agencies such as S&P and Fitch in September last, the market experts had made it very clear that KIIFB would find it difficult to sell its bonds through to reputed institutions at ‘good rates’, thanks to the below-investment grade rating the bond programme has been conferred with.

The heated exchanges between the leaders from Opposition, led by Ramesh Chennithala, the opposition leader, and the finance minister in the House went in circles each one trying to defy other’s arguments irrespective of whether they made sense or not.

The heart of the issue lies in the fact that the KIIFB’s pre-issue exercises involving investor road shows in Dubai, Singapore and London had failed to evince serious interest from investors there, resulting in the bond issue being bailed out by CDPQ, which is the largest shareholder in SNC-Lavalin with 19.9 per cent holding.

In the meantime, Dr KM Abraham, the chief executive officer of KIIFB and the brain behind the KIIFB architecture informed that the masala bond was sold through a public issue and not private placement as being bandied about by the Opposition, and the issue was subscribed through London Stock Exchange (LSE) floor where it was listed in September, 2018.

He also stated that 15 investors participated in the bond sales, the big chunk being subscribed by CDPQ.

Defending the high price KIIFB had to pay for the bonds as coupon, Dr Isaac said with a rating of BB, KIIFB could not have attracted investment to the bonds at a lower rate.

“We had tried twice to raise funds through debentures, but due to the higher price at about 10.25 per cent demanded by the investors then, we had to drop that idea,” he explained.

Moreover, he said the option to raise treasury deposits at relatively low rates as suggested by some others was not workable as the funds thus raised would automatically affect the public borrowing limit of three per cent the state is entitled to.

Dismissing the Opposition claim that the KIIFB’s ‘flagrant’ borrowing programmes are bound to push the state into an irrevocable debt trap, Dr Isaac who has always been a vocal advocate of borrowing for developmental activities, said the contribution from motor vehicle tax (MVT) and the petrol cess apportioned by the Government to KIIFB will alone will take care of the repayment of KIIFB debt in the worst case scenario.

But a probable move by the Centre to bring petrol and diesel under the fold of GST could ‘topple this applecart’, according to the KIIFB document on masala bond filed with LSE.

The document noted that the process and mechanism adopted for inclusion of petroleum products under the Goods and Services Tax (GST) may adversely impact the cash inflows of the Issuer (KIIFB).

In the event of the taxation of petroleum products such as petrol and diesel being subsumed into the GST in the future, there may be an impact on the cash inflows of the Issuer.

“There may be a material impact on the Issuer’s financial condition owing to any reduction of Cess collection, including its ability to carry out its obligations under the Notes (masala bonds), unless, the State Government makes appropriate alternative budgetary allocations to meet the operational and administrative expenses of the issuer as mandated by the KIIF Act,” the document has explained.

As of  June 39, 2018, KIIFB had received a sum of Rs,1,772 crore from the State Government, which comprised Rs869 crore on account of cess, Rs903 crore on account of Motor Vehicles Tax (MVT) and Rs2,498.42 crore as a grant from the State Government.



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