Govt Rider On Power Debt Cap Removal

The government has removed the 40 per cent ceiling on domestic funds that financial institutions (FIs) face in funding private power projects on the condition that the projects source equipment and supplies from domestic manufacturers.

Official sources said, though the Centre will not monitor the funding pattern of FIs, the relaxation means that FIs can use their discretion while extending funds to power projects being set up by the private sector .

They added that this condition is meant to avoid any mismatch in the source and application of funds when FIs raise resources for power projects.

This implies that the foreign funds being raised by FIs go towards meeting the foreign expenditure. They further said that with this relaxation will enable domestic FIs which are already flooded with funds. The 40 per cent cap on domestic funds was fixed by the government in 1992 as part of its private power initiative. Under this, FIs and banks cannot raise more than 40 per cent of the total debt funds from the domestic market for financing power projects.

FIs and banks have been lobbying with the Centre for the removal of this ceiling as it only acts as a deterrent for funding power projects.

They feel that once this ceiling is removed, they will have more flexibility while raising debt funds. The power ministry has already relaxed this ceiling in the case of captive power projects. For captive projects, FIs can raise up to 100 per cent of the funds required from the domestic market.

The government has, however, clarified that as long as these captive power projects do not supply power to the grid _ they will not be subject to the 40 per cent ceiling. This relaxation for captive power projects came after the Industrial Credit and Investment Corporation of India sought clarifications over the 40 per cent ceiling being applicable for captive power units, which are set up as shell companies by project promoters.

The funding pattern for power projects generally includes 30 per cent of the total cost in the form of promoter's equity, and the balance as debt funds, which can be arranged from the domestic as well as the international market.

The foreign borrowing is normally backed by a guarantee from the export credit agencies. Some power projects that are close to financial closure are raising around 36 per cent of their debt requirements from the domestic market.