Even as the government is concerned about its long-term sovereign rating outlook being downgraded from ‘stable’ to ‘negative’ by Standard & Poor’s, rating agencies are closely watching the developments at Indian Telephone Industries (ITI) Limited — the first PSU set up in independent India.

A monopoly producer of telecom equipment till 1991, ITI had raised Rs 332 crore through two series of bonds in 2004 — months before it turned sick — on the strength of an ‘unconditional and irrevocable’ guarantee from the Centre. However, ITI bondholders haven’t yet received the interest payment, which was due on March 31, 2008.

Incidentally, bonds worth Rs 94 crore were due for redemption on March 31, 2009. In another four months, the remaining bonds worth Rs 238 crore will also be up for redemption.

“If investors don’t get money on time, it’s a worry as timely payment of dues is important. If it was a private sector firm, we would have put it in junk grade immediately. But since it’s backed by a sovereign guarantee, we don’t have the right to classify it as a default,” said Soumendra Dash, chief economist at rating agency CARE Limited, which tracks ITI. It has, however, downgraded ITI from AAA to D grade.

A Singapore-based S&P economist who tracks India’s sovereign rating told FE, “It can’t be considered a sovereign default as we need to understand the conditions under which the guarantee was extended to ITI. But it’s an interesting case to watch.”

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