Spelling Hope

10 states sign MoUs under UDAY

The Ujwal Discom Assurance Yojana (UDAY) was launched by the central government in November 2015 to facilitate the revival of the discoms, which have been struggling with losses and mounting debt. Within five months of the announcement of the scheme, 17 states have agreed inprinciple to participate in it, covering over 90 per cent of the total discom debt. The total outstanding debt of the discoms increased from about Rs 2.4 trillion in 2011-12 to about Rs 4.3 trillion as on September 30, 2015, with interest rates in the range of 14-15 per cent.

While UDAY is optional, it gives the discoms opting for it the opportunity to break-even in the next two to three years through a reduction in the interest burden, and cost of power and power losses in distribution, as well as an improvement in the operational efficiency of discoms. According to the Ministry of Power (MoP), the scheme is expected to lead to a saving of Rs 1.8 trillion annually.

Current status

Of the 17 states that have agreed to participate in the scheme, 10 have already signed MoUs with the MoP for implementing the scheme. These states – Jharkhand, Chhattisgarh, Rajasthan, Uttar Pradesh, Gujarat, Bihar, Punjab, Haryana, Jammu & Kashmir, and Uttarakhand – have a total debt of over Rs 1.98 trillion, accounting for about 46 per cent of the total debt on the books of distribution utilities as on September 30, 2015. Among these states, Rajasthan has the highest outstanding debt of Rs 805 billion, followed by Uttar Pradesh, Haryana and Punjab.

Under the tripartite MoUs signed by the MoP, with the state government and the discoms, the latter have committed to improving operational efficiency through initiatives such as compulsory feeder and distribution transformer metering, consumer indexing, infrastructure upgrades and smart metering, based on a given timeline. The state governments have also agreed to take over 75 per cent of the total outstanding debt of the discoms and issue the balance debt as state-guaranteed discom bonds at coupon rates that are 3 per cent less than the average existing interest rates. This is likely to reduce the discoms’ interest burden to 8-9 per cent. Eight states have already issued bonds worth an aggregate of Rs 989.59 billion on behalf of their respective discoms till March 2016.

The central government will provide various incentives to states opting for the scheme. These include additional/priority funding through the Deendayal Upadhyaya Gram Jyoti Yojana, the Integrated Power Development Scheme, and the Power Sector Development Fund. States not meeting the operational milestones will be penalised under the scheme.

The states would benefit through UDAY by way of savings in interest costs, reduction in aggregate technical and commercial losses (AT&C) and losses, interventions in energy efficiency, coal reforms, etc. Apart from annual savings in interest costs on account of debt restructuring, the discoms would also benefit from an improvement in credit ratings as a result of financial and operational efficiencies. This would help them in raising cheaper funds for their future capital investment requirements.

The 10 states that have signed MoUs so far are likely to get benefits amounting to over Rs 1,000 billion. Moreover, Jharkhand and Jammu & Kashmir have been given a special dispensation to clear the provisional dues of various central power sector undertakings as on September 30, 2015 in the current financial year itself.

Impact on state finances

Although there may not be an instant impact, state finances may come under stress in the coming years on account of burgeoning liabilities due to the takeover of 75 per cent of the existing debt of discoms. The takeover could lead to a curtailment of capital expenditure by the states with an adverse impact on growth. At the same time, UDAY has the potential to improve asset quality by enhancing the state discoms’ financial health, thereby reducing the vulnerability of banks.


UDAY is being seen as markedly different from earlier restructuring schemes, which could not deliver the desired results as there were no deterrents for non-compliance with targets. In this context, UDAY is focused on both liquidity improvement and loss reduction. However, the actual outcome of the scheme will only be known over time.


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