Masala bonds: Chennithala targets Pinarayi, alleges private deal to help SNC-Lavalin

Masala bonds: Chennithala targets Pinarayi, alleges private deal to help SNC-Lavalin
Chief Minister Pinarayi Vijayan, Opposition leader Ramesh Chennithala
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Opposition leader Ramesh Chennithala on Wednesday alleged that the issue of masala bonds was a conspiracy hatched by Chief Minister Pinarayi Vijayan to help the controversial Canada-based SNC-Lavalin company with which, Chennithala said, Vijayan had entered into an “unholy alliance” in 1996 when he was power minister.

Chennithala's principal charge is that the bond issue was not 'public' as claimed by finance minister T M Thomas Isaac. “This was placed as a private issue in the first place,” Chennithala said. The secondary charge is that contrary to what the government said, CDPQ, the main investor in masala bonds, has strong links with SNC-Lavalin.

Quebec's private affair

“For Canada's Quebec province (where the CDPQ is based) alone, this was placed as a private issue,” Chennithala said. He said there was something fishy in placing the bonds as a private issue solely for Quebec.

“The finance minister himself had said that under a private issue the interest and other factors are arrived at on the basis of hard bargaining. Given the exorbitant interest rate of 9.723 per cent, it is clear that CDPQ had driven a hard bargain,” Chennithala said. Kerala Infrastructure Investment Fund Board (KIIFB) has raised ₹2,150 crore through masala bonds.

Chennithala said the interest rate of 9.723 per cent was dacoity. “By the end of the five-year maturity period, the government would have to pay Rs 1045 crore as interest alone, which is nearly half the principal amount,” he said. Chennithala said the government should have looked out for alternatives. “The loan taken to finance Kochi Metro had an interest rate of just about 3 per cent,” Chennithala said.

The opposition leader wanted to know why the government insisted that it was a public issue after making a private placement in Quebec province. “What was the real deal behind this secret arrangement,” he asked.

Thomas Isaac had earlier made fun of Chennithala saying he did not know the difference between private and public issues. To counter this, Chennithala also distributed the 'Note Offering Circular' that was issued exclusively for recipients in Canada. The note states 'private placement in Quebec', and is dated March 2019. He also wanted the finance minister to speak out. “Thomas Isaac should clarify whether the masala bond deal with CDPQ was through a 'private issue',” he said.

SNC-Lavalin's alter ego

Chennithala said that the finance minister has admitted to only CDPQ's “minor” link with SNC-Lavalin. “Fact is, both have a very strong link,” he said. Though CDPQ began as a pension fund investor, today its activities are spread over a variety of areas like real estate, infrastructure and private equity. It is CDPQ Infra that carries out major infrastructure projects like automated railway transit across the world.

CDPQ Infra, on its part, has formed a consortium for the implementation of its various projects. “SNC-Lavalin is the leader of this consortium,” Chennithala said. “In other words, the works that CDPQ takes up are executed by SNC-Lavalin,” he added.

Chennithala said that the LDF government had gone ahead with a deal with SNC-Lavalin when a former alliance struck with the company was still in the court. “The company is absconding in an old corruption case. It is morally and politically wrong to enter into a deal with such a company,” the opposition leader said.

SNC-Lavalin's Kerala connection

The deal refers to a contract that the KSEB had entered into with SNC-Lavalin company for the renovation of Pallivasal, Sengulam and Panniar power stations.

The Kerala High Court, in its August 23, 2017 verdict, had absolved Pinarayi Vijayan of any wrongdoing in the SNC-Lavalin deal. The court did not give a clean chit to the deal but stated that it was made behind the back of the then power minister.

However, the CAG report tabled in the Assembly on March 31, 2005, said that it was after discussions with a delegation headed by the power minister in October 1996 that a contract for technical services signed seven months before was converted into a contract for the supply of goods and services for the renovation of Pallivasal, Sengulam and Panniar power stations. What was originally a contract for Rs 17.89 crore in February 1996 swelled to Rs 169 crore by October of the same year, barely four months after Pinarayi assumed charge as power minister.

KIIFB says it's reasonable

Though Chennithala has described the interest as cut-throat, top KIIFB officials said it was reasonable.

They say to understand the reasonableness of the rates it is necessary to evaluate the interest rates in which such issues have been made in both the international market and the domestic market in India.

As regards the international market, so far only institutions which are rated at AAA by rating agencies have entered the masala bond Market. This is the first time that an entity like KIIFB with a rating of BB had attempted a bond of this nature.

In the masala bond market, investors evaluate three kinds of risks. One, liquidity risk (the ease at which the bonds can be sold in the market). Two, currency risk (the risk arising from fluctuations in the foreign exchange rate). Three, credit risk. All these risks are analysed before an investor makes the investment.

Even for a AAA rated agency, it is said that the investors in the masala bond market bid for rates which range from 1.25-1.75 per cent over the securities issued by Government of India. “Considering these risks in the market, KIIFB with a BB rating has been able to obtain the best possible rate in the masala market when viewed against rates obtained by other institutions with a much superior AAA rating,” a top official said.

KIIFB officials said bonds issuances in Indian domestic market tell a similar story. “In comparison to KIIFB’s masala bond rate of 9.723 per cent, the rates obtained by bond issuers rated similar to KIIFB in the domestic market for the last one year are significantly higher. The lowest rate at which an A+ rated entity has been able to raise fund in domestic market has been 9.87 per cent,” the official said.

This is not all. A government entity like the Andhra Pradesh Capital Region Development Authority (APCRDA), which is a state entity like KIIFB, has raised funds in the domestic market at 10.32 per cent (payable quarterly). Rates at which other institutions had raised funds during the same period are much higher; Central Bank (10.8 per cent), IOB (11.7 per cent ) and South Indian bank (11.75 per cent ).

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