India's power sector is back in action again, however for all the wrong reasons. In February, India's federal bank tightened the norms for settling a bad debt by setting timelines for resolving Non Performing Assets (NPA) within 180 days for as many as 80 large borrowers. On February 12, when Reserve Bank of India (RBI) came out with the circular, nobody gave them a chance so that they will be able to tide over all opposition. With this resolution in place, RBI witnessed opposition from all the sections including the parliamentary panel, power companies, from the courts and from industry. In fact, the resolution was challenged by the power companies to seek a breather at least for the next 3-6 months from going these assets in NCLT post August 27. However, the recent verdict from the High Court is a big blow to the power companies, but a big relief to the RBI.
Firstly, in the process of approaching the High Court, they (power companies) have wasted 180 days of the period for settling the debt and saving their assets going to NCLT process. Secondly, showing a big thump to the power companies, the High Court now has mandated initiating of insolvency proceedings by lenders against defaulting projects of companies.
According to a note by BofA Merrill Lynch Global Research, the only way out is to form a public sector Asset Reconstruction Company (ARC) that manages banks' power NPLs either directly or by bidding at NCLT auctions. Second, media reports suggest that the Ministry of Finance may exercise the option of directing the RBI to modify its February 12 circular within 15 days allowed by the court. Third, the court has also given the government's just-formed committee on the power sector two months to work out a resolution plan with the RBI. Finally, the Allahabad High Court has left the door open for private power producers to seek relief individually. Media reports suggest that they are approaching the Supreme Court.
This begs the question, how will the power PSU ARC be funded? Analysts expect a few options. First, the Ministry of Finance will have to recapitalise PSU banks by Rs 1.8 trillion in FY19-20 to fund 14 per cent loan growth in FY20. Of which, Rs 1,323 billion will go to fund banks' 75 per cent haircut on Rs 2.5 trillion of stressed power assets. Another option is that the banks would transfer their stressed assets to the proposed ARC at the 75 per cent haircut and securitise the balance of NPLs into ARC paper to seed it.
Although, the court has asked the centre to decide and take action under Section 7 of the RBI Act within 15 days on power companies. This also shows that the judiciary kept the sacredness of the IBC process intact. According to experts, the Central Government will try to retain potential upside from restructuring within the public sector as USD 50 billion of banks' stressed assets head to the NCLT after the Allahabad High Court refused to stay the RBI's February 12 circular.
The question arises, who will buy it in NCLT? In terms of rupees in crore, 1 MW of power plant construction could cost a company Rs 40 million. Hence, the construction cost of 42,800 MW of power plants is Rs 1,710 billion, which has already been spent. That is the kind of money which will look for buyers in the coming six months. So why would anyone come to NCLT and buy these stressed assets, which do not have PPAs (19,723 MW) in place and adequate gas availability (10,581 MW)? If no takers are found, Rs 1,200 billion will go down the drain because they are financially unviable projects.
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