CERC to include RPT in review, probe of power exchanges

The central electricity ombudsman is of the view that related party transactions are part of books of accounts

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The Central Electricity Regulatory Commission (CERC) proposes to include related party transactions in power exchanges as one of the terms of reference in its review of the power exchanges.

The power exchanges had represented for excluding the related party transactions from the purview of the review and investigation as it is compiled by the power exchanges under various Acts like Income Tax Act, Service Tax Act, Labour Laws and under Companies Act.

However CERC is of the view that related party transactions are part of books of accounts and existing power market regulations empowers the commission to investigate into the affairs of the exchange or the members of the exchange including books of accounts. Therefore related party transactions are covered under power market regulations.

Related party transaction in general parlance is referred to a business deal or arrangement between two parties who are joined by a special relationship prior to the deal. The department of Company affairs has specifically brought an accounting standard to incorporate related party transactions under the amended Companies Act.

The objective of this Standard is to establish requirements for disclosure of related party relationships, transactions between a reporting enterprise and its related parties, enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries), associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture.

Explaining the intentions of this inclusion, official sources said that related-party transactions are close relationships between entities or individuals and they are not necessarily wrong. But because of their delicate nature and the risk of abuse or fraud, they must be carefully scrutinized and usually fully disclosed, they said.

As an investor, one would like corporate disclosures to provide a clear and fair picture of the entity's net worth, operations, and cash flow. To be precise, related party transactions are important because they have the potential for distorting that information.

The Central Electricity Regulatory Commission (CERC) has ordered a review and investigation of the operations of power exchanges by an independent consultant. One of the essential defaults that have led to such a review of operations is the fact that the exchanges have a risk management committee (RMC) which shall review the risk management framework and processes of the power exchanges on a six monthly basis.

As per regulation 33 of the CERC power market regulations 2010, the report of the RMC is to be submitted to the board of directors of the power exchanges In the due process, , the Power Exchange shall carry out periodic IT system audit for data security, date integrity and operational efficiency and submit a report to the CERC annually. According to official sources, this has not been done since 2011.

At present there are two power exchanges – Power Exchange India Ltd (PXIL) and Indian Energy Exchange Ltd (IEX) which have been in operation for six years by now.

The review will be two pronged. The first part will be the second will be regulatory compliance related to the related party transaction and promoter and power exchange relation, degree of control etc. It has been specified that the period of the review/investigation will be FY 2012- 14 except for related party transactions which would be examined since inception of power exchange.

The second area will be technical preparedness of the exchanges in conducting power exchange business with fairness, transparency. As per CERC, these Power exchanges have nationwide operations, have over 3000 participants, handle large financial transactions, interact with multiple stakeholders like banks, generators, discoms etc.

CERC intends to undertake review of the overall regulatory compliance to these Regulations, the robustness of operational processes, the control and checks placed by the power exchanges to ensure business continuity, safeguarding the public interest and absence of any untoward systemic risk, officials said.

On the other hands, as per officials, a power exchange deals with financial transactions, monies of participants and undertakes various other functions and thus should remain robust and safe at all times and maintain confidence of market participants in the institution.

Thus the overall review will be within the scope of the business Processes of the power exchanges to ascertain whether these are in compliance with the applicable Act, regulations framed thereupon by the Commission, orders, rules, bye-laws, business rules related to Power Exchange and Power Market Regulations.