Investors in this govt-guaranteed bond have been left high and dry

That’s not all. While you are waiting for your funds, you learn that some other investors in the same bond got their money back in full and on time.

This is what happened to 68-year-old Rakesh Seksaria, who invested ₹10 lakh in Andhra Pradesh Power Finance Corporation Ltd (APPFCL) bonds. The 9.4% bond was set to mature in June 2024, but six months have passed and he hasn’t received anything. He said his family had invested ₹70 lakh in the bond issue as it was guaranteed by the state government.

Delhi-based chartered accountant Manoj Agarwal, whose 65-year-old father invested ₹20 lakh in the bond, is in the same boat. So is RK Tandon, 71, who invested ₹10 lakh.

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“Despite trying repeatedly, I’ve not been able to meet the government officials,” said Agarwal. “Interest payments used to be delayed by a month or two but now when the bonds have matured, they have not said anything for the past six months.”

Cracks started appearing in the state government-backed bonds after Telangana carved out of Andhra Pradesh. Now, the two states are fighting over how to bifurcate the bond commitments. Of the seven bonds issued by the erstwhile Andhra Pradesh, the June 2024 one was the last to mature.

Emails sent to APPFCL, the Telangana government, and SBICAP Trustee Company Ltd, the bond’s trustee, remained unanswered.

The backstory

When Telangana became a state in June 2014, an exercise was conducted to carve out the ownership of APPFCL between Telangana and Andhra Pradesh. That was when signs of trouble in the state-guaranteed bonds first started to appear.

The issue was which state would service the ₹5,894 crore of bonds issued by the erstwhile APPFCL. An expert committee decided that Telangana would be allocated 59.54% ( ₹3,509 crore) of the bonds while Andhra Pradesh would service the remaining 40.46% ( ₹2,385 crore).

But the 2014 annual report of APPFCL mentioned that Telangana disputed this division ratio. For context, all bonds are held under APPFCL but TPFCL must pay interest on its portion. In 2017-18, as part of the dispute resolution, APPFCL took over bond liability of ₹41.90 crore from Telegnaga Power Finance Corporation Ltd (TPFCL).

With the states at loggerheads, TSPFC is said to be delaying interest and principal repayments, resulting in defaults on the APPFCL bonds. On 15 September, rating agency CRISIL downgraded APPFCL bonds from A to D, the lowest grade, when it started delaying interest payments “due to some disputes between APPFC and Telangana State Power Finance Corporation, relating to the distribution of assets and liabilities”.

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The agency said, “While APPFCL has made timely payments to investors, there have been delays in payments from TSPFC.” In August 2024, the agency reaffirmed its D rating. “Furthermore, the T-structure (T-10) of crediting the bond servicing account before the due date has not been followed,” it said.

Mohan Rao, chief financial officer of APPFCL, said Andhra Pradesh has cleared its dues of ₹2,835 crore but is yet to receive the ₹1,927 crore owed by TPFCL. He added, “Last month both the chief secretaries (of AP & Telangana) met to discuss the clearance of the amount. They will probably meet again next month to resolve the issue… When Telegana sends dues to APPCL, APPCL will clear the remaining dues.”

M Janki, managing director of APPFCL, said, “After the bifurcation, whatever bonds have been bifurcated to Andhra Pradesh have been fully paid.”

Investors hung out to dry

Praduman Tandon, a chartered accountant in Mumbai who had recommended the bonds to a few of his clients, said he was shocked when he found that some of them had not received their payments while others had. “On what basis were the bonds bifurcated?” he asked.

“They’ve (APPFCL) already made and honored payments to many provident funds and government authorities who were the investors in the same June 2024 maturity bond and I don’t know on what basis they have left us out,” said Tandon, founder of Krishnarpan Investments Pvt Ltd and advisor to Manoj Agarwal. He added, “Andhra Pradesh state road transport has been paid in full, Punjab warehousing has been paid, and Kodaikanal International school has been paid on time and in full.” Mint could not verify these claims.

A source at SBICAP Trustee Company said it only got to know about the bifurcation of the bonds when the defaults began, adding that it could not take this up with Telangana because the state was not part of the agreement when bonds were first issued.

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Rating agency ICRA said, “Despite the delays, the trustee to the bondholders has not invoked the guarantee extended by the erstwhile government of Andhra Pradesh towards the rated debt as per the terms of the structured payment mechanism.” The source cited above said that SBICAP Trustee Company has since revoked the guarantee and that the matter is now in court.

“Our demand is only with Andhra Pradesh because they did not take consent from the trustee or debenture holder and our agreement is with them,” his person added. “We are following up, filing a case, posting legal notices, etc. Andhra Pradesh assures us that they will take the funds from Telangana and pay the bondholder, but we don’t know when this will happen”

The biggest losers

Many provident fund trusts bought the bonds owing to the “irrevocable and unconditional” guarantee from the government of Andhra Pradesh Government when it issued them between 2010 and 2012.

In India, some companies create their own PF trusts and manage employees’ contributions under guidelines specified by the labour ministry instead of putting their employees’ money in the Employees’ Provident Fund Organisation (EPFO).

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A senior official in one such PF trust, who did not wish to be named, said this is technical default and not an actual default, meaning interest and principal are delayed but will be paid. Considering the bonds were bought when Telangana did not exist, the method used to bifurcate bonds between the two states remains a mystery, he added.

Adarsh Vir Singh, founder of Nidhi Niyojan Inc, echoed this view. “Ultimately it’s the employees who are losing out.” He said a majority of the investments in such bonds were from PF trusts, including EPFO.

Lesson for investors

Bonds issued by state-owned enterprises may or may not have an explicit state government guarantee. Either way, they are not completely risk-free. Anshul Gupta, co-founder of Wint Wealth, said, “People assume that it’s issued by the state government and so there cannot be a default. Both these assumptions are incorrect. These are not issued by the state government, they are issued by state-owned enterprises. The risk is not directly on the state government but on an entity owned by it.”

He added that even in cases where there is an explicit state government guarantee, defaults can occur when there is a dispute, or when the state government is in poor fiscal health. “Not all states do well from a fiscal standpoint, so even if there’s no dispute the state government can end up defaulting.”

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On the other hand, state development loans – bonds issued by state governments to fund their fiscal deficit – are considered risk-free. In 2019, Shaktikanta Das, former governor of the RBI, said that in case the fiscal situation of the state were to deteriorate, the RBI would step in and make the payments on these bonds. Gupta said, “It’s important for investors to know the difference between bonds issued by state-owned enterprises and state development loans… This is not the first time a state-backed issue has defaulted.”

With inputs from Devika Ganu.