2. GENERAL ENERGY POLICY
At the time of writing, there are 8 Maharatnas1 and 16 Navratnas in India. The Maharatnas included Bharat Heavy Electricals Limited (BHEL), Bharat Petroleum Corporation Limited CIL, GAIL, IOCL, NTPC, ONGC, Powergrid and Steel Authority of India Limited. Among the Navratna are Power Finance Corporation Limited and Rural Electrification Corporation Limited.
The governance of each PSU depends on the ministry (the “line ministry”) that exercises ownership rights and is responsible for the vision, mission and longand short-term objectives of the PSU. In most cases the board of the PSU has limited autonomy to decide on the company’s management structure, such as the appointment and removal of the CEO, and, to a lesser extent, strategy formulation. The Department of Public Enterprises (DPE), as part of the Ministry of Heavy Industries, acts as the “nodal” agency for all PSUs and sets the policies guiding performance improvement and evaluation, financial accounting, personnel management and related areas.
Over the past decade the GoI has continuously reformed the governance of the PSUs with the objective of increasing their autonomy and management efficiency, while strengthening the transparency, accountability and auditing of operations. The DPE adopts regulations, in conjunction with sectorial regulatory bodies, and deals with the corporate governance of the sector through governance guidelines (in line with OECD Guidelines 2007). PSUs are required to submit quarterly compliance or grading reports to their line ministries. Memorandums of understanding have been signed by most PSUs and have emerged as a key tool for monitoring and motivating performance and controlling debt levels. While the top 10 PSUs are performing well, the DPE reminds in its 2017/18 PSU survey of the “sickness” of many PSUs, which still “include old and obsolete plant and machinery, outdated technology, low capacity utilisation, low productivity, poor debt–equity structure, excess manpower, weak marketing strategies, stiff competition, lack of business plans, dependence on Govt. orders, heavy interest burden, high input cost, resource crunch, etc.” (DPE, 2018).
No major privatisation has taken place in the past decade, but the GoI has reduced shareholdings by disinvestment through public listing and selling stakes of listed companies while maintaining majority ownership.
Economy and the energy sector
India’s economy is growing rapidly, with real annual growth rates of around 7% in recent years. It has experienced an average of 7.4% growth over the last 15 years; in 2017/18 it was 6.8% and in 2018/19 it was 7.2%, according to the Ministry of Finance.
India has a diverse economy that includes traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Slightly less than half of the workforce is in agriculture, but services are the major source of economic growth, accounting for nearly two-thirds of India's output but employing less than onethird of its labour force. India has capitalised on its large educated English-speaking
1 Maharatna status allows state companies greater financial autonomy. The status is granted to companies that had Navratna status and are listed on Indian stock exchange with minimum prescribed public shareholding under SEBI regulations with an average annual turnover of more than INR 25 000 crore, during the last 3 years; an average annual net worth of more than INR 15 000 crore, during the last 3 years; an average annual net profit after tax of more than INR 5 000 crore, during the last 3 years; and significant global presence and international operations.
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population to become a major exporter of information technology services, business outsourcing services and software workers.
India’s GDP in PPP is the third largest among the G20 largest economies, after the People’s Republic of China (“China”) and the United States. In terms of per capita income, however, India remains below the world average and ranks last among the G20. In 2017 India’s GDP per capita (in PPP) was USD 7 200 (2017 prices and PPP), significantly below the IEA average of USD 39 250 (2010 prices and PPP). In recent years the country has made a significant dent in poverty levels, with extreme poverty dropping from 46% in 1995 to an estimated 13% in 2015. India’s ability to achieve rapid sustainable development will have profound implications for the world. The world will only be able to eliminate poverty if India succeeds in lifting its citizens above the poverty line.
Over the past ten years the GoI has spent over USD 1 trillion on infrastructure according to the Ministry of Finance, as it promoted investment in manufacturing and development through fiscal incentives and policies in transport, power and urban and rural infrastructure. Reforms and liberalisation were enacted to boost foreign direct investment and remove bottlenecks in the supply of key raw materials. Major economic growth initiatives include Skill India, Digital India and Make in India. The Start-up India initiative aims to encourage entrepreneurship and job creation, boosting the agricultural sector with a focus on microirrigation, watershed development, soil conservation and credit, and various measures to improve clarity and transparency in economic policy-making.
