In an interesting 'win-win' financial arrangement worked out between the cash-strapped Maharashtra Krishna Valley Irrigation Development Corporation, its contractors and some banks, the corporation has managed to close its Rs 400 crore (Rs billion) bond issue.
The flip side of the deal is that it has converted the dues it owed to its contractors into bonds. Contractors of the corporation, in the bargain, have now turned investors!
Around this time last year, the corporation had stumbled upon an innovative way of selling its bonds - it roped in its contractors to do the hawking. The contractors then fell over each other to sell bonds, simply because that was the only way they could recover their dues of Rs 2,000 crore (Rs billion) from MKVIDC.
As its latest bond issue received a subscription of only Rs 900,000 between March 1 and April 28 despite the subscription period being extended by a month, MKVIDC through its lead arranger, Mennen Financial Services persuaded the contractors' association to invest in the issue.
Only the big contractors obliged by investing Rs 395 crore (Rs 3.95 billion) and the issue closed in a record two days. The small contractors, however, stayed clear.
To close the bond issue, MKVIDC, through its lead arranger, ensured that big contractors received bridge finance from a consortium of banks. This helped the contractors subscribe to the bonds in their own and their nominees' names. "The contractor(s)
Their subscription amount was directly credited by the banks to the corporation. The MKVIDC, in turn, paid off contractors' dues to the extent of the subscription. The contractors will pay back the banks the amount owed to them (by the corporation)," a senior official of the corporation said.
After this transaction, contractors are left holding the bond papers, which they can either sell off in the secondary market at a discounted price or retain them, thus enjoying high returns ranging between 11 to 11.50 per cent per annum.
An MKVIDC official said: "Today MKVIDC is the most stressed corporation with most of its accounts with banks having turned sticky. Our endeavour is to reduce the contractors' dues, which is in excess of Rs 800 crore (Rs billion), after which we intend to sit idle."
He said the lead manager MFS, a clutch of scheduled banks, and the contractors worked out this arrangement. "On our part we have paid the contractors bills to the extent of Rs 395 crore (Rs 3.95 billion). Our attempts to get investors to subscribe to the bond issues did not pay off, hence we went in for this arrangement," the official said.
With this, the outstanding dues owed by the corporation to the contractors is expected to come down to Rs 300 crore (Rs 3 billion), taking into account that the corporation has made some additional payment to the contractors recently.