To raise funds to build Andhra Pradesh’s capital Amaravati, the state government has tapped the capital markets with the listing of bonds issued by AP Capital Region Development Authority (AP-CRDA) for Rs 2,000 crore on Monday.
The bonds titled ‘Amaravati Bond 2018’ have been listed on the Bombay Stock Exchange, attended by CM Chandrababu Naidu. While the bonds were issued for Rs 1,300 crore, they were oversubscribed by 1.53 times, thus raising Rs 2,000 crore of funds. It is also being touted as the largest bonds issue in the country from a local authority.
In fact, riding on the back of the positive response, the CRDA is also planning to raise upto Rs 10,000 crore more through retail investors.
A bond is a fixed income investment where an entity borrows funds from investors for a fixed period of time at an interest rate, which can be fixed or variable. When an entity issues a bond, the funds raised through it is technically a loan that is repaid over time. Bonds are generally issued to fund projects and in this case, it is to fund the development of Amaravati.
The 10-year instrument is being offered at a fixed interest rate of 10.32%, paid quarterly, with a five-year moratorium on the principal payment. This will be redeemed at 20% every year for the next five years.
The funds are being raised for the development of the upcoming capital where projects worth nearly Rs 27,000 crore are underway and those worth Rs 11,000 crore are ready to be awarded.
An amount of Rs 2000 crore will be used as an equity pool and the government will keep investing towards equity contributions for various infrastructure projects at Amaravati.
Speaking at the listing of the bonds at BSE in Mumbai, Naidu outlined his grand vision for the greenfield capital, claiming that he is confident of making Amaravati one of the best cities in the world. Through the capital, he envisions to take the economy of the state, which is currently at about $124 billion, to one trillion dollars by 2029.
“Our growth rate is consistently moving forward, and I am confident it will cross 12-13%. We will be among the top 3 developed states in India in 2022 and want to become a leading global destination by 2050,” Naidu said while addressing the gathering at BSE.
While outlining plans of building world-class infrastructure in terms of office spaces, hotels, tourism, among others, Naidu also requested Ashish Kumar Chauhan, CEO and MD of BSE, to have its innovation centre in Amaravati. Naidu also shared his grand vision of wanting to host the Olympics at Amaravati in the near future.
“We will prove our truthfulness and sincerity in fulfilling plans of Amaravati. All those who invested, I request you to visit Amaravati and get first-hand information, as seeing is believing,” Naidu added.
However, there have been concerns raised over this high-cost borrowing exercise. Bonds are known to have a high interest rate and for a state that is already cash-strapped, servicing the debt may become a bigger burden for a state that is already under high debt.
The interest rate at which Amaravati bonds are being issued are quite high. Greater Hyderabad Municipal Corporation (GHMC) recently issued bonds which were subscribed for an interest rate of 8.9%. Similarly, Pune Municipal Bonds were issued at an interest rate of 7.59%. However, in the case of Amaravati, the interest rate to be paid is as high as 10.32%.
The funds raised through the bonds are being used for infrastructure projects and these projects do not guarantee generating enough returns in the near future that will be required to service the debt of the state. Moreover, as a guarantor, if the state government is obligated to repay the debt, it will put further strain on Andhra’s economy.