Finance Minister Jaswant Singh is likely to formally launch the issue of bonds to restore the financial viability of the state electricity boards in the Budget.

Though the last Budget had laid out the roadmap for the one-time settlement scheme regarding overdues of the state power boards to the central public sector undertakings, the actual issue of bonds had not commenced so far.

According to the central government estimates, states are likely to take a Rs 2,700 crore (Rs 27 billion) hit annually for the scheme for servicing the bonds.

The modified tri-partite agreement, reached between the state government, the Reserve Bank of India (RBI) and the Centre for the settlement of SEB dues till 30 September 2001, includes outstandings payable by SEBs to the National Thermal Power Corporation, the National Hydroelectric Power Corporation, Power Grid Corporation, utilities under the power ministry and the coal ministry and the railway ministry.

All amounts payable will be converted into long-term loans to be repaid by the state governments over 15 years in 20 equal 6-monthly installments starting on October 1, 2006. The state government will issue bonds to the respective central public sector undertakings who will be free to trade them in the market in a phased manner.

For example, 10 per cent of the bonds will be eligible for trading in the secondary market every year on a cumulative basis, thus releasing the bonds for trading in 10 years.

The process of issue of bonds by states in favour of the central public sector undertakings is expected to start by March. The bonds will carry a tax-free interest rate of 8.5 per cent per annum.

Despite over Rs 42,000 crore (Rs 420 billion) outstandings, the central public sector undertakings are expected to get bonds worth just Rs 17,000 crore (Rs 170 billion) from states because of the numerous exemptions and discounts being given to states as part of the scheme.

Of the total dues till September 2001, Rs 26,000 crore (Rs 260 billion) is the principal amount and the remaining Rs 16,000 crore (Rs 160 billion) the interest component. With the partial write-off of 60 per cent of the interest amount, as specified by the Montek Singh Ahluwalia Committee, which formulated the scheme, the central public sector undertakings stand to loose Rs 9,600 crore (Rs 96 billion) from the interest amount.

A string of other exemptions has been introduced in the scheme, including a bi-annual incentive for states' compliance with provisions of the scheme, are expected to reduce the sum.

As an incentive for compliance with the scheme, states' which do not commit any default have been allowed a bi-annual incentive equal to 3 per cent of the nominal value of bonds issued to the respective central public sector undertakings, which is to be paid in cash by them to the eligible SEBs on September 30 and March 31 in respect of the preceding six months.

Similar bi-annual incentive payable for 2003-04 is 2.5 per cent while or 2004-05 and 2005-06 it amounts to 2 per cent, as per the scheme.