Narmada Nigam bonds: Sordid tale of how investors were lured to support a controversial dam project

damBy Himanshu Upadhyay*

On 8 February 2016, two news items appeared in the newspapers. The first was about an announcement by Mukesh Jhaveri, Director of Sardar Sarovar Narmada Nigam Ltd (SSNNL) that Narmada waters will reach Pragpar Chokdi in Mundra by end of this year, after a delay of many years. The second news ironically was about investors, who had put their money in Deep Discount Bonds (DDB) of SSNNL and planned to wait for 20 years to get the return on investment as promised and had to come to terms with Gujarat model’s anti-investor face.

The second news story was in reference to a recent Gujarat High Court verdict  that termed SSNNL (Conferment of Power to Redeem Bonds) Act, passed in Gujarat assembly in March 2008 as “ultra vires” and “void”. The Act was resorted to when SSNNL suddenly faced a situation wherein servicing the debt liability on these bonds till the maturity turned out to be a task that may drive its coffers dry. Investors had approached Gujarat, Maharashtra and Karnataka High Courts and the petitions were clubbed together when the matter reached Supreme Court. In December 2013, Supreme Court clubbed all these similar petitions together and sent the matter back to Gujarat High Court for combined hearing.

The latest High Court verdict however does not yield immediate relief to bondholders, as it stipulates many riders. The first hurdle that investors have to cross is to prepare themselves to further legal proceedings as High Court verdict directs them to approach the Civil Court to adjudicate and determine the amount of loss incurred by them due to the Act. The Court verdict also restricts such a forum for adjudication to only those bondholders, who received proceeds of premature redemption of bonds enabled by the impugned Act, if and only if they had recorded their protests! So, investors are again planning to move to Supreme Court on this matter.

Is the question merely that of investors being lured with promises of higher returns backed by state government standing guarantee or should we be asking more fundamental question on the due diligence by regulatory institutions in this entire episode of indiscriminate market borrowing resorted to by SSNNL and then the manner in which it went about to pre-retire the debt unilaterally?

The sordid tale of how these investors were lured to support a controversial dam building project by putting their hard earned money as investment into bonds and thereby lend a helping hand to SSNNL to portray as if that controversial dam enjoyed popular support started unfolding in early 1990s. Thanks to an audit report by Comptroller and Auditor General (CAG) for Gujarat (Commercial) for FY2001, citizens know that in the revised cost estimates of 1991-92 had remained unapproved. But oblivious of this, SSNNL was allowed to indulge in market borrowing in February 1993 and then again in November 1993. None of the cost-benefit estimates had identified this route of project financing and hence failed to calculate the debt liabilities arising from them.

On 1 November 1993, SSNNL announced a public issue of DDBs and Non-convertible Bonds (NCBs) to raise a part of finances required for a project, which had come under heavy criticism by World Bank appointed Independent Review Mission. So did SSNNL stand a chance to lure investors to subscribe to these bonds? It appears that SSNNL had initially planned to sell it to non-resident Indian (NRI) segment to raise the money, but the promotional events in the US were stormed by protestors. If a letter to editor by Narmada Bachao Andolan (NBA) published in Economic and Political Weekly is to be believed, it appears that the efforts by SSNNL to access investments from financial market were hit by roadblocks raised by two religious agglomerations: Bharat Sant Samaj and Mumbai Jain Sangh. The size bond issue was Rs300 crore and SSNNL was allowed to retain 25% extra of the size of public offer in case of it getting over-subscribed.

The NBA alleged that SSNNL spent Rs 30 crore on media advertisements and hoped that the issue will get 12-fold subscription, but eventually could raise around Rs 570 crore, even as underwriters themselves subscribed to the issue. It was also alleged by NBA that SSNNL’s claim that bonds were supported by state government standing guarantee to this were hollow, since all that existed were “letters of comfort”. NBA also alleged that the Reserve Bank of India (RBI) had made strong reservation against cooperatives investing into the bonds and even the National Bank for Agriculture and Rural Development (NABARD) had taken strong exceptions to cooperatives investing into bonds. A public interest litigation (PIL) was filed in Gujarat High Court by Ashwini Bhatt and others and the case was pending as of early 1994.


