A high-powered committee headed by former finance secretary Ashok Jha to rejuvenate Hudco has recommended that the government-owned enterprise should be permitted to raise funds under the purview of municipal tax-free bonds.

This will enable Hudco to sanction more loans for housing and core infrastructure projects. The government is considering the recommendations and an appropriate decision will be taken soon.

At present, municipal bonds are raised only by urban local bodies for capital investment in setting up of urban infrastructure projects in areas such as urban transport, roads, bridges, portable water supply, sanitation and solid waste management.

The committee said the government has already provided for a significant tax waiver under this scheme, which has not been availed fully by urban local bodies, "and thus the projected amount of bond

issues remains unutilised". Hudco is expected to utilise the funds more efficiently compared to local bodies, where the money mostly lies idle as it is raised upfront, while the requirement for projects is in stages. Local bodies will be able to avail loans from Hudco as and when required, depending upon the progress of the project.

The bonds are likely to be at a coupon rate of 8.25 per cent, which will result in savings of Rs 512 crore over seven years, assuming

bonds will be redeemed in equal installments. This will enable Hudco to reduce the cost of funds for the sector and reduce the negative net interest margin of Rs 1,176 crore over the next seven years.

The panel has also suggested that Hudco should be allowed to raise cheaper funds by issuing 54 (EC) bonds, which are marketed at 7.5 per cent, compared with Hudco's present borrowing cost of 12 per cent.

Permission to issue these bonds may result in savings of Rs 608 crore in three years and address the asset-liability mismatch.

The committee said that Hudco should be regulated by the Reserve Bank of India and not by National Housing Bank (its present regulator) because its portfolio comprises 65 per cent of infrastructure projects and only 35 per cent of housing projects. It has also supported restoration of equity support of Rs 100 crore per year to Hudco, which was discontinued in 2004 after the enterprise got 'miniratna' status.