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Uday Bonds

 
 
 
Insurance companies want to invest in the Ujwal Discom Assurance Yojana (Uday) bonds that have been floated to rescue debt-laden state power distribution companies.The insurers say these longer-term instruments offer better returns than government securities and corporate bonds.

The Uday bonds have an implicit guarantee from the issuing state and the interest and principal are part of the state government's budget.

With low credit risk, attractive spreads and guarantee from the state government, investment in Uday bonds is a good investment option. They are similar to state loans but don't have statutory liquidity ratio (SLR) status. They are available at a spread of 63-67 basis points over government securities and are actively traded. AAA-rated bonds issued by state-run companies trade at a spread of 40-50 basis points over government securities. SLR refers to government securities that banks need to set aside as a proportion of deposits. A basis point is 0.01 percentage point.

The Uday scheme was launched in November last year to revive debtstressed distribution companies. The bonds were issued mostly to banks directly and very few investors got an opportunity to buy them.

We are biased towards non-SLR, SDL and we would like to take extra exposure that otherwise would have invested in AAA-rated corporate bonds. We are interested in longer-tenor bonds issued by these companies.

SDL or state-development loans are market borrowings that qualify for SLR status.

Insurance companies are required to invest 25% in central government securities, 25% in state government securities, 15% in infrastructure and the remaining 35% in corporate bonds, equities and other securities from the premiums collected through traditional plans. Total fixed-income assets, at book value, held by the life insurance industry stood at `18.8 lakh crore at the end of March 31, according to the Life Insurance Council.

Uday bonds worth about `1 lakh crore were issued in the last financial year. Bonds worth another `1.5-1.75 lakh crore are expected to be issued in the current financial year.

Power minister Piyush Goyal had said that the distribution companies have accumulated debt of `4.37 lakh crore.

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