Wait for debt resolution likely to get longer for stressed power assets

The Supreme Court on Tuesday quashed the February 12, 2018 circular, and thereby denied all resolution process arising after it

The Rs 2-trillion worth of non-performing assets (NPAs) in the power sector have escaped the noose of insolvency, but the route to resolution remains long drawn.

About 34 thermal power generating assets totalling 40,000 megawatt (Mw) will now have to find a buyer or undergo debt resolution without the Reserve Bank of India (RBI) prescribed deadline.

The Supreme Court (SC) on Tuesday quashed the February 12, 2018, circular, thereby denying all resolution process arising after it. In the circular issued under the Insolvency and Bankruptcy Code (IBC), 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 National Company Law Tribunal (NCLT) for initiation of insolvency against them. The deadline expired on August 31, 2018. Most companies took the legal route to avoid the NCLT.

Power companies such as Essar Power, GMR Energy, KSK Energy, and RattanIndia Power as well as the Association of Power Producers and Independent Power Producers Association of India had in August moved the SC, challenging the constitutional validity of the IBC and the February 12 circular.

“With the threat of IBC proceedings mitigated, power firms and lenders will have some breathing space as well as flexibility to restructure debts in a manner which ensures continuity and value maximisation for lenders as well as power companies,” A K Khurana, director-general, APP, said.

The apex court has, however, upheld the constitutionality of the IBC governed under Sections 35AA & AB of the Banking Regulation Act that giv­es powers to the government to recommend to the RBI insolvency proceedings of certain companies. So while the deadline of resolution is not there anymore, the lenders could still initiate a resolution process or drag any to the NCLT.

“This provides some relief for promoters and lenders, who can now hope that the asset utilisation would improve in the coming quarters, with electricity demand going up and coal supply improving,” said Debasish Mishra, leader, energy, resources and industrial products, at Deloitte in India.

Resolution outside the IBC could, however, worsen the debt resolution of various assets. Of the 34 stressed thermal power assets identified by the finance ministry, only one has found a buyer to date. Jaiprakash Associates’ operational power project (1,980 Mw) at Bara was bought by Resurgent Power — a joint venture promoted by Tata Power and ICICI Bank.

More than 24 stressed power projects will now find it hard to find buyers because they are “incomplete”. Most of the incomplete projects are due to cancellation of coal block allocation, delay in getting land and/or environmental clearances, and local unresolved issues. There were seven projects which were subsequently declared resolved after they received subsidised coal supply under the SHAKTI scheme of the Centre.

Besides coal, there are 14,000 Mw of gas-based power projects which don’t have any gas supply. These would face a hard time as there was no likelihood of any assured supply either. The Centre discontinued the scheme to offer subsidised gas last year. The other 14,000 Mw projects have enough to run at barely 30 per cent plant load factor or operating ratio.

Leading banks, sector lenders such as State Bank of India, Power Finance Corporation, and REC designed several plans last year — Samadhan, Parivartan, Sashakt. The government officials later claimed these were ‘resolution frameworks’ and did not amount to a bailout scheme.

A high level empowered committee (HLEC) was formed under the chairmanship of the Cabinet secretary to provide long-term solution for stressed assets in the power sector. It came out with its report in November 2018. The report had a slew of recommendations to improve payment to power companies, boost coal supply, and provide power sale contracts to private units.

The power industry in its submission to the SC said that extrinsic factors such as lack of coal supply, power purchase agreements from states, and delayed payments had worsened their debt situation.

The submission quoted the parliamentary committee report, which said NPAs in the power sector was “primarily on account of government policy changes, failure to fulfil commitments by the government, delayed regulatory response, and non-payment of dues by distribution companies.” Market experts said similar issues would continue to haunt the sector.

The power industry, however, in its SC submission condemned the HLEC report saying the committee in its deliberations has not provided a remedy for the root cause of stress in the power sector.

It also said there has been delay in implementing the HLEC by several departments. “While the CCEA and the Ministry of Power have issued notifications, concerned ministries like coal and railways will also have to issue necessary notifications in order to give effect to the recommendations.