Stressed power generations firms face tough insolvency journey in court

The chances of stressed power generation units landing in the insolvency court have increased after the Reserve Bank of India revised last month its framework for the resolution of non-performing assets. A more worrying aspect, according to sector analysts, is that these assets — totalling more than 80,000 megawatts across operational and under-construction projects — may not attract big players once put on the block, unlike stressed steel firms.

The RBI, on February 12, withdrew its Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A) schemes, and said accounts in which the banking sector’s aggregate exposure was Rs 20 billion or above, lenders must implement a resolution plan within 180 days, starting March 1, 2018.

Low availability of coal supply, lack of long-term power purchase agreements (PPAs), regulatory hurdles, and delays in receivables from distribution companies (discoms) are key reasons for many power projects being stranded. Of 80,000 Mw stressed assets, more than 20,000 Mw, with an investment of about  Rs 1,000 billion, are operating with long-term PPAs and necessary fuel supply agreements. These, however, owe lenders big money because of various sectoral issues.

While stressed steel assets have seen private equity firms and rival steel companies, such as JSW, ArcelorMittal, Vedanta, and Tata Steel, vying for them, most private players in the power sector are under stress. An insolvency professional handling a power company undergoing resolution under the Insolvency and Bankruptcy Code (IBC) said project completion cost was so high that nobody wanted to touch these assets. Even promoters of these companies might not be able to bid because of restrictions imposed by an Ordinance last year.

In the steel sector, players bidding for stressed firms want to expand their capacity, seeing a potential demand rise. While both power and steel sectors have seen a subdued growth in demand, problems besetting the power sector are more in the realm of state governments and are regulatory in nature. 

A source cites the case of Visa Power, which has total claims of about Rs 17 billion. The insolvency professional is engaging a consultant to see if the pending projects can be completed. Based on this, the IP will work out criteria for the bidding as well as a plan to run the company. State-owned Telangana State Northern Power Company is another firm undergoing the resolution process. 

Unlike the steel sector where promoters have been reluctant to sell their assets and who even wanted to bid for their companies till the Ordinance barred them, about 25,000 Mw stressed capacity in thermal power is on sale outside of the IBC. 
Business Standard reported recently that these assets were not finding buyers. Most promoter companies want to exit to lighten their debt.

The stress in the power industry has left State Bank of India, the country's largest bank, with a 30 per cent share in the stressed assets of private power producers. Punjab National Bank (PNB) has the second-largest chunk of the total debt exposure to these projects. 

Private players said with rising under-recovery in thermal power projects, if corrective steps were not taken in time, almost all of the debt was feared to convert into NPAs. Thirty projects are already either classified as NPAs or are under the RBI's now-scrapped SDR and S4A schemes.

On Insolvency path already    
Company Capacity (MW) Status Outstanding Debt (Rs billion)
Monnet Power 1050 NCLT 37.50
East Coast 1320 NCLT 20.40
Jindal India Thermal 1200 NCLT 15.40
Essar Power MP 1200 NCLT 18.19
Essar Power Gujarat 1200 NCLT 4.70
SOURCE: NCLT/Companies