RBI denies a breather to the power sector for stressed assets

The power ministry had asked the RBI to provide a relief to the power sector in the IBC guidelines, but the central bank had refused.

Leading bankers recently met to draft a proposal for bailing out stressed power assets outside the IBC route.

The initial plan is that banks will identify sustainable debt in an asset and rework the debt-equity at a certain assumed cost. Banks have proposed that an agency similar to the National Investment and Infrastructure Fund can acquire a portion of the equity thereby leaving the promoter with only a nominal stake.

With this financial engineering, the banks may try and sell off these assets or join hands with some operation and management companies to operate the project. (Source: Business Standard)

I believe there are deeper systemic issues plaguing the power sector like shortage of coal and or absence of a long term power purchase agreement (PPA). It will be difficult to attract potential investors with just financial engineering and systemic issues have to be addressed and resolved.

Imported coal could be an option for power plants situated close to coastal line and it needs to be borne in mind that all power plants are not designed to operate efficiently on imported coals. As regards signing of long term PPAs by discoms, there are early signs of growth in industrial activity and demand of power but capex/investment cycle may be slow on account of general elections slated next year.

In the past, state-owned companies such as Power Finance Corporation , Rural Electrification Corporation and NTPC were planning to come together to take over the equity and manage operations of the stressed assets. Successful implementation of the same is yet to be established.

After metals, the next sector that can witness a flurry of activity under Insolvency and Bankruptcy Code could be infrastructure sector and how the story unfolds will be interesting to observe.

#IBC #Insolvency