The automatic debit facility of a state government's current account with the Reserve Bank of India is being constructively used for the first time to enhance the credit worthiness of a Maharashtra government-promoted entity.

The Maharashtra Patbandhare Vittiya Company Ltd is tapping the bond market with a Rs 500 crore (Rs 5 billion) non-convertible debenture issue on the strength of the auto-debit mechanism.

The corporation promises prompt payment of dues on these state-guaranteed bonds to investors, quoting the auto mechanism as a quicker alternative to the state guarantee.

Under the automatic debit mechanism, the Maharashtra government's current account with the RBI, into which all revenue collections are pooled, will be debited on specified dates or in the case of specified events taking place.

This addresses the primary concern of banks/financial institutions regarding their investments in state-guaranteed bonds turning bad.

Despite the comfort of auto debit, MHPVC, a special purpose vehicle formed by the state government for raising resources on behalf of various irrigation corporations in Maharashtra, has got tepid response to its bond issue so far.

It has managed to garner only around Rs 30 crore (Rs 300 million) in the last one month as against the issue size of Rs 350 crore (Rs 3.50 billion) plus a greenshoe option of Rs 150 crore (Rs 1.50 billion) in the last one month.

 "With many state governments loath to honour their guarantee obligations to investors, especially banks and financial institutions, the auto debit mechanism is intended to be an additional assurance to keep the latter interested in state guaranteed bond issues," said a banker clued in to the development.

The union finance ministry had, in fact, authorised the RBI to debit the current account of the Government of Maharashtra with it and credit the designated account of MHPVC for payment of interest and repayment of principal.

The Centre has given consent to GoM under Article 293 of the Constitution of India as a special case and the payment mechanism is available to the current issue only till September 19, 2003.

MHPVC's bonds issue offers three tenor options to investors -- seven years (giving an annualised yield of 11 per cent), 10 years (11.25 per cent) and 12 years (11.50 per cent). It also has put/call options at the end of five, seven and ten years.