How Government’s Latest Resolution Plan For Stressed Power Assets Could Work

The government, banks and other power sector lenders are currently working on a resolution plan for stressed assets in the power sector.

The plan, labelled the ‘Samadhan Scheme’, includes 11 stressed power assets shortlisted by State Bank of India with a total 12-15 gigawatt capacity and debt burden in the range of Rs 80,000-90,000 crore. While stakeholders are still working out the details, there are three potential ways in which the plan can be implemented, at least four people with direct knowledge of the discussions told BloombergQuint on the condition of anonymity.

The Government-Led Route

Under this route, the proposal is to float a special purpose vehicle with equity contribution from state-owned entities like SBI, Power Finance Corporation Ltd. and Rural Electrification Corporation Ltd., the four people quoted above said.

Before this route is implemented, banks would convert a portion of their outstanding debt in the stressed power companies into equity and assume control of the asset.

The SPV would take over the power asset by purchasing controlling equity from banks and issue government-guaranteed bonds for the remaining debt.

Operations and management of these assets would be the responsibility of the SPV, which could appoint specialists from the public or private sector. The assets would remain parked in the SPV till they can be sold to an appropriate bidder at the right value.

The question, under this route, is how the banking regulator would treat these government-guaranteed bonds on bank books, said two of the four people quoted above, both senior public sector bankers. If the RBI does not provide bankers with some lenient dispensation, the benefits availed from this scheme would be negligible.

The Private Sector Route

Alternately, banks could sell these 11 power assets to private sector asset reconstruction companies or funds that specialise in stressed assets. This route may be contingent upon the interest shown by large global stressed asset funds in these assets, the four people said.

Banks would be willing to sell these stressed assets at a 30-40 percent discount to their outstanding debt, said the people quoted above. The assets can be sold in exchange for security receipts or a similar instrument in favour of banks, the people confirmed.

The lack of interest from foreign funds in recent stressed asset deals might be an obstacle under this scheme, the people BloombergQuint spoke to added. While large international investors like KKR, SC Lowey and JC Flowers have all shown interest in the Indian stressed asset market, they have not closed too many big deals yet.

One-Time Dispensation

The third route currently being discussed between the government and the RBI is that of a one-time dispensation.

If the RBI were to agree to this, the promoters of individual assets may continue to be in the driver’s seat and ensure turnaround of their companies. However, banks would convert some of the unsustainable debt into equity. The terms for the sustainable debt could, in turn, be revised.

According to the people quoted above, this route can only be implemented if the RBI agrees to a dilution of its Feb. 12 guidelines on stressed asset management, which laid down strict timelines and conditions for a bank-approved restructuring scheme.

If the circular is not diluted, banks will be forced to take the asset to the National Company Law Tribunal for insolvency proceedings as per guidelines. The fear among bankers and the government is that these assets may not find buyers at a reasonable value under insolvency, which may lead to significant haircuts for the lenders involved.

Experts believe that special dispensation by the RBI and the government could make the most sense since promoters have spent considerable time, effort and money in creating these assets. Besides, most of the issues facing the power sector have their roots in policy making and not because the promoters have tried to benefit themselves, said Vinayak Chatterjee, chairman of Feedback Infra, an integrated infrastructure services provider.