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FCI draws large banks to raise Rs 8,000 cr via bonds

FCI has been raising funds through bonds to purchase wheat and rice from farmers at minimum support price (MSP).

, ET Bureau|
Updated: Dec 10, 2019, 09.09 PM IST
Mumbai: Food Corporation of India has raised Rs 8,000 crore in one of the largest bond sales in India this year, to fund the state-run agency’s plan to increase storage capacity for food grains.

The government-backed bonds offered 7.64% with a 10-year tenure. The sale received 247 bids, worth about two-and-a-half times the issue size.

State Bank of India, ICICI Bank, Axis Bank, Yes Bank and HDFC Bank are said to have subscribed to the paper perceived as “zero risk”, amid growing signs of risk aversion, market sources said. The banks could not be contacted immediately for comment. Besides, some insurers and bond houses also subscribed to the instruments, they said.

“The pricing was tighter as these are government-guaranteed bonds offering higher safety,” said a senior executive from a large bond house, involved in the sale.

Investors in these bonds will get their coupon repayments from the central government if FCI defaults. This is an inherent feature of any government-guaranteed debt paper.

The differential between such bonds and state government bonds is about 20-25 basis points, which could be higher in the absence of the sovereign support, dealers said.

FCI, which purchases food grains on the government’s behalf, is not a frequent issuer of bonds in the market like REC or Power Finance Corp. The National Bank for Agriculture and Rural Development (Nabard) had raised 15-year bonds Monday, offering 7.75%.

On November 5 this year, ET reported that FCI was set to raise up to Rs 13,200 crore from government-guaranteed bonds. This means it has room to sell more bonds.

FCI needs capital to maintain food stocks worth Rs 60,000 crore to 1.03 lakh crore, said a person in the know. While it has already tied up with lenders for short-term working capital, the proposed government-backed bonds will provide it with long-term funds.

The Cabinet Committee on Economic Affairs had approved a proposal to increase the authorised capital of FCI from existing Rs 3,500 crore to Rs 10,000 crore, ET reported on November 27.

With the increase of authorised capital, additional equity capital can be infused in FCI through the union budget, to fund the food grains stock perpetually held by FCI. This should reduce the borrowings of FCI, save interest cost of the agency and reduce food subsidy in consequence.

FCI had earlier sold bonds in March.

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