The finance ministry plans to issue long-term bonds at a discount rate attractive enough for banks to subscribe. The value of such bonds will be equal to or less than Rs 10,000 crore -- roughly the amount owed by SEBs to Coal India, National Thermal Power Corporation, Powergrid Corporation of India, National Hydro-electric Power Corporation and the North Eastern Electric Power Corporation.

The number of bonds to be issued will depend upon how much of the outstandings will be securitised, and how much of the central cover will be utilised to directly tap resources from the market. This decision will depend upon the public-sector units (PSUs).

Once the subscription for bonds is completed, the amount will be passed on to the central PSUs for financing their on-going expansion plans. Thishuge quantum of funds, which the PSUs were finding it difficult to extract from the SEBs, will become immediately available to them.

The onus of collection will be transferred from the PSUs to the finance ministry. But expenditure secretary C Ramachandran clarified that the interest on the bonds would be borne by the PSUs. "This is a small price to pay for funds that were either lost, or would have taken many years to collect," he said.

The finance ministry, in turn, will start deducting the outstandings against the SEBs from the budgetary allocations to state governments. It will be done over a period of time, ranging anywhere between seven and 10 years. The "sinking fund" will absorb the deducted amount, which will, in turn, be utilised to amortise the bonds. Every year, depending upon the rate of deduction from allocations to the states, a certain quantum of bonds will stand liquidated.

Ramachandran said there were several issues to be sorted out. For one, the discount rate was yet to be devised. Therate should be attractive enough to the subscriber and to the PSUs. Both will look at the net present value of such bonds -- but from a different perspective. The energy PSUs will view it from the point of opportunity cost of raising similar funds through market borrowings (using the central cover), while banks will look at the discounted value as of date, and compare it with returns that they could get from an investment portfolio in other instruments.

The other issue pertains to how much of the budgetary allocation to states will be deducted on an annual basis. For this, the ministry has to enter into a dialogue with the states. The life of the bonds will depend on what is agreed.

The central cover does come for a price. Besides the interest element that will be borne by the PSUs, the entire amount will be regarded as a contingent liability of the central government, much like counter-guarantees given by the Centre to fast-track power projects. Standard & Poor's and Moody's will take this liability intoaccount while assessing the macro-economic balance in the economy.

Ramachandran said that the Reserve Bank of India will be kept out of the picture, unlike in the case of oil bonds issued to finance the oil-pool deficit. The subscription will be limited to banks. This will imply an attractive interest rate to ensure that the bonds don't devolve on the central bank. The issue of whether these bonds will be allowed to be circulated in the secondary market is also to be ironed out.