The power sector accounts for a major share of the country’s stressed infrastructure assets. According to the latest data (as of July 2017) from the Department of Financial Services (DFS), Ministry of Finance, around 34 thermal power plants (TPPs), entailing an estimated debt of Rs 1.77 trillion, are under stress.
Earlier, in February 2017, the Ministry of Power (MoP) had stated that 17 under-construction coal-based power plants aggregating 18,420 MW and 17 gas-based plants aggregating 11,154 MW of capacity are under stress. In fact, of the total loan amount of Rs 4.71 trillion reported by scheduled commercial banks for the generation segment, the major part was for projects that are now stranded.
The build-up of stressed assets in the power sector is attributed to a host of reasons, including the non-availability of fuel supply arrangements, the absence of power purchase agreements (PPAs), and promoters’ inability to infuse equity and service debt. Falling electricity prices at the exchanges have rendered long-term PPAs unviable, so much so that three states – Uttar Pradesh, Karnataka and Andhra Pradesh – have cancelled previously signed PPAs, seeking tariff renegotiation. Apart from sector-specific issues and challenges, the worsening of the macroeconomic environment has lowered the demand for power from industries, adding to the woes of developers.
Taking cognisance of this scenario, the MoP is mulling over several proposals to salvage the beleaguered plants. The government is looking at a host of possibilities, including auctioning of stressed assets after they have been acquired by the lender, as well as the formation of a national asset management company (NAMC).
Recent discussions and proposals
The government is considering an initiative wherein all stressed generation assets identified by the DFS would be transferred to a special purpose vehicle after they have been acquired by the lenders. The projects would then be auctioned. In case there are no takers, a consortium comprising bankers, financial institutions and an appropriate state-owned firm would operate the plant. Under the mechanism, promoters’ equity may be reduced, along with a haircut for banks and financial institutions.
Another plausible option put forward by the Reserve Bank of India (RBI) for the revival of stressed generation assets is the formation of an NAMC. The NAMC would perform functions such as raising debt for financing needs, paying off banks a haircut, ensuring a minority equity stake for the government and roping in asset managers such as asset restructuring companies and private equity firms.
Earlier, in December 2016, RBI launched the Scheme for Sustainable Structuring of Stressed Assets (S4A). Under this, loans are split into sustainable and unsustainable portions. Banks will continue to hold the sustainable portion of the debt, while the latter will be converted into equity or a convertible security. The scheme allows the incumbent management to continue as long as the default is not wilful. RBI had launched the S4A scheme for deeper financial restructuring, following the limited success of its previously launched schemes such as Strategic Debt Restructuring (SDR) and the 5/25 Refinancing Scheme. In December 2016, invoking the S4A scheme, Jindal Steel and Power Limited’s lenders decided to restructure the company’s gross debt Rs 468 billion. The lenders have already extended the repayment period of loans under the 5/25 scheme.
Apart from this, the government has asked state-owned non-banking financial institutions, the Power Finance Corporation and the Rural Electrification Corporation, to consider creating a stressed assets equity fund and a stressed assets lending fund.
Another noteworthy development in the stressed generation assets space is the possibility of acquisition of stressed assets by public sector undertakings. NLC India Limited has identified three stressed assets for acquisition – the Damodar Valley Corporation’s 1,320 MW Raghunathpur TPP Phase I in West Bengal, the GMR Group’s 1,370 MW coal-based plant in Chhattisgarh and Ind-Barath Power Infra’s 700 MW coal-based plant in Odisha. Meanwhile, although NTPC Limited does not have plans to acquire stressed assets, it has been sounded out to extend assistance in operating the plants acquired by the lenders during the course of the bankruptcy proceedings.
In a fillip to the signing of new PPAs the government is planning to modify the PPA norms to remove the contractual requirement for the buyer to pay a fixed cost to the developer, even if no power is purchased. In addition to revive commissioned stressed coal plant the government is likely to soon release revised norms for medium-term PPAs. These are expected to have a single component tariff and no provision for fixed cost.
The revival of stressed assets is important to maintain a positive sentiment among investors and private developers. In line with this, it is expected that the MoP will finalise a policy in the coming months. Such initiatives will go a long way in maintaining the overall health of the power sector and help in meeting the objective of 24×7 Power for All.