Date:15/07/2005 URL: http://www.thehindu.com/2005/07/15/stories/2005071507570400.htm

Karnataka - Gulbarga

Failure to use call option costs KBJNL Rs. 41 crores

T.V. Sivanandan

Company did not use chance to redeem bonds prematurely: CAG

KBJNL raised funds for the Upper Krishna Project by issuing bonds
Company raised Rs. 588.31 crores under the fourth and fifth series of bonds
KBJNL had the opportunity to use the call option in January 2002 and July 2002

The company paid a higher rate of interest until the redemption of the bonds

GULBARGA: The failure of Krishna Bhagya Jala Nigam Ltd. (KBJNL) to exercise the call option on bonds issued by it deprived the company of the opportunity to save Rs. 41.07 crores in interest payments for the fourth and fifth series of bonds.

The Comptroller and Auditor-General of India (CAG) in its latest report submitted to the State Government has pointed out that KBJNL had failed to use the option to redeem the bonds prematurely on the dates prescribed in the offer document, thereby losing the chance to save Rs. 41.07 crores in interest payments.

The report says that KBJNL had raised funds for the completion of the Upper Krishna Project by issuing regular return bonds and deep discount bonds. While regular-return bondholders are paid periodic interest (half yearly), the bond amount is paid on maturity. Deep-discount bondholders are paid the cumulative amount on maturity.

The report points out that the terms and conditions for the issue of bonds, among other things, contains a "call/put option," which provides an opportunity to the company and the bondholders to redeem the bonds prematurely on dates prescribed in the offer document.

The CAG report says that the company raised Rs. 588.31 crores under the fourth and fifth series of bonds. While Rs. 184.33 crores was raised in January 1997 at a coupon rate of 17.5 per cent, Rs. 403.98 crores was raised at a coupon rate of 15.75 per cent in July 2002. KBJNL had the opportunity to use the call option in January 2002 and July 2002.

During the audit and cross-verification of records by the GAG, it was found that though the interest rate had fallen and KBJNL had issued bonds at 11.75 per cent interest in January 2002, it failed to exercise the call option for early redemption of the fourth series of bonds for which KBJNL had to pay a considerably higher interest rate.

The CAG has rejected the reason given by the Government for not utilising the call option as unacceptable.

Govt. response

The Government, in its response to the CAG observation, stated in July 2004 that the KBJNL Board had discussed the precarious financial position of the company in a meeting held in November 2001, and it was decided not to exercise the call option.

The CAG has pointed out that the board meeting discussed the financial position of KBJNL on the treasury account and regular interest payments, and no discussion on the issue of exercising the call option took place.