REC Tries Again To Get RBI Approval For Pariwartan - A Power Sector ARC

The government and the Rural Electrification Corporation Ltd. will once again seek the Reserve Bank of India’s approval for setting up an asset reconstruction company to resolve stressed power assets, two people in the know said.

During a meeting between representatives of the central government, lenders and Reserve Bank of India on Aug. 31, the plan, called Pariwartan, is likely to be discussed one more time after the banking regulator refused to approve it earlier, the people quoted above said. The plan aims at resolution of those stressed thermal power projects with inadequate fuel linkages or lack power purchase agreements.

The scheme, Power Assets Revival Focused Warehousing and Revitalization, prepared by REC, India’s largest power sector lender, seeks to resolve assets that combined owe close to Rs 70,000 crore to banks. These power projects have been picked from a list of 34 stressed projects with Rs 1.8 lakh crore worth of loans—identified by a standing committee of Parliament.

“REC has suggested certain changes which are being discussed by the lenders and the RBI because it needs certain concessions under the RBI scheme of asset management companies,” Power Secretary Ajay Kumar Bhalla told BloombergQuint in an interview.

The RBI didn’t respond to BloombergQuint’s emailed queries. PV Ramesh, chairman and managing director at REC, didn’t respond to calls or messages.

Friday’s meeting stems from the Allahabad High Court’s order on a petition by power producers against the central bank’s stricter debt resolution framework. The RBI’s Feb. 12 circular asked lenders to consider even a one-day delay in repayment as default; and gave them 180 days to find a resolution failing which insolvency proceedings would begin. That deadline ended on Aug. 27.

How ‘Pariwartan’ Will Work

According to the plan, lenders—including banks—would transfer stressed power assets to the ARC for three years, giving them time to improve power-purchase pacts and fuel linkages. After that, the ARC would cease to exist, and the companies would have to continue their business by themselves.

For this warehousing mechanism, Bhalla said, the issue is at what value an asset will be transferred and how the lenders will treat it on their books. “This issue is being handled by REC and lenders.”

REC initially proposed that the ARC would take over the assets at a discount and offer only security receipts in exchange for the lenders’ remaining exposure. The RBI, according to the people quoted earlier, rejected the suggestion since ARC norms mandate that lenders be paid at least 15 percent of the net asset value in cash.

REC has now proposed that banks and other lenders contribute the capital necessary to set up the ARC, so that it may be used to restructure stressed power assets.

The ARC, according to the plan:

• Would employee sector specialists and independent experts in the investment committee, so that the decision to purchase an asset is not influenced by investors.
• The specialists would also help keep the power projects operational for three years.
• For any additional funding, the ARC would raise capital from eligible investors in the future.

The REC’s Pariwartan plan would run parallel to the State Bank of India’s Samadhan scheme, which is meant for assets facing financial difficulties and can be sold to investors for a haircut.

SBI, India’s largest lender, is expected to finalise resolution plans for at least six stressed power companies under Samadhan, outside the insolvency process at the National Company Law Tribunal. On Tuesday, Resurgent Power, a joint venture between Tata Power Ltd. and ICICI Ventures Ltd., said it has received a letter of intent from lenders to purchase Jaiprakash Associates Ltd.’s stressed Prayagraj power project in Uttar Pradesh.

To be sure, this is not the first attempt to restructure power generation companies. Previously, under the the Power Ministry, a number of such plans were suggested. These involved bundling power assets and holding them under a special purpose vehicle managed by state-owned entities like NTPC Ltd. for a fix period of time. Those didn’t go beyond the discussion stage because all lenders didn’t agree.

Does A Power Sector ARC Make Sense?

When many other resolution schemes for the power sector have not worked, is an ARC the best way forward?

Industry experts think so.

There is interest among investors for power assets which are under some financial stress but have their permissions in place, according to RK Bansal, chief executive officer, Edelweiss Asset Reconstruction Company. For other assets, he said, insolvency proceedings may spell liquidation as investors may not be keen on backing them.

“My worry is for those type of accounts which are incomplete and where there is part PPA (power purchase agreements),” Bansal said. “We as a country should take a call on whether these should go to scrap or whether we should try warehousing. I would say that we should warehouse them.”

Besides, said Manish Aggarwal, partner at KPMG, the government’s push towards total electrification will help in improving demand for power. Which, he said, will require additional power generation capacity in the next few years.

To ensure that all houses are electrified, Aggarwal said, it would be essential for the government to make considerable structural changes in the way power is generated and distributed.

“Like introducing penalties saying that distribution companies would need to ensure that power is available and they cannot go for load-shedding; then these assets would be in demand again,” Aggarwal said. “Hopefully, these projects would be able to tie-up more PPAs and become commercially viable.”

For lenders, however, the success would hinge on the extent of the haircut and future opportunities to recoup losses. A haircut is a shortfall on loan repayment.

While avoiding liquidation of power assets is important, the price at which the assets are transferred to the ARC will also be crucial, a senior public sector banker who has been working on the resolution of stressed power assets told BloombergQuint requesting anonymity. If the discount is too high, then the ARC structure will not be much of an improvement over insolvency proceedings, the banker said.

It would be important to close these deals with an option of upside to bankers when these assets turn around, he said. That way, according to the banker, the haircuts on these assets can be justified.