The subscription amount collected by the SPV would be used to give the state government an advance against the deferred sales tax receivables. The state government, in consideration of the advance received would enter into an agreement, guaranteeing repayment to the SPV.

The agreements to be entered into by the state government would provide that it would agree to segregate the collection of deferred sales tax receivables into a separate designated account of their own, it would pass an order directing the selected companies to deposit their dues under the scheme in the designated account and it would use the funds in the designated account, first for servicing the bond holders.

Mantralaya sources told The Financial Express that the state government had asked SBI Capital Markets Limited to make suggestions on securitisation of deferred sales tax receivables as the total receivables due to the state government from various companies covered under various package scheme of incentives amount to over Rs 1,350 crore.

Large proportion of the receivables are due from corporates with rating of "AA" and above. Similarly, "AAA" companies such as Reliance Industries, Bajaj Auto, Mahindra & Mahindra, Johnson & Johnson, Siemens also owe receivables. The state government though has yet to take a final decision in this regard, is quite keen to unlock these receivables.

Sources said that units covered under the package scheme of incentives are eligible for sales tax deferement for a predetermined period and these units are liable to repay the total amount of deferement available to them in yearly equal installments after an initial deferment period and a fixed moratorium period. The outstanding receivables would flow to the state government upto 2004.

SBI Capital Markets Limited said that the receivables cannot be assigned to the SPV since the sales tax collections have to be made by the state's sales tax department and deposited into the consolidated account of the state government. This statutory power to collect cannot be delegated to any third party nor can the collection diverted at source. Thus, the sources said that the SPV could become a government company.

The receivables would keep flowing into the designated account of the state government on a regular basis and the state government would transfer money into escrow account of the SPV well in advance before the repayment liability on the bonds issued by the SPV falls due.

As and when the state government transfers money into the escrow account, the advance made by the SPV to the state government would stand adjusted on that day. SPV would be entitled to make scheduled payment of principal and interest to investors from the accounts received in the escrow account. The trustees to the investors would monitor the escrow account and servicing of the securities.

As far as fund raising is concerned, crystallised deferred sales tax receivables for a 7 year period starting from 2002 would be securitised. Thesecurities issued by the SPV would be of a 7 year tenor.

The discount rate would depend on the credit rating that emerges for the proposed structure and a rating higher than the state government rating would be targeted for the proposed structure.

SBI Capital Markets Limited has pointed out that a developed market does not exist for bonds of tenor of 10 years and above. Nearly 17 per cent of the bond issues in 1999-00 were of 7 year tenor compared to less than 7 per cent for tenor of 10 years and above.

It has said that the government can unlock their outstanding receivables and enhance the much needed liquidity. As the SPV is a government entity, the state government can retain control over such arrangement.