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Reviving Stressed Assets in Power Sector

Stress in Power Sector

Reasons for stress

► Power industry has been facing inherent sectoral issues which are
fundamental to their survival

Lack or delay in execution Delay in securing Excessive focus on

Non availability of fuel Land acquisition delays
of PPAs approvals renewables

► These fundamental issues ultimately led to stress in the power sector

► While RBI had come up with many schemes/ regulations to counter

the ever increasing incidence of NPAs, these could not achieve
desired results

► Which leads us to the question - Should there be a special

dispensation to the power sector………

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Identifying the problem

► …….however, there can be no solution unless, fundamental sectoral

issues are resolved

► Resolving these fundamental sectoral issues would require time –

one of the option entails involving a nodal agency, such as an ARC,
which can house these assets until the time policy changes are

► Availability of long term/ medium PPAs – there is some traction wherein

government/ PTC is coming up with medium term PPAs of 3 years;

► Ensuring coal supplies (FSAs) – making coal available for IPPs with tied-up

► Streamlining land acquisition; single window for approvals and clearances

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Financial Re-engineering to
deal with Power Sector
An attempt to resolve
Financial Re-engineering (1/3)
► Put aside power assets which either are under-construction/ dormant
or do not have tied-up capacities and/ or coal linkage - Identify and
segregate power assets which can be salvaged

► Change in mindset amongst lenders is the need of the hour – move

away from recovery mindset towards resolution mindset; which was
always the original intent of IBC

► Change in regulatory environment which allows lenders to lend and

support distressed assets

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An attempt to resolve
Financial Re-engineering (2/3)
► Develop long term capital market/ bond market

► Involvement of infrastructure funds/ pension funds/ insurance

companies - develop an enabling environment through policy
changes to attract such funds

► While involvement of the above sources of fund are desirable, it is

likely to take some time – as such, lenders should be empowered to
re-engage in the power sector to bridge any funding gap

► While developed markets tend to finance infrastructure projects from bonds/

pension funds to the extent of 90%, India can be a 75% bonds/ 25% banks market

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An attempt to resolve
Financial Re-engineering (3/3)
► An example - Road sector

► With visibility of revenue and long term tolling arrangement, we now see a lot of
investor interest wherein infrastructure funds such as Cube Highways, IFC etc are
not financing and backing such road projects

► Which leads us to believe that power sector can also be revived

► There is certainty in revenue streams – PPAs are not terminated and offtake
commitments are met by power procurer;

► Coal linkages are not cancelled; supply ensured to IPPs with tied-up capacities;
► Pass-through of increases in input costs;

► Improving DISCOMs delinquencies – subsidy transfer through DBT or funding of

such subsidies by the State governments

► Ensuring DISCOMs are regular in making payment to IPPs – LCs mechanism

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Developing an Institutional
Framework for Resolution
Sub-optimal resolution structures
► Assets cumulating to 36GW have been identified which are in financial stress;
► Multiple initiatives taken by Government and RBI towards resolution of power


► Lenders are contemplating to resolve the stressed power assets under IBC,
however, CIRP process has its own set of inherent challenges;
► There is a need to address the regulatory aspects of formulating and
implementing resolution plan in the power sector;
► Considering the above factors, following aspects may need to be addressed
in order to migrate to a congenial regulatory environment:

Need for
Reduce litigation/ Insulating investors Ease of divestment Impact of IBC
modification to RBI
scrutiny for lenders

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Points deliberated
► IBC, a process to resolve assets / companies. However, IBC cannot work if issues
Limitations of impacting underlying sustainability of assets are not solved
resolution process
► Process delays and litigations hindering timely resolution

► Sanctity of existing concessions, say PPAs and FSAs post implementation of Resolution
plan remains to be tested
Legal & lenders
► 100% Lender approvals under Feb 12 RBI Circular is a practical challenge; however, the
circular, having been adjudged ultra vires, may be modified
► Practical challenges of lenders to approve resolutions with hair cuts in light of increased
public scrutiny

► Lack of long term PPAs

► Inadequate visibility of coal linkages

Sector ► DISCOM delinquencies' – Renegotiation of PPAs, delayed payments as well as non

fundamentals payment of Late payment surcharge
► Regulatory delay – Delays by regulator / APTEL in resolution of regulatory matters
► Market rules to be consistent for private and public / state owned companies

► Lack of indemnities in respect of uncertainties/ contingent liabilities (coal availability, Land

Issues specific to acquisition issues, Tariff disputes, etc)
incoming investors ► Funding of new debt and working capital
► Regulatory CAPEX & CAPEX for completing U/C projects

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Recommendations on institutional
► Lenders could consider Pre-negotiated resolution plans (Pre-packs), to be approved by a
certain threshold of lenders); promoter involvement to be discussed as relevant
Pre-packs ► Plan to be put in front of NCLT for confirmation within 30-60 days
► Pre-packs amendments are being considered in IBC

Achieving ► More feasible bilateral restructuring policy to be worked out (before the IBC option is
consensus among actioned) – lender threshold (60% - 75% approvals to cram down the others) and lender
lenders mind set (to approve such viable plans) to change

► Acquisition of stressed assets by State Generators, a possible solution to be explored

Exploring avenues keeping into consideration the existing regulations including National Tariff Policy
with States ► May solve long term PPA problem

► On creating exceptions – Precedence on exception of applicability of Section – 29A for

MSME sector. However, any exception may have to be within the IBC framework (eg. Pre
Exceptions for
packs) and not as a substitute to IBC.
power sector
► Sectoral issues have to be resolved via a specific policy for the sector.
► Robust research required on finding precedents to support the IBC institutional mechanism.

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This document has been prepared by EY Restructuring LLP (‘EY’) on the basis of publicly
available information and information obtained from other internal/ external sources, neither
of which has been independently verified by EY. Neither EY, nor any person associated with
it, makes any expressed or implied representation or warranty with respect to the
sufficiency, accuracy, completeness or reasonableness of the information set forth in this
document, nor do they owe any duty of care to any recipient of this note in relation to this
document, and unless specifically pre-agreed in writing, in relation to any other information
which a recipient of this document is provided with at any time.

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