Stressed Power Assets: Government Comes Up With Five-Pronged Plan, Leaves Core Issues Untouched

The Indian power sector is in deep crisis — which can be traced back to the reforms ushered in by the Electricity Act 2003 — and the banks as always stand to pay the price. 

And for the past few months, the government and the private power producers have been working overtime to come up with a plan to save thermal power plants with generating capacity of more than 75,000 megawatts (MW) from being sold for peanuts or being shut. They have come up with a so-called “five-pronged strategy”, but one that leaves untouched the problems at the structural and policy levels. 

On 12 February this year, the Reserve Bank of India (RBI) issued a circular with a revised framework for Resolution of Stressed Assets. Loans that have been fully or partially defaulted on are categorised under ‘stressed assets’.

Under the new RBI rules, creditors to companies that are defaulting on loans of Rs 2,000 crore or more, as on 1 March 2018, will have to implement a Resolution Plan within 180 days, or file for insolvency under the Insolvency and Bankruptcy Code (IBC) within 15 days from the expiry of the deadline. If a company defaults after 1 March 2018, then the 180 days will be counted from the date of such first default. 

Also Read: Power Employees Demand Right To Electricity For All, To Hold Nationwide Strike Against Privatisation Bill

As per the RBI’s timeline, the deadline for the power sector is end of August. The total Non-Performing Assets (NPAs) of the private power generation companies stand at Rs 70,000 crore as of this year. The defaulting power projects are at various stages of construction and production. According to media reports, power generation assets of more than 10,000 MW with debts of more than Rs 34,600 crore are currently already facing insolvency proceedings before the National Company Law Tribunal (NCLT).

Both the power ministry and the companies had requested the RBI for a special dispensation for the power sector, and asked for at least 12 up to 18 months — on the ground that the companies had defaulted due to factors outside their control, such as shortage of coal, lack of long-term power purchase agreements, etc. 

The RBI had refused, and a clutch of power generation companies under the banner of Independent Power Producers’ Association of India had approached the Allahabad High Court. On 1 June, the court had granted a reprieve to these companies from facing insolvency proceedings till the finance ministry met with the stakeholders to come see if the issue could be resolved. 

Even before the court ruling, leading bankers had reportedly been working to design a scheme for bailing out the stressed power assets without the latter being subjected to the IBC. 

On 8 June, interim finance minister Piyush Goyal had announced the setting-up of a committee of bankers that would submit a resolution plan. The panel was headed by Punjab National Bank non-executive chairman Sunil Mehta, and included SBI chairman Rajnish Kumar and Bank of Baroda managing director PS Jayakumar.

Now, if the stressed power assets were to face insolvency proceedings under the IBC, it would amount to a garage sale. Not only would the stressed power assets likely find it hard to find bidders, but once a company is declared insolvent it would sell for scrap value. And it would not help the NPAs of the banks, as the banks are likely to be among the last in the line of lenders to be paid. So the banks would likely gain nothing from the distress sale. And the power projects being shut or liquidated is not an option, as it will spell doom for the power scenario in in the country and be a terrible drain on the economy.

Also Read: Opposing Electricity Amendment Bill, Power Employees to Hold National Convention in Delhi

According to speculation in the media, the bail-out plans that the banks had been considering included a debt-equity swap — whereby a creditor cancels the outstanding debt in exchange for equity in the company. However, this would only amount to dressing up the books of the banks, as the NPAs would be reduced only theoretically.

Then there was also talk of setting up a state-owned bad bank — a structure set up to buy the bad loans of another bank or a group of banks/financial institutions. That way the loans would be off the balance sheets of the original lending banks, and the defaulting companies would become credit-worthy again. However, that would amount to transferring the debt to the taxpayers.

Another solution looming on the horizon was that the stressed assets be handed over to an Asset Reconstruction Company (ARC). 

An Asset Reconstruction Company (ARC) is a specialised financial institution that buys the bad debt or NPAs from the banks at a cheap price, so that banks can clean up their balance sheets by getting rid of the NPAs while the specialists in the ARC can turn the stressed assets around or sell them. The ARCs came into existence after the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was passed in 2002. 

On 2 July, interim finance minister Piyush Goyal said the Sunil Mehta-led committee of bankers had come up with a five-pronged strategy — to be known as ‘Project Sashakt’ — to deal with the NPAs with the banks. Goyal said the government had accepted the plan and the report submitted by the panel.

The five prongs of the strategy are — SME (small and medium enterprises) resolution approach for loans up to Rs 50 crore; bank-led resolution approach for loans between Rs 50-500 crore; resolution approach led by ARC, Asset Management Company (AMC) and an Alternative Investment Fund (AIF) for resolution of loans above Rs 500 crore, the NCLT/IBC approach, and an asset-trading platform (a platform for trading performing and non-performing loans). The plan for setting up a bad bank was reportedly dropped.

