Fourteen states will issue the 8.5 per cent tax-free power bonds soon to meet their respective electricity boards' (SEB) dues.

Total SEB dues amounting to Rs 45,000 crore (Rs 450 billion) will be paid through tranches.

The first tranche of bonds will be issued by Assam, Andhra Pradesh, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Uttar Pradesh, Uttaranchal, Meghalaya, Nagaland, Punjab, Rajasthan and Tamil Nadu.

The decision was taken at the recently held state finance secretaries meet with the Reserve Bank of India and notification is underway, said market sources.

These bonds will be issued as per the tripartite agreement signed between the central government and the RBI with states for a one time settlement of state electricity boards' dues to central utilities as proposed by the Montek Singh Ahluwalia committee.

The agreement signed by 24 states provides for securitisation of old arrears of SEBs amounting to Rs 37,400 crore (Rs 374 billion), including a waiver of 60 per cent of the interest/surcharge of Rs 8,300 crore (Rs 83 billion).

As per the agreement, the RBI has agreed to the entire principal and 40 per cent of surcharge being securitised in the form of bonds on behalf of respective state governments with a moratorium of five years for redemption of these bonds.

The tax-free SLR bonds will carry an interest rate of 8.5 per cent per annum, a repayment period of 15 years with a moratorium of five years and incentives amounting to Rs 6,100 crore (Rs 61 billion) over a period of 4 years to the states participating in the scheme.

The agreement also provides for full payment of current bills through letters of credit and commitment of the states to undertake reforms based on performance milestone.

While the National Thermal Power Corporation will be the biggest beneficiary from the scheme as it is expected to realize about Rs 19,000 crore (Rs 190 billion) net of surcharge waiver, others include PowerGrid, National Hydroelectric Power Corporation, Coal India Ltd and Neyvelli Lignite Corporation.