Why comparing KIIFB with NTPC and NHAI over masala bonds is an unfair argument

NTPC and NHAI are revenue-generating bodies whose authority is the Indian government, which can legally borrow money from foreign markets, whereas the burden of KIIFB is on the people of Kerala
Why comparing KIIFB with NTPC and NHAI over masala bonds is an unfair argument

In a recent statement, Union Minister V Muraleedharan said that Kerala Infrastructure Investment Board raised money through Masala Bonds by violating rules. Kerala Finance Minister Thomas Isaac questioned as to which rules were broken. “KIIFB followed all the current rules in the country to raise money through Masala Bonds. How did NTPC collect Rs 2,000 crore through masala bond? He may not be aware that the National Highway Authority of India went to the London Stock Exchange to collect Rs 5,000 crore through Masala Bond. If there was such stupidity, it would not have been called out in public,” Isaac said.

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Isaac pointed out that KIIFB followed all rules that NTPC and NHAI followed to raise money through Masala Bonds since KIIFB is also a legally formed body corporate. “If the following people can use the masala bond to complete the developmental activities, then KIIFB can also use it,” he added. However, this comparison is not straightforward and is not fair.

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Ratings Cannot Lie

Since a comparison with NTPC and NHAI was brought on, it would also make sense to add that both the agencies fall under the ambit of the central government, which has the constitutional right to borrow money from foreign markets. Moreover, both NTPC and NHAI are revenue-generating organisations, with a CRISIL rating of AAA. Interestingly, their masala bonds are at a coupon rating of 7.30%. On the other hand, KIIFB’s coupon rating is 9.72%, and it isn’t a revenue-generating organisation. Its main source of funding is state funding supported by a percentage of motor vehicle tax and petrol cess, which is an additional burden on the state government.

KIIFB is a proxy financing platform for large-scale and capital-intensive state projects, with a total planned project outlay of INR 500 billion by 2024. KIIFB’s creditworthiness is directly linked to that of the state given the legal guarantee provided by the state government. A default by KIIFB would lead to direct repercussions for the state's credibility
Fitch Ratings

On the other hand, adding to the burden, if KIIFB fails to pay back the bonds, then the burden shall fall on the state government to do so, adding to the burden of the individual taxpayer of Kerala. American credit rating agency Fitch — it is one among the big three rating agency in the world — gave KIIFB ‘BB’ rating and in a report said, “KIIFB is a proxy financing platform for large-scale and capital-intensive state projects, with a total planned project outlay of INR 500 billion by 2024. KIIFB’s creditworthiness is directly linked to that of the state given the legal guarantee provided by the state government. A default by KIIFB would lead to direct repercussions for the state's credibility.” This is a reference to the fact that if KIIFB, an agency that does not generate revenue, fails, then the burden will fall on the state.

The report adds, “The state government is statutorily mandated to guarantee the payment of principal and interest of any funds that KIIFB proposes to raise. Besides, the state government has created a dedicated ring-fenced fund to help KIIFB’s debt servicing, which draws on the entire petroleum cess and a progressive step-up share of up to 50% of the motor-vehicle tax collected by the state.” This is another reference to how KIIFB is funded.

Meanwhile, credit rating agency CRISIL gave KIIFB A+ stating, “The outlook revision reflects the strain on the financial risk profile of the Government of Kerala in fiscal 2021 on account of the Covid pandemic and the resultant decline in economic activity nationwide.” Adding to the weakness in the plan, the agency reports, “The state has had consistent revenue deficit for the past few fiscals (Rs 15,500-17,500 crore). Primarily because of a modest share in central taxes, low own-tax and non-tax revenue and large committed expenditure base (61% of revenue expenditure) under salaries, pensions and interest.”

The CRISIL report of September 2020 adds that there is the likelihood of a strain on state finances in the near to medium term on account of the pandemic, which may result in widening of revenue deficit and indebtedness in fiscal 2022 if cash flow recovery gets delayed.

According to various judicial interpretations, both statutory and non-statutory bodies can be considered as a ‘State’ provided they get financial resources from the government and “have deep pervasive control of the government and with functional characters”

The Doctrine of Colourable Legislation

Here is an additional argument for why KIIFB cannot be pursued as a body corporate but as a state. In its basic terms, the doctrine means that what can’t be done directly can’t be done indirectly as well. In practical terms, if the state can’t borrow money from foreign markets, then it can’t do so through a body in between. In this case, that body is KIIFB. While Isaac claims that KIIFB is a body corporate registered under the Companies Act and the KIIF Act of 1999, it is not so simple. While states cannot borrow money from foreign markets, agencies like KIIFB reportedly can since it is a body corporate. However, some argue that KIIFB, like LIC and ONGC, falls under the ambit of the definition of State, and thus cannot borrow money from foreign governments.

According to various judicial interpretations, both statutory and non-statutory bodies can be considered as a ‘State’ provided they get financial resources from the government and “have deep pervasive control of the government and with functional characters.” ONGC, Delhi Transport Corporation, IDBI, and Electricity Boards are referred to as a ‘State’. In this case, KIIFB is funded by the state of Kerala and the chairman of the board is Pinarayi Vijayan, the vice chairman is Thomas Isaac, and the parent organisation is the Finance Department, thus marking a deep and pervasive government control. Moreover, KIIFB also participates in large-scale infrastructural activities traditionally handled by state governments. Yet, the Kerala government and its finance minister are claiming that KIIFB is a body corporate and thus borrow money.

Maybe Isaac is right. Maybe KIIFB didn’t break any rules in the process — apart from the long list of loopholes it used instead. However, to compare KIIFB whose burden the state has to carry with revenue-generating bodies such as NTPC and NHAI are not fair in any sense of the argument.

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