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Tenure of recap bonds extended

New Delhi, Aug. 31: The Cabinet Committee on Economic Affairs (CCEA) today approved the proposal to convert the 12-year bank re-capitalisation bonds carrying a 12 per cent fixed coupon into bonds in perpetuity with a coupon linked to the yield on the 364-day treasury bill.

The bonds will carry a revised coupon of 100 basis points above the 364-day treasury bill yields, which is currently ruling at 5.87 per cent.

The government had issued these cash-neutral bonds to boost the tier I capital base of nationalised banks including Bank of India, Indian Bank and Punjab National Bank.

The 12-year bank re-capitalisation bonds, now extended to perpetuity, will imply that the re-capitalisation funds, which are treated as tier-II capital, can now be treated as permanent tier-I equity. Banks will henceforth be free to raise additional tier-II capital.

The bonds were issued in the second phase of re-capitalisation stretching from fiscal 1993-1995, a time when the government was upbeat on financial sector reform. The government had issued re-capitalisation bonds worth Rs 5,700 crore to 19 nationalised banks in 1993-94. The following year, five banks were left out as the Centre believed that there was no need to infuse fresh capital.

IFCI package

The government will finalise a bailout package for the ailing Industrial Finance Corporation of India next week.

“We have decided to deal with UTI, IFCI and IDBI one by one and IFCI’s case would be taken up by the CCEA next week,” finance minister Jaswant Singh told newspersons here today after announcing the CCEA decision on UTI.

The FI has been facing serious asset-liability mismatch with credit rating agencies branding the financial institution as below investment grade.

It has huge non-performing assets at 21 per cent, which worked out to around Rs 4,000 crore.

Because of the poor health of its finances, IFCI recently defaulted in external payment of $ 100 million besides interest payment of Rs 300 crore to the trustees of Employees Provident Fund, which has parked some of its investments in the financial institution.

Water purification

The CCEA today said the government will waive customs and central excise duty on all machinery needed to establish plants for desalinisation, demineralisation and purification of water.

“This is being done to encourage private initiative to take up water supply, desalinisation and demineralisation activities,” Jaswant Singh said.

“Further, exemption from central excise duty for pipes needed for delivery from the source of supply of raw water to the plant and from the plant to storage facility will be provided,” he added.

At present, a provision under section 80-IA of the Income Tax Act (direct taxes), 1961, allows deduction of 100 per cent of profits of companies engaged in the business of providing any infrastructure facility. This also includes a ‘water supply project’ and ‘water treatment system’.

Moreover, any plant, machinery, equipment, buildings established for the above-mentioned purpose will be entitled to a depreciation rate of 100 per cent per annum.

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