The holding company has been considering fresh borrowings to part-finance several power projects of Maharashtra State Electricity Board (MSEB) and to pick up stake in the second phase of Dabhol Power Company (DPC).

Non-convertible bonds floated by MPDCL are fully guaranteed by the state government. "Considering the present financial position of the state, the government guarantee does not provide any comfort to the investors," said a senior official from a leading financial institution. Crisil's announcement has further depressed investor sentiment, he added.

This will also make the future debt instruments of the government more expensive and it would have to offer a higher coupon on its bonds, according to industry analysts.

"Crisil's downgrade has only confirmed the rumours of the state being in financial trouble," said a senior official of the IDBI. Earlier, investment in government-guaranteed instruments was considered safe also because it did not have a large exposure, he said.

In the recent past, the state government has been floating a series of debt instruments through various special-purpose vehicles, launched for investments in different sectors. This has increased the state governments exposure.

However Icra, MPDCL's credit rating agency, is unlikely to change its grades for the power company, according to sources. Icra has been rating MPDC's bonds as "LAA(SO)" and does not plan to re-evaluate the status.

The MPDC, set up by MSEB, has already raised over Rs 1,200 crore from the three bond issues launched last year. Of this, Rs 636 crore have already been used to buy a 30 per cent equity stake in DPC's first phase of 740mw. MSEB has yet to pick up a similar stake in the second phase of 1,444mw -- for which funds are yet to be raised.