On 15 April, US credit rating agency Moody’s Corp. made history. It put all municipal bonds of the US on a negative outlook. Not that the downgrade wasn’t warranted.

Like many state governments in India, the municipalities in the US, too, went on a spending splurge and notched up debts, which they thought could be financed by property taxes coming from property sales at ever-increasing values.

All this evaporated when the housing bubble burst.

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After all, the property market was being financed by not very sound purchases by NINJAS (people with no income, no jobs and no assets). Money was loaned to them and property dealers notched up their prices periodically in collusion with lenders. Evidently, both property agents and the lenders were more interested in their commissions than in the soundness of their financial dealings.

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Moody’s said it was assigning a negative outlook to the entire $2.6 trillion US municipal bond sector— operated by local town, city and state governments—because of the combined collapse in the financial and housing markets. The fact that the markets are worried about these bonds can be seen in the yield rates for “Munis" which are six times higher than those on US treasuries. The decline in yields is largely due to US government’s injection of funds which may introduce liquidity in the markets.

This hasn’t happened in India because of two reasons. First, not all debt in India is rated by credit agencies. Second, because much of the debt in India is backed by the government and borrowed from the Reserve Bank of India and not from the markets. Had a proper exercise been done, it is probable that the debt of many states would get a junk-rating. This could very likely be true of Maharashtra as well, where profligate spending and little attempt to encourage economic growth have left this leading industrial state virtually impoverished.

In the past five years, most policy decisions in Maharashtra have revolved around real estate transactions. Simultaneously, most prime areas of Mumbai have continued to fetch the lowest property taxes because of a collusive attempt among powerful industrialists, bureaucrats and legislators to keep such taxes low, because they own substantial real estate in these areas. Much of Mumbai’s property tax earnings thus come from relatively poorer areas.

Is it any surprise then that Mumbai and the rest of Maharashtra have been hurt most savagely by the current meltdown in property prices?


TARA fund—perplexities abound

There are times when the market disclosures by investment management companies do not make sense. Unfortunately, many such companies are also shy of disclosing anything further because many of their funds are locked up in the declining real estate market.

Though the TARA fund of IL&FS Investment Managers Ltd (IIML) is not strictly a real estate fund, it does come from a company that has many real estate-related interests and investments. Some of them were covered in this column on 15 April.

The TARA fund was launched in September 1997 with a corpus of $166 million and a hurdle rate of 8%. The hurdle rate is the minimum rate of return guaranteed by the investment banker, and any return higher than this rate allows the investment manager to charge a higher management fee on the increased amount. IIML generally charges a 20% management fee on the profits made above the hurdle. According to IIML documents, this fund was to close in 2017 and it made four investments. But, surprisingly, this fund finds no mention on IIML’s website: http://www.ilfsinvestmentmanagers.com/active_TARA.aspx

The URL leads to the web page of TARA-III, a fund launched in 2007 with a corpus of $225 million. The hurdle rate is not given, nor is the closing year. The number of investments is shown as five (against four of TARA) involving $64 million (no figures available for TARA). A press release of IIML dated January 2009 does say that TARA-III “growth equity fund [closed] at $225 million... [against an original target of] $400 million...given the economic downturn." This fact too is not given on the website.

This does lead us to some questions.

What happened to the original TARA? Was it closed prematurely? Was there a TARA-II? If yes, why is this not mentioned on the website? Or were the funds and transactions of TARA transferred to TARA-III? If yes, why call it TARA-III, and not TARA-II?

We wrote to IIML for clarifications but got none till the time of going to press.


Gold deposit scheme

Without any fanfare, State Bank of India (SBI) launched a gold deposit scheme last month. A few advertisements in select publications announced the scheme.

The advertisements merely said that one can deposit gold in any form and get the same back after three, four or five years. It did not mention the rate of interest on the deposit but said that it is free from income tax, wealth tax and capital gains tax. It, however, did not say whether this exemption covered the source of funds for acquiring the gold, in addition to the proceeds it could earn.

At the time of writing this column, few SBI managers had any inkling about this scheme.

The big questions are:

Why this surreptitious introduction of the scheme?

Why are the details of the scheme not clearly stated either in the advertisements or on SBI’s website?

And, is the scheme like the gold bond scheme, which this column had advocated?

If the last is true, it could actually allow the country to bring back into productive use the hundreds of thousands of tonnes of gold lying with Indians. If deposited with SBI, gold could be used as collateral to get international loans at cheaper rates—irrespective of the credit rating of the country.

One hopes that our bankers and the finance ministry has done precisely that.

R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com

Graphics by Ahmed Raza Khan / Mint