States cannot float SPVs to raise funds

NEW DELHI: The Centre has issued firm and specific guidelines to state governments seeking to bar borrowings by special purpose vehicles floated by them without the approval of the finance ministry. The latest guideline is directed at foiling attempts by state governments to raise funds through their SPVs either from the market or in the form of negotiated borrowings. SPVs or corporations promoted by states raise funds on the back of a guarantee or letters of comfort from their respective state governments. These funds then flow into the state exchequers to finance current expenditure. Over a period of time, the stock of contingent liabilities has increased, and going by an RBI study, the outstanding guarantees of state governments aggregated Rs 1,66,712 crore at the end of March '01. As a percentage of GDP, it was over 8% at the end of the same year. The nominal stock of state-level guarantees clocked an average growth of 12.2% between end-March 1992 and end-March '00, the study said. Article 293 empowers the Centre to impose a ceiling on borrowings by states. Guarantees are contingent liabilities, if not outright borrowings and amenable to central government restrictions. Clause (3) of Article 293 says A State may not, without the consent of the Government of India, raise any loan if there is still outstanding, any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government. Clause 4 goes on to say, A consent under clause (3) may be granted, subject to such conditions, if any, as the Government of India may think fit to impose. The Finance Ministry has used these powers to prevent what one official termed nocturnal borrowings by states through SPVs and other corporations promoted by them. Henceforth, even negotiated borrowings by these entities from institutions like Hudco, for instance, would need the approval of the Central Government, officials said. The RBI has, over the last couple of years, sounded enough warning bells about the implications on the sovereign of any default by states against the guarantees or letters of comfort issued by them. It would impact the credibility of the state in the market, given their borrowing requirements, besides casting doubts on the integrity of their fiscal accounts, it had warned. Several states have since placed legislative ceilings on the issue of guarantees. Some states have issued administrative ceilings on guarantees. According to RBI norms, investments by banks in state government-guaranteed securities outside the market borrowing programme attract a risk weight of 20%.

States cannot float SPVs to raise funds

The Centre has issued firm and specific guidelines to state governments seeking to bar borrowings by special purpose vehicles floated by them without the approval of the finance ministry.

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