Banks to rethink loan pacts with power companies

Banks will have to rethink existing and future loan agreements with power companies if the latter get a loan for a power plant given by the government through a tender or a contract for a certain time period.

According to the new accounting norms notified by the government recently, if a power company has done a power purchase agreement (PPA) with any state for such a plant, where it will get an assured return from the government, the plant may be considered a "financial asset" in the company's balance sheet.

Banks give loans to power companies against the fixed assets on their balance sheets. Power companies categorise such power plants as fixed assets to avail such loans. "Banks will have to align their loan agreements with new accounting norms," said Ashish Gupta, Partner, Walker Chandiok & Co LLP. "They will have to re-work the arrangements for such loan agreements which they may have done and which they may do in future."

All such power plants will be considered financial assets or intangible assets, instead of fixed assets. Most of the current PPAs (solar or otherwise) and agreements for ultra mega power projects will fall under this criterion. "The new accounting norms in substance consider such power companies as contractors and not owners for power plants," said Gupta.

According to Appendix-C of the Indian Accounting Standards (IndAS) 115, relating to service-concession agreements, all such PPAs where the government controls the purchase of power and its price will be considered a fixed asset in the government's books and financial assets in the power company's books. However, in case a power company establishes a power plant on its own, and enters into a PPA with the government or any other buyer later, the power plant will remain in the power company's balance sheet as a fixed asset.

If a company finds it difficult to apply this norm retrospectively, it may be allowed to apply the new norms from a transition date. "Power companies will have to do an impact assessment and explain to banks soon about this development," said Sai Venkateshwaran, head of accounting advisory services, KPMG in India.

The government has asked all companies, listed and unlisted, with a net worth of more than Rs 500 crore, to start following these accounting standards for the accounting periods beginning April 2016.

AGREEMENT REVISIT

• Applicable on power plants that were given to private companies by government with a power-purchase agreement (PPA)
• Power companies used to consider such power plants as 'fixed assets' in their balance sheets
• New accounting norms consider such power companies as contractors, not owners; so such power plants become 'financial assets'
• Banks that used to give loans to power companies on the basis of their fixed assets will have to re-work their agreements
• Most of the current PPAs (solar or otherwise) and agreements for ultra mega power projects will fall under this criterion
• If a power company finds it difficult to apply this accounting norm retrospectively, it can apply these norms from the transition date