Allahabad HC order to undermine future investment in Indian power sector

The Allahabad High Court refusing to grant interim relief to power companies, which had filed pleas against RBI norms on stressed loans, is a setback for the sector as a whole. The authors explain why only financial engineering, without resolving key structural issues, cannot revive these stressed power projects. 

On the backdrop of the 180-day grace period granted by the Reserve Bank of India (RBI) ending on Monday, the Allahabad High Court refused to grant interim relief to the firms facing National Company Law Tribunal (NCLT) proceedings. According to the RBI's February 12, 2018, circular, 60 companies that have turned defaulters -- including power firms --  will have to be taken to the NCLT by the lenders after the 180-day grace period. 

This development is going to be very negative for the Indian power sector in terms of future investments in the sector, which witnessed a significant capacity expansion during the past 6-7 years. In case stressed power projects are taken to the NCLT by lenders, liquidation value will be significantly lower than the replacement cost. Given that the projects face key issues, getting buyers for these stressed assets would be very difficult, unless the underlying issues -- coal supply and power purchase agreements (PPAs) -- are addressed.  

Out of the 40,130 Mw of stressed assets identified by the government, 8,460 Mw worth of projects have seen no progress on the ground, while 10,430 Mw worth of projects are without any PPA. The order will be a negative for large power generation projects belong to companies like Jaiprakash Associates, Lanco, GMR, KSK and Essar Power. 

Earlier, the Standing Committee on Energy was informed that there were 34 coal-based thermal power plants that have been categorised as financially 'stressed'. Notably, there is no single reason that can be assigned as a cause for making all these power plants stressed but some major issues have been identified and categorised as: (a) non-availability of regular fuel supply arrangements, (b) lack of power purchase agreement, (c) projects set up without linkage, (d) cancellation of coal blocks, (e) delay in project implementation leading to cost overrun, (f) inability of the promoter to infuse equity and working capital, (g) aggressive bidding by developers in PPA, and (h) lack of enough PPA by the states. In our view, only financial engineering without resolving key structural issues cannot revive these projects. In fact, at current capital cost, the power produced will be very expensive and thus unfavourable for power companies. In short, Monday's court verdict is a negative setback for power generation companies. 

Regarding banks, the court verdict would not have a huge impact. A major part of the stressed power sector accounts is already classified as non-performing assets (NPAs) by the banks and currently they are carrying approximately 35 per cent provision on these loans. If these loans are referred to the NCLT, then banks have to increase their provision coverage to the 65-70-per cent level over the next one year, which is more near to the estimated realisable value of these assets. However, banks are trying to resolve some of these assets by bringing in new owners/buyers, without taking them through the IBC process. The banks were trying to come up with a resolution plan for these firms, as going to the NCLT would mean large haircuts. Almost three-fourths of stressed assets worth Rs 3.8 trillion is from power companies, which had dragged the RBI to the Allahabad High Court. Currently, the bankers are trying to resolve the pile of stressed power assets under the "Samadhan" scheme while working with the power companies. The State Bank of India (SBI) said it is in advanced stages to resolve seven to eight power sector loan accounts worth about Rs 170 billion, while the Bank of India is looking at five to seven accounts. While the order is bad for power companies, the only hope are the banks that have the option to withdraw an insolvency case referred to the NCLT after obtaining 90 per cent of members' vote for it.

Rupesh Sankhe & Asutosh Mishra are senior research analyst with Reliance Securities