The debt placement, being lead-managed by Kotak Mahindra Capital Company, is the first instance of a corporate issuing a paper benchmarked to the year-end YTM. The issue will close on April 24.

According to merchant banking sources, the five-year paper--with a call and put option at the end of one year--has been priced at 300 basis points above the one-year paper. With the YTM for the one-year paper pegged at 10.07 per cent, the Karnataka PSU paper will carry a coupon of 13.07 per cent. The current yield of the 364-day T-bill is 10 per cent.

"In effect it will be a one-year paper with a rollover facility for five years. The coupon will be reset in the beginning of every year with the RBI annoucing the YTM," merchant banking sources said.

The core sizeof the issue is Rs 50 crore and it carries a greenshoe option of another Rs 50 crore. Rating agency ICRA has rated the company for a Rs 600 crore issue. The state government has given guarantee for Rs 200 crore.

"The paper has a call and put option after every year. Both the options can be exercised in the beginning of the year when the RBI announces the year end YTM," sources said.

"The floating rate will keep the subscribing banks as well as the issuer happy. Banks are unlikely to suffer any mark-to-market losses as they can exercise the put option," sources added.

Karnataka Niravani Nigam has been given a LA+ (structured obligation) rating by ICRA. It was set up by the state government of Karnataka for the purpose of building dam and irrigation projects. The bond issue carries a state government rating.

Sources said that for a company with a LA+ (SO) rating, a floating rate coupon of 13.07 per cent for five years (assuming that current interest rate continues) is a fairly attractive rate.

Truckand car giant Tata Engineering Locomotove Company is planning to issue a ten-year paper at 13.50 per cent. The company is rated with a AAA from rating agencies.