Replying to NBA’s allegations about the lack of “sovereign guarantee”, SSNNL representative in a rejoinder argued:

“Regarding the statement that the state or central governments did not guarantee the bonds, it is opportune to enlighten all concerned that the investor’s security has not been jeopardized at any point of time. On the contrary, concern for investor has been displaced by the Nigam (i.e. SSNNL), by entering into a tripartite agreement with the government of Gujarat and ICICI to cover the bonds. As per the terms of agreement, if there are insufficient funds available with SSNNL 45 days before the due date for payment of interest, principal or premium on the bonds, the ICICI will issue a notice to the state government which will be bound to make good the payment seven days before the due date. While a guarantee can be invoked only in case of a default, the Nigam, through its tripartite agreement has ensured that the government’s assistance is available well in advance to avoid any contingency or default. What better security can one ask for that this?”

Was it known to SSNNL and Government of Gujarat that there existed a design error since only bondholders were given the right to pre-redeem the DDBs at the end of 7th, 11th or 15th year and the NCBs at the end of 5th year? In January 1994, when SSNNL made allotment on the issue, 7,13,619 DDBs worth Rs256.90 crore and 2,36,194 NCBs worth Rs118.10 crore at face value were issued. Deep discount bonds had a face value of Rs3,600 and promised to yield investors Rs1.11 lakh at the end of 20 years, whereas non-convertible bonds had a face value of Rs5,000 and promised to yield investors 17.5% interest payable half-yearly with a premium of 5% payable at the time of redemption at the end of 9th year.

It has been argued by Himanshu Thakkar in an article, ‘Ominous Figures of SSP’ (Economic Times dated 29 December 1995) that there existed a confidential study conducted for Government of Gujarat that indicated resorting to market borrowing as an unviable option. Quoting from the report, the article stressed that “the trend clearly indicates SSNNL’s ability to raise funds through this source (i.e. bonds marketed with tri-partite agreement) on a sustained basis is doubtful”.

A policy document titled Gujarat Infrastructure Agenda Vision 2010 (released in 1999) had asked SSNNL and Gujarat Government to tread cautiously and stressed that, “the required borrowing for the Sardar Sarovar Project in the 9th Five Year Plan period is Rs9,876 crore (taking into account debt obligation), as against the projected Rs5,596 crore”.

The document’s calculation for such an argument showed SSNNL’s interest expenditure to rise to Rs1,294 crore in 2001-02 from Rs229 crore in 1997-98 and its outstanding debt to rise to Rs10,496 crore as on 31 March 2002 from Rs2,000 crore as on 31 March 1998. (For detailed discussion see Shah, Rajiv (1999) ‘SSP Cost Escalation to have fall out on State Finances’, The Times of India, 7 July 1999)

While it is not known, how many investors holding NCBs came forward to surrender and pre-redeem their bonds at the end of 5th year, it has been documented that in September 2001, when the first pre-redemption option came, SSNNL wrote letters to bondholders asking them to opt for pre-redemption. However, this move met with a very cold response, as only 5.96% bondholders came forward for early redemption and they were paid an interest amounting to Rs37.89 crore. A CAG audit report for FY2001 stated that on the remaining DDBs, SSNNL will have to shell out Rs7,448 crore in FY2013-14. This CAG audit report calculated the debt liability of SSNNL as on 31 March 2002 as Rs12,282 crore.

Again at the end of 11th year, SSNNL announced through newspapers in the first week of May 2004, its willingness to pre-redeem the bonds by calling for an extra ordinary meeting of bondholders at Gandhinagar on 28 May 2004 with a view to seek consent from bondholders for the same. On 19 May 2004, investors from Delhi and Mumbai field petitions against this move. Surprisingly, the very next day, i.e. on 20th May, SSNNL issued a press release stating that in the wake of communication it received from Securities and Exchange Board of India (SEBI) and Bombay Stock Exchange (BSE), it had cancelled the said meeting. A news release by IANS dated 6 July 2004 claimed that SSNNL was harbouring thoughts of bringing in a legislation in Gujarat assembly that enables it to pre-redeem bonds unilaterally.

On 3 November 2008, citing the impugned Act, SSNNL issued notice to bondholders for pre-redeeming DDBs by January 2009. Acting on complaints filed by several investors,SEBI asked SSNNL to disclose the formula used to calculate price at which bonds will be redeemed. SSNNL in its reply first sought to buy time and later questions jurisdiction of SEBI!

By last week of January 2009, several petitions were filed in different High Courts and in Supreme Court.

Even as next round of legalese start on the issue of deep discount bonds, shouldn’t citizens ask questions about the institutions that failed to carry out due diligence in 1993 and that neglected to pay any heed to sane advice by CAG in its report for the year ending 31 March 2001?

*Works with Azim Premji University. Published with the permission of the author. This article first appeared in two parts in

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