Telangana Congress govt continues fund hunt, sets new records in borrowings
State government is reportedly pressuring State agencies as well to raise funds through every means possible
Hyderabad: Once the most staunch critics of government borrowings, Congress had changed tack after assuming power, with its government setting new records in borrowings. Now, the State government is reportedly pressuring State agencies as well to raise funds through every means possible.
After the Telangana Industrial Infrastructure Corporation (TGIIC) raised Rs 10,000 crore through debt markets, it is the turn of the Hyderabad Metropolitan Development Authority (HMDA) to rope in a merchant banker to raise Rs.20,000 crore through debt markets, all this by paying eye-popping amounts as commission.
The TGIIC had raised Rs 10,000 crore through a merchant banker and paid a staggering Rs 100 crore as commission. The amount that the HMDA will shell out as commission if its plans fructify remains to be seen. The move to tap the debt market by these two agencies reflects the pressure being exerted on State-run organisations to raise funds through different means, officials said.
In July, the TGIIC floated a Request for Proposal (RFP) to select a merchant banker to raise funds through the debt market for capital expenditure and general purposes. The task was to identify an advisor cum merchant banker, who would handle the fund-raising assignment. As per the terms, the merchant banker had to raise Rs 5,000 crore within six months from the date of issue of the work order.
“Accordingly, one merchant banker was identified and Rs 10,000 crore has been raised already,” a senior TGIIC official said. TGIIC officials, however, are tightlipped on the purposes for which the funds were being raised, besides on what was the interest being paid.
Now, following suit, the HMDA is also roping a merchant banker to raise funds and has issued an RFP. As per the conditions, the merchant banker has to give an undertaking to mobilise a minimum of Rs 20,000 crore within 18 months (minimum of Rs 5,000 crore to be raised within four months) from the date of issue of the work order.
Initially, the contract period is for 18 months and this can be extended further. It depends on factors, including whether the merchant banker raises the Rs 20,000 crore within the specified period. The work order can be extended for a maximum of 12 months. During the extended period, the merchant banker will be responsible for raising additional funds as required by HMDA.
Considering the market scenario, financial experts feel it would be a challenge for the HMDA to raise the desired amount and at the same time, it would also have to pay considerably high interest rates as well. The commission is another concern, they point out.
In the past, the Greater Hyderabad Municipal Corporation raised Rs 1,000 crore through municipal bonds for executing different development works, especially Strategic Road Development Programme projects. However, the funds were raised with the help of SBI and at a very low interest rate of Rs. 7.05 per cent and 7.20 per cent.
Who are merchant bankers and how are funds raised?
Merchant bankers are specialised finance service providers, who extend finance advice and services to corporations, government and business entities. They serve as intermediaries between their clients and financial markets and help them raise capital. Towards these services, the clients pay commissions to merchant bankers. Funds are raised in different ways.
For instance, if a corporation intends to raise funds, it would have to pledge its assets, including land parcels etc. This apart, the government can extend guarantees on behalf of the corporation. Generally, most governments tend to avoid extending guarantees as the amount raised would be included in its Fiscal Responsibility and Budget Management (FRBM) limits.
This could hamper efforts to raise more loans through RBI. Furthermore, escrow accounts are opened and the corporation’s assured income is deposited into the account. The loan component is deducted from the same account and this provides security to the lenders or banks over the repayment of loans.
