Both categories of bonds will be managed by a special purpose vehicle (SPV), to be jointly floated by three power corporations, including National Thermal Power Corporation (NTPC), Power Grid Corporation of India Limited (PGCIL) and the National Hydro-electric Power Corporation (NHPC).

Top official sources told The Financial Express that the first type of tax free bonds will be classified as `Category A' bonds and will be issued by the SPV in the secondary market. The credit rating of `Category A' bonds is expected to be almost as good as Treasury-Bills (T-Bills).

This is because, under the modified securitisation scheme, the SPV would be issuing bonds backed by an undertaking by the central government to provide funds for servicing them through the mechanism of central plan allocation (CPA) deductions. This will provide the much needed liquidity to the central public sector undertakings (CPSUs) as the bonds will be freely tradeable in the market. The second type of bonds come under `Category B' bonds and will be issued by the SEBs or state governments to the PSUs through the SPV and not to the public. These bonds will also enjoy tax free status.

Sources disclosed that in case the SEBs or state governments agree to make specific allocations in the state budget for securitisation of the dues of specific PSUs, such commitments may be considered for issuance of Category B bonds to the PSUs against whose dues state budget allocations are approved by the state cabinet.

These allocations will be backed by state cabinet decisions to this effect for servicing the interest and principal of additional bonds to be issued on this basis.

Sources disclosed that in order to meet the debt service obligations of the `Category A' bonds, the ministry of finance will make payment to the extent of 15 per cent of the CPA of various defaulting states to the SPV each year.

Earlier, the proposal approved by the cabinet called for the SEBs issuing bonds in the market. However, in order to provide better rating and acceptability to these bonds in the market, it was later decided that the SPV would issue bonds in the secondary market.

"This would also make implementation of securitisation smooth and faster as SPV would be better equipped for bond issue and have more credibility", sources added. The total costs of the SPV will be shared amongst the CPSUs in proportion to the total amount of securities issued to them against their outstanding dues.

Another significant changed proposed under the modified scheme is to withdraw the conditionality regarding reform of the state power sector and establishment of letter of credit (LC) to the level of 105 per cent as such provisions would be counter productive and SEBs may use the same for not securitising their dues.

"Moreover, the scheme for Category A bonds is based purely on 15 per cent CPA and is not dependent upon the acceptance of SEBs", sources said.