Amidst a scenario of large-scale stressed assets being put on the block, the Appellate Tribunal for Electricity (APTEL) in a key positive has recently approved the transfer of ownership of Prayagraj Power Generation Company Limited (PPGCL) to Renascent Power Ventures Private Limited without any reduction in the adopted tariff. Renascent Power is a wholly owned subsidiary of Resurgent Power Ventures Pte Limited. The latter is a joint venture between Tata Power International Pte Limited, ICICI Bank, the Kuwait Investment Authority and the State General Reserve Fund of Oman, set up to acquire assets in the Indian power sector.
PPGCL, a subsidiary of Jaiprakash Power Ventures Limited, owns and operates the 1,980 MW Bara coal-based power project in Uttar Pradesh, but the project became a non-performing asset (NPA) due to financial and operational stresses. In November 2018,
Renascent Power signed a share purchase
agreement (SPA) with a consortium of lenders led by the State Bank of India (SBI) to acquire 75.01 per cent stake in PPGCL. The transaction was part of the stressed asset resolution process initiated by lenders through competitive bidding under the Scheme of Asset Management and Debt Change Structure (Samadhan). However, the approval of the regulators including the state electricity regulatory commission was one of the preconditions for concluding this transaction.
Responding on this development, Praveer Sinha, CEO and MD of Tata Power, said, “APTEL’s judgement is a positive development for the power sector and specifically for the resolution of stressed assets. The APTEL judgement protects the economic viability of the stressed assets post resolution, thus providing certainty for bidders who wish to participate in the resolution process of stressed assets in the future.”
Background
When the parties, including Renascent Power and SBI, approached the Uttar Pradesh Electricity Regulatory Commission (UPERC) seeking approval, the latter asked the new owner (Renascent Power) to reduce the tariff of the project by Re 0.14 per unit. The commission passed an order in April 2019 stating that the proposed transaction of transfer of 75.01 per cent equity shareholding of PPGCL would result in the entire debt burden of PPGCL going off the books. It also opined that with zero debt, the interest on loan, which is a part of the fixed cost, would become zero. As per UPERC, the new owner would be benefited beyond what was contemplated at the time of the adoption of the tariff for the TPP and, therefore, asked for a reduction in tariff. The adopted tariff was Rs 3.02 per unit, which was determined through competitive bidding in 2010. Aggrieved by UPERC’s order, Renascent Power approached the Allahabad High Court, which directed it to approach APTEL.
During the proceedings at APTEL, SBI clarified that the proposed transaction would not result in PPGCL’s entire debt burden going off the books and it was only being done to ensure that the project would be sustainable for the future and the lenders would be able to recover the best value of the outstanding debt. PPGCL has an outstanding debt of Rs 119 billion, as on October 31, 2017. The company had failed to make interest payment, apart from the principal amount, to the project lenders since February 2017; as a result, the lenders classified it as an NPA. Renascent Power decided to acquire stake in PPGCL in a deal size estimated at Rs 60 billion. But the total liabilities to be cleared by Renascent Power amount to Rs 82.23 billion after including additional amounts of Rs 10.73 billion to be paid to capital creditors, expenditure of Rs 4.5 billion to maintain the plant and keep it running, and a working capital debt of Rs 7 billion.
APTEL’s ruling
In its order dated September 27, 2019, APTEL ruled in favour of Renascent Power and the lenders, stating that the PPA tariff was the fundamental basis for arriving at the bid amount by the bidders, and any subsequent reduction in the PPA tariff post the conclusion of the bid process by the lenders would amount to a change in the fundamental basis of the bid. The bid process adopted by SBI was to recover its dues and salvage the project. If the bidders had known that there was a possibility of reduction in the already adopted tariff, the bid amount would not have been Rs 60 billion plus other amounts; it would have been much less.
APTEL ruled that the adopted tariff (of Rs 3.02 per unit) should not change by virtue of the SPA between Renascent Power and SBI. It concluded that the proposed reduction in tariff by UPERC in this case amounts to revisiting the tariff adoption process and is beyond the scope of the state regulator’s jurisdiction.
Notably, there are about 40 GW of thermal power assets facing financial stress, with a project cost of Rs 2.91 trillion. If regulatory approvals delay the debt resolution mechanism in such a manner, it would lead to a disastrous situation for the sector.