The power sector has recently seen some progress in the resolution of stressed generation assets. Vedanta Limited, a metals and mining major, recently emerged as the successful bidder to acquire Meenakshi Energy Limited (MEL), which has 1,000 MW of coal-based capacity, through the Corporate Insolvency Resolution Process (CIRP).
Notably, this is Vedanta’s second acquisition of a stressed asset in a span of over six months. In July 2022, the company acquired Athena Chhattisgarh Power Limited, which has a 1,200 MW coal-based power plant in Jhanjgir Champa district, Chhattisgarh, for Rs 5.65 billion. Vedanta is looking to enhance its power generation portfolio by way of inorganic expansion and has made significant headway so far.
Project background
MEL, promoted by Meenakshi Energy and Infrastructure Holding Private Limited (MEIHPL) and India Power Corporation Limited (IPCL), has a 1,000 MW coal-based power project in the Nellore district of Andhra Pradesh. The project has been divided into two phases – Phase I of 300 MW (Units 1 and 2 of 150 MW each) is complete while Phase II of 700 MW (Units 3 and 4 of 350 MW each) is pending testing and commercial operations. The project cost is estimated at about Rs 75.8 billion, which includes a debt of Rs 34.7 billion and an equity of Rs 41.1 billion.
MEL was admitted under the insolvency proceedings on November 7, 2019, following a petition filed by the State Bank of India (SBI) with the National Company Law Tribunal (NCLT), Hyderabad. MEL had secured a term loan and working capital facilities from a consortium of lenders including SBI and its associate banks, to fund the development of its coal-based power project. However, after the project’s Phase II incurred a cost overrun, the lenders extended additional financing, but MEL defaulted on servicing the principal repayments and interest payments for Phase I.
As a result, the loan was classified as a non-performing asset (NPA) in October 2017. The shares held by MEIHPL and IPCL were fully pledged with SBI CAP Trustee Company Limited, which invoked the pledge in 2018 following defaults in loan payment by MEL. Currently, SBICAP Trustee holds 95 per cent equity in MEL on behalf of the lenders.
Notably, MEL had attracted foreign direct investment earlier in the decade when its original owner and shareholder MEIHPL sold 74 per cent of its stake for Rs 6.5 billion to French energy giant Engie in December 2013. Engie’s stake gradually increased to 89.11 per cent. However, in the next few years, as part of its global strategy to reduce its carbon footprint, the French company decided to limit its exposure in thermal generating assets and sold its entire stake in MEL to IPCL in 2016.
Vedanta’s bid details
Expressions of interest for the resolution of MEL were invited in July 2022. Vedanta, Jindal Steel and Power Limited (JSPL), and a consortium headed by Prudent ARC were reportedly among the bidders to buy MEL. In the first round, bidders offered to make staggered payments over 7-10 years. The resolution professional invited improved resolution plans from the three bidders by the first week of November 2022. In October 2022, the National Asset Reconstruction Company of India Limited (NARCL), a government-owned asset reconstruction entity, made a binding offer of Rs 9 billion to acquire MEL’s debt, which was later revised to Rs 10.03 billion. The lenders decided to evaluate the offer from NARCL alongside the revised bids they received from the three bidders.
In the final round, Vedanta submitted the highest offer of Rs 11.43 billion, which was also the threshold price set by the resolution professional. JSPL, which had made an initial offer of Rs 8.59 billion, reportedly did not submit a bid in the final round. Therefore, Vedanta was declared the successful bidder on January 18, 2023, and its board approved the acquisition of MEL.
Vedanta will acquire 100 per cent of the paid-up capital and management control of MEL for a total consideration of Rs 14.4 billion. Of this, Rs 3.12 billion will be paid upfront, with the remaining Rs 11.28 billion to be paid in the form of secured, unlisted non-convertible debentures issued by MEL to the financial creditors. These debentures will be repaid in five equal instalments over a period of five years, starting from the end of the second year.
As per its exchange filing, Vedanta intends to operate MEL as an independent power project to meet the demands of the market by entering into short- or medium-term power purchase agreements as well as through the merchant power route. The acquisition is expected to strengthen the Vedanta Group’s portfolio in power, which already includes Talwandi Sabo Power Limited, a 1,980 MW coal-fired thermal power plant (TPP) in Punjab, a 2,400 TPP and a 1,215 MW captive power plant (CPP) at Jharsuguda in Odisha, a 1,710 MW CPP and a 300 MW IPP at the BALCO plant in Chhattisgarh, a CPP at the MALCO plant in Tamil Nadu, as well as wind power plants. MEL is a strategic asset due to its proximity to the Krishnapatnam port and nearby coal basins, which allows it to utilise both domestic and imported coal.
MEL generated revenues of Rs 2,010 million in 2021-22, a 112 per cent increase from Rs 950 million in the previous year. Vedanta’s acquisition of MEL is likely to be completed in 2023-24 following approval from the NCLT.
Future outlook
In the coming months, the resolution of stressed assets in the power sector is expected to pick up pace, driven by growing power demand and renewed investor interest. Currently, the bidding process for the acquisition of SKS Power Generation (Chhattisgarh) Limited is under way. The 600 MW operational coal-based plant has attracted interest from 23 bidders. Reportedly, Reliance Industries, the Adani Group, NTPC Limited, Torrent Power, Jindal Power, Sarda Energy & Minerals, and Singapore-based Vantage Point Asset Management have submitted final bids to take over the distressed company, which owes Rs 18.9 billion to Bank of Baroda and SBI.
It is important to address the underlying causes of stress in the sector such as lack of firm power offtake and fuel supply agreements, regulatory and contractual disputes, delays in payments by discoms and lack of funds with promoters in order to avoid the buildup of NPAs in the long run. This is crucial for the growth of the power sector.
