MUMBAI, Nov 4: Faced with a sluggish credit offtake, public sector banks have started indulging in fierce undercutting to boost their investment portfolios. The State Bank of India (SBI) kicked off the war, by grabbing the Rs 200-crore non-convertible debenture issue of the AV Birla flagship, Grasim Industries.

It is a rare "direct deal", with the State Bank underwriting the entire NCD issue. The paper, carrying an average lifespan of six years, will be placed at 12.25 per cent, setting a new benchmark for corporate debt after the announcement of busy-season credit and monetary policy.

The Grasim placement, at 12.25 per cent for a six-year paper, has stirred a hornet's nest in merchant-banking circles, as industry sources feel that the rate is too fine for lenders in the private placement market.

"If the State Bank had not given its special commitment to pick up the entire Rs 200 crore, the company would have found it difficult to raise money at such fine rates," a merchant-banking source said.

Merchant bankers feel that there would have been stiff resistance from the market had the State Bank not given its commitment to fully underwrite the deal. "It is outright price-cutting. A foreign investment bank had wanted to cut the rates even further, but it could not arrange underwriters for the issue. Then State Bank walked in, and decided to underwrite the entire amount," a merchant banker associated with the issue said. "It may not be a healthy practice, but we could not help it. One needs to be aggressive on the investment front when the conventional credit offtake is sluggish," a State Bank source said.

This is one of the rare instances of the country's largest commercial bank underwriting the entire NCD issue of a corporate. As a prudential norm, the State Bank usually picks up one-third of the NCD issue floated by corporates.

The triple-A-rated company from the Birla stable is placing a seven-year Rs 200-crore issue, carrying call and put option after five and six years.The Grasim mandate is likely to handled by Birla Global Finance and SBI Capital Markets, merchant-banking sources said. DSP Merrill Lynch and Kotak Mahindra may also be included among lead managers, a merchant banker said.

The Rs 200-crore issue is being raised through the book-building route. The rate has been fixed at 12-12.25 per cent. If the company finds it difficult to raise funds at this rate, State Bank will pick up the entire amount at 12.25 per cent. A clutch of blue-chip corporates, led by the engineering giant Larsen & Toubro, cement major ACC and another AV Birla company Indo Gulf, are waiting in the wings to raise cheap money through NCDs. While L&T is planning to raise Rs 150 crore, ACC will raise Rs 100 crore. The two companies are seeking to raise five- to seven-year funds. "After the announcement of bank rate cut, domestic debt has become a cheaper alternative than overseas borrowing," a merchant banker said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.