The 2019 budget set out a ten-point vision for economic growth in the next decade, with a financial package to support investment in physical and social infrastructure and promote the Digital India initiative, a pollution-free India, and the Make in India initiative for micro, small and medium-sized companies and start-ups in the automotive, electronics, batteries, and water and water management sectors. To attract foreign direct investment, the government plans competitive tenders for mega-scale manufacturing facilities for EVs, charging stations, solar photovoltaic (PV) cells and lithium ion batteries, and proposes financial incentives for EVs. In the 2019 budget the GoI put a major focus on further improving the financial health of the power sector by strengthening the conditions of public loans to power distribution companies (DISCOMs) and adopting a new tariff policy. Moreover, the GoI announced reform of the gas and oil markets.
Although economic performance has been strong, development has been uneven, with the gains of economic progress spread unevenly between population groups and geographic areas. Furthermore, India has a very large infrastructure deficit – it is estimated that India would need to spend USD 200 billion (7-8% of GDP) on infrastructure annually and USD 5 trillion in total till 2030 at current exchange rates to eliminate it. The GoI spends around 4-5% of GDP on infrastructure investment annually, but its financing is restricted under the financial discipline and limits imposed under the Fiscal Responsibility and Budget Management Act of 2003. New insolvency and bankruptcy-related legislation aims to improve the financial health of the enterprises, including those in the energy sector. Private investment is made on a project finance basis. In many sectors, 50-70% of the debt comes from the banking sector, while institutional investors are only involved to a small extent.
Financial health of the power sector
One particular area of concern has been the power sector. India’s electricity generators suffer from financial stress due to the rapid addition of capacity amid slower than expected electricity demand growth. This left many generators with underutilised capacity and new
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2. GENERAL ENERGY POLICY
projects without adequate power purchase agreements (PPAs) or without fuel supply agreements (FSAs), causing delays for project promoters. The failure of DISCOMs to pay generators, or their delay in paying, has left project owners unable to service their debt or get fresh equity or working capital (HLEC, 2018).
The 67 DISCOMs, mostly owned by the states, have faced chronic physical commercial and technical losses due to the lack of metering and low payment collection rates, leading to high levels of debt and delayed payment or non-payment to generators. The GoI Department of Financial Services identified 34 coal-fired projects with a total capacity of 40.1 gigawatts (GW) as so-called stressed assets, broken down into 24.4 GW of commissioned capacity and 15.7 GW of projects under construction, mostly belonging to independent power producers (IPPs). Besides this coal-fired capacity, there are also 14 GW of non-performing gas-fired power plants, following the halt of domestic gas production.
In February 2018 the Reserve Bank of India (RBI) adopted the circular on a revised framework for stressed assets, according to which a company could be declared bankrupt even if it missed its repayment schedule by one day. Once a company was in default, for loans above INR 2 000 crore (USD 0.28 billion) the lenders would have to implement a resolution within 180 days, or otherwise file a bankruptcy application with the court within 15 days of the expiry of the 180 days. This circular prohibited loan restructuring and caused much stress to companies in the energy infrastructure and power sectors.
On 2 April 2019 the Supreme Court annulled the RBI circular on the grounds that it was beyond the powers of the RBI. The Supreme Court mandated RBI to exercise its powers under Section 35AA “in respect of specific defaults by specific debtors”. The Supreme Court’s judgment came as a relief to the stressed assets in the power sector as the ruling restored banks’ discretion to invoke insolvency proceedings under the Insolvency and Bankruptcy Code on case-by-case basis. In June 2019 the RBI adopted the new “prudential framework for resolution of stressed assets”. By doing away with mandatory referral of stressed accounts under the code, the new framework puts the onus on banks to devise a suitable resolution plan. Lenders can review a borrower’s account within 30 days following a default. However, it stipulates additional provisions in case of delayed implementation of the resolution plan.
While the defunct circular was applicable only to scheduled commercial banks (excluding regional rural banks) and all-India financial institutions, the new circular is also applicable to small banks and systemically important non-deposit-taking non-banking financial companies and deposit-taking non-banking financial companies. All lenders must put in place board-approved policies for resolution of stressed assets. Lenders also have to report to the GoI credit information on all borrowers to whom they have aggregate exposure of INR 5 crore and above.
Since 2015 the GoI has adopted a range of measures to address concerns surrounding stressed assets, which are explained in detail in the respective sector chapters and provided here as an overview. The GoI’s High-Level Empowered Committee issued a number of recommendations in 2018 to improve coal supply, allow for the pass-through of additional cost in electricity tariffs and improve DISCOM revenues by introducing latepayment surcharges, payment security mechanisms and other measures.
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The GoI introduced a new gas auction mechanism for electricity generating units by pooling |
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