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Modi govt considering new approach for stressed assets in power sector

LiveMint logoLiveMint 08-06-2017 Utpal Bhaskar

New Delhi: The National Democratic Alliance (NDA) government is considering an asset reconstruction company of sorts to address the problem of stressed assets in the power sector, according to three people familiar with the thinking.

On Wednesday, power, coal, mines and new and renewable energy minister Piyush Goyal chaired a meeting where the subject of discussion was ways to address the issue of stalled power projects. One of the solutions suggested was the creation of a special purpose vehicle (SPV, which is a company set up for a specific purpose) to which all stressed power generation assets could be transferred after they were acquired by lenders. The department of financial services in the finance ministry would identify these assets. These projects would then be auctioned.

The share of power sector non-performing assets in overall stressed assets (Rs9.64 trillion) isn’t known, but is likely to be significant. In October last year, credit rating firm Crisil Ltd estimated that around Rs1.34 trillion of loans to private power companies were at risk, although this doesn’t mean all these are bad loans.

“Lenders have the option to sell the properties under their possession. It was discussed that those projects which are not completed due to paucity of funds will be completed, and those which are ready to be operated will be run to generate revenues,” one of the three people cited in the first instance said on condition of anonymity.

In the event of no takers for these projects at the auction, a consortium comprising of bankers, financial institutions and an appropriate state-owned firm would operate them, according to the plan being suggested.

Apart from the central government officials from the ministries of power, finance and public sector firms such as NTPC Ltd, Wednesday’s meeting was also attended by representatives of banks and financial institutions such as State Bank of India, ICICI Bank Ltd and Axis Bank Ltd. The meeting was also attended by representatives of some states.

“We are focused on finding solutions to make stressed assets into national assets,” Business Standard on Thursday quoted Goyal as saying.

JM Financial Research, in an 8 March note, wrote that its 2016 study of stressed power assets had concluded that of the total 28 gigawatts (GW) generating capacity in question, assets accounting for 14GW were at high risk.

“The plan is still at an early stage. It may involve promoter’s equity to be reduced, along with the banks and the financial institutions taking a haircut. A committee will be set up to work out the modalities. We are awaiting more clarity,” said a second person who didn’t wish to be named.

The government and the central bank have been discussing measures to tackle the bad debt problem, including creation of a private asset management firm which will work out a feasible resolution plan for the stressed firm, as well as a national asset management company with a minority government stake for companies that are more stressed.

The solution discussed at Wednesday’s meeting may involve a state-owned company completing the projects and running the operational ones. The plan sees this consortium participating in the electricity procurement tender issued by the state utilities and selling the power generated from these projects.

“Electricity demand will go up in a few years on account of the rural electrification drive, Ujwal Discom Assurance Yojana (UDAY) and the country’s economic growth. Also, the pent-up demand will come in, making these projects viable. This is the proposed model,” added the first person.

Spokespersons for the ministries of power and finance, NTPC, ICICI Bank, Axis Bank and State Bank of India did not respond to questions mailed to them on Wednesday.

Experts said the government is playing a facilitator’s role. “Dealing with stressed assets in the sector is getting the right impetus with the Reserve Bank of India and line ministries working on it along with the recent changes in legislation. Each case in the sector has its own set of issues,” said Sambitosh Mohapatra, partner, power and utilities at PwC India.

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