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SC’s coal block allotments order spooks ongoing deals

SC’s coal block allotments order spooks ongoing deals Ongoing transactions in power sector, related infrastructure come to a halt, with asset values dropping further

As power, mining, and banking firms wait for the 1 September verdict in the Supreme Court, ongoing transactions in the Indian power sector and related infrastructure like ports have come to a halt, with asset values dropping further, according to experts, analysts and advisers.

The apex court ruled on 25 August that all coal block allocations between 1993 and 2010 are illegal. That ruling capped a recent spate of setbacks for power companies. On the same day that it ruled on the coal blocks, the Supreme Court in a separate judgement on compensatory tariffs stayed an order by the Appellate Tribunal for Electricity allowing Tata Power Co. Ltd and Adani Power Ltd to charge higher prices for electricity produced from their plants in Mundra, Gujarat. On 21 August, a Special Investigation Team appointed by the Supreme Court to look into the matter of black money (or unaccounted money) said in its report that over-invoicing power equipment imports was another way of generating black money.

And over the past weeks, India’s Central Bureau of Investigation has arrested bankers, promoters of companies, and middlemen as it intensifies its investigation into the bad loans on the books of banks; at least some of these loans have been extended to power companies. India’s power ministry had flagged the danger of loans sanctioned without fuel supply tie-ups and power purchase agreements (PPAs) turning into non-performing assets (NPAs), or bad loans, as early as April 2011 to state-owned Power Finance Corp. and Rural Electrification Corp., but banks continued to lend to private sector power project developers. “Even after the cut-off period provided by the power ministry, banks continued to lend to the project developers without a PPA or a fuel-supply agreement,” said a top executive at India’s largest power sector lender who asked not to be identified. The result, say experts, is a slowing in negotiations and transactions related to mergers, acquisitions and strategic stake sales in the power sector; these had picked up in June, after the National Democratic Alliance government, perceived to be business- and investor-friendly, took charge.

“The deal market, which was witnessing some fervent activity in power and related infrastructure like ports, will be impacted by recent developments on the issue of black money in imported power equipment, lack of appraisal rigour by lenders during funding, the Supreme Court judgement on compensatory tariffs and coal allocations,” said Sambitosh Mohapatra, an executive director at consulting firm PricewaterhouseCoopers Pvt. Ltd. “The timing is bad,” said a person involved in an ongoing deal, who spoke on condition of anonymity. The recent revival of interest in the Indian power sector came after several slow years during which power projects were affected by slowing economic growth, high borrowing costs, delays in securing environmental clearances and land acquisition as well as shortages of fuels such as coal and gas.

There have been two recent transactions in the Indian power sector. Last month, Reliance Power Ltd, controlled by Anil Ambani’s Reliance Group, agreed to buy the hydropower assets of Jaiprakash Power Ventures Ltd for an undisclosed amount. Earlier this month, Adani Power, controlled by billionaire Gautam Adani, acquired Lanco Infratech Ltd’s 1,200 megawatt Udupi power plant in Karnataka. That revival is now threatening to be short-lived, say experts. “The recent spate of (bad) news will definitely dampen fledgling investor confidence in the Indian coal and power sector,” said Abhishek Poddar, a partner at consulting firm A.T. Kearney Ltd. “While there has been a lot of focus and attention on the SC judgment on coal allocation, the views expressed by the highest court on compensatory tariff relief for Tata Power and Adani Power also present significant ramifications. There are several projects in the Indian power sector that are hoping for some relief through compensatory tariff—an overall adverse view on the same reduces the viability of several assets,” Poddar said. “The transactions market that was showing signs of activity is likely to slow in view of the Supreme Court verdict, worsening the fuel risk perception. This, coupled with uncertainties around supplies from Coal India Ltd in the medium term, concerns about equipment procurement practices and growing concern on quality of bank lending to the sector, the hour indicates need for desperate measures soon,” said Dipesh Dipu, an associate professor at Administrative Staff College of India.

“The power sector has been reeling under various issues, fuel shortage, delay in clearances, the coal scam etc, over the last 18-24 months, and the Supreme Court’s verdict has further led to investors developing cold feet towards the sector,” said Amol Kotwal, director, energy and environment practice, South Asia, Middle East and North Africa, at consulting firm Frost and Sullivan. “International investors would be doubly cautious. In future, instead of financial due diligence, investors will shift to conduct of forensic audits to be certain of costs,” Mohapatra said. India has an installed power generation capacity of 250,257MW, and faced a peak deficit of 3.9% in July. Analysts say the data doesn’t capture the real demand, ascribing the lower deficit to the unwillingness of state electricity boards to buy enough power because they cannot afford to do so. Many Indian companies, especially in the infrastructure space, are selling assets to reduce debt. Forty listed Indian banks had gross NPAs of Rs.2.52 trillion as of 30 June, up 21% from Rs.2.08 trillion a year ago. Banks’ exposure to the capital-intensive power sector is estimated at Rs.3 trillion, more than the total amount of gross NPAs in the banking system.

Source: www.livemint.com