Stressed power assets escape insolvency noose, but uncertainty remains

Stressed assets in the power sector escaped insolvency under the new Reserve Bank of India circular but uncertainty still remains for those assets where debt resolution processes are underway. 

Lenders have a cumulative exposure of roughly Rs 2 trillion to stressed assets in the power sector. Of the 30 identified stressed power projects, a dozen are in the National Company Law Tribunal (NCLT) for insolvency. For seven projects, the resolution process is going on outside the Insolvency and Bankruptcy Code. 

A senior executive in the Power Finance Corporation (PFC) said they have submitted three projects in the NCLT afresh, including two thermal power projects of Rattan India. “Projects already in the NCLT will not be impacted by the revised circular. We will have to study what measures can be taken up for projects where the resolution was going on,” he said. 

There are about 10 plants totalling 10 Gw, which are incomplete and are highly unlikely to find a buyer. 

Power experts are sceptical if Friday’s Prudential Framework for Resolution of stressed assets would provide any blanket relief to the sector. “The revised circular is very open-ended, and it banks on the assumption that the sector would turn around on its own. The resolution of sectoral problems, such as power demand and coal, remain unaddressed by the government,” said a power sector executive. 

“This (the new circular) provides a liberal breathing space and flexibility to lenders and the stressed independent power producers. However, with stagnant demand (thermal generation growth in May 19 was 2 per cent), regulatory activism demanding a cut in tariff based on haircut by lenders, and overall lack of investor interest in these assets, it remains to be seen how useful this circular will be,” said Debasish Mishra, partner, Deloitte Touche Tohmatsu India. 

The new circular replaces the February 12 circular of last year. Only two power projects have found new buyers since February 2018 outside the IBC process. This includes Prayagraj thermal power project of Jaiprakash Associates’ that was bought by Resurgent Power – a JV promoted by Tata Power and ICICI Bank. The project is under regulatory tiff with the Uttar Pradesh government, which wants the tariff to be reduced. The other resolved project was SKS Binjkote. Besides, Lanco's Teesta VI power plant found a buyer in the government-owned NHPC under the IBC process. 

The Association of Power Producers, one of the petitioners in the Supreme Court against the February 12 circular, welcomed the move, citing that no mandatory referral to NCLT is a huge relief. 

“The discretion of referral/bank-led resolution now rests on bank boards through inter-creditor agreements. 

Consent thresholds at 60 per cent by number and 75 per cent by value, as compared to earlier 100 per cent by number, is practical and will help resolution of bad loans. The circular provides for a way forward for dealing with dissenting bankers, too. Overall, a holistic and workable framework,” said A K Khurana, director general, APP.

The power sector, through its two representative bodies, had moved the Supreme Court, challenging the constitutional validity of the February 12 circular. The Supreme Court quashed the circular in April, and denied all resolution process arising after it.

In the February circular, the RBI had allowed 180 days to the lenders for debt resolution of large defaulters. Failing which, the asset would have to be taken to the NCLT for initiation of insolvency. The deadline got over on August 31, 2018.

The revised circular has increased the review period of default to 30 days. “During this review period, lenders may decide on the resolution strategy, including the nature of the resolution process, the approach for implementation of the resolution process, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery,” said the new circular.