On 6 July, it was reported that banks had finalised an inter-creditor agreement and were working on the five-pronged strategy. State-run banks are also reportedly working on setting up an Asset Management Company (AMC) as also an Alternative Investment Fund (AIF) to raise money and back the AMC.  

Also Read: The Crisis of the Power Sector Reforms – Part I

“An independent AMC would be set up, and AIF would raise funds from institutional investors,” Goyal was quoted by the Economic Times. He said the government would have no role and the banks would work independently. 

It is also reported that the government is banking on two public-sector ARCs — Arcil and India SME Asset Reconstruction Company — to bid for stressed assets based on “independent due diligence” by the AMC and AIF. After the ARC acquires the stressed assets, it will be “responsible for financial restructuring and transfer equity of the borrower (the stressed company) held by it to the investment fund. The operating expenses and a reasonable return on capital will paid as a fee to the to the ARC.”

However, Sunil Mehta told Mint that multiple ARCs, AMCs and AIFs can bid for stressed assets under Project Sashakt. “The moment banks sell it to asset reconstruction companies and these ARCs will in turn transfer the ownership of asset to the Alternate Investment Fund (AIF). The AIF then becomes the effective owner because the intent is that the promoter if at all he is there becomes the minority.” 

While one needs to wait and watch how the “five-pronged strategy” plays out — and while it does provide relief to the stressed assets of private power producers — what is clear is that it does not address any of the structural issues plaguing the power generation sector, and the power sector as a whole.

This is also unlikely to help the banks, as simply making the defaulting companies credit-worthy again without fixing the many structural problems unleashed by the 2003 power reforms is going to lead to the same problem again, only much worse.

As mentioned in the beginning of this piece, the Electricity Act 2003 — which had replaced the Electricity (Supply) Act 1948 — can be blamed for much of the crisis that the power sector in India finds itself mired in today. 

The 2003 Act dismantled the State Electricity Boards (SEBs) and trifurcated the electricity boards into three separate entities — generation, transmission and distribution. This move was in keeping with the World Bank model of “unbundling” of the power sector, which would allow entry of private companies into the safer and more profitable aspects.

The 2003 Act also brought in delicensing in power generation, eliminating the need for private companies to obtain a license for setting up a power plant. 

As a result, a large number of private companies entered power generation. As the current crisis of stressed power generation assets illustrates, most of the private generation began taking place with the help of bank loans — in fact, priority sector lending of nationalised banks was made available to these private players under the then finance minister, P Chidambaram.The free hand given to private producers also led unplanned capacity addition. And private power plant owners were resorting to all kinds of shenanigans to reap profits. 

Meanwhile, transmission and distribution remained with the state governments, except for a few cities like Mumbai, Delhi, Kolkata, Surat and Ahmedabad, where there are privately owned distribution licensees. In Odisha and Delhi, the privatisation of distribution had failed spectacularly. Although some states, such as Himachal Pradesh, had resisted the unbundling, Kerala is the only state that has not trifurcated its electricity board.

The crisis goes beyond the power generation, of course. Thanks to the private producers, the state-owned distribution companies (discoms) had no control over the cost of generation, mainly due to faulty power purchase agreements. 

In fact, the discoms have already accumulated losses of Rs 4.14 lakh crore while their debt has risen to 4.22 lakh crore as of 2015-16. 

For a more detailed analysis of how the crisis originated in the 2003 power sector reforms, read thisand this. 

So no matter the eventual efficacy of the “five prongs” of the stressed assets resolution strategy, it is not going to make the power sector crisis disappear — nor is it going to help the banks, already saddled with NPAs of Rs 8.41 lakh crore as of December 2017, in the long run or even strengthen them. 

Even if the government can manage to ensure adequate supply of coal to top power plants— the government has allowedthe states to import coal flagging shortage for the next 2-3 years — the problem will persist.

The government must review the disastrous consequences of the Electricity Act 2003, the serious and deliberate loopholes it allowed, and take decisions to undo the untold damage caused by the so-called “reforms” of the power sector at the level of policy. 

In other words, the government must scrap or amend the Electricity Act 2003 — but not in the way it currently envisages it, in the form of the Electricity (Amendment) Bill 2014. 

The amendment Bill seeks to further bifurcate power distribution into carriage (the distribution infrastructure carrying the electricity to consumers) and supply (or the sale of electricity to consumers). The motive is the same — to bring in private companies to make profits by compete over selling the power while the government lays down the wires.

While power employees across the country have been protesting against the Bill and the overall crisis that government policy has dumped the sector into, if the government does not pay heed and continues focussing all its energies on cultivating private profit, darkness awaits a country where nearly 30 crore people still do not have access to electricity. As for the banks, well.

Also Read: The Crisis of the Power Sector Reforms – Part II