The ARCs, which will have specialised knowledge of the revenue models and problems faced by the two sectors, will buy out distressed assets, turn them around and sell them off. In the power sector, where projects with a combined capacity of 76,000 MW are hit by fuel shortage, public sector NTPC will be the majority stakeholder in the proposed ARC.
Although all of NTPCs projects are outside the tariff-bidding regime which is the norm for private players and it has access to states share in the Centres funds, the purchase of stressed assets could dent its balance sheet, analysts said. The government, however, believes the PSU is better placed to turn around/complete stressed power projects where R3.33 lakh crore investments are sunk.
Power sector PSUs such as NTPC will hold majority stakes in the proposed ARC for the power sector, and banks will be minor equity holders, financial services secretary GS Sandhu told reporters on Friday Similarly, in the ARC for the roads sector, the National Highways Authority of India (NHAI) will will be the majority stakeholder, while banks will hold minor stakes, he said.
NTPC, which has R18,000 crore of surplus funds, along with other cash-surplus PSUs, has been asked by the finance ministry to either invest these funds to create new assets or pay higher dividends. Since setting up new plants would be take time, especially given the delays in various clearances, and given the current coal scarcity, the government reckons that in the interim, the PSU could use its surplus to buy stressed assets and use its expertise to revive them.
Sandhu said specialised ARCs are required as existing ARCs do not have the expertise to manage power and road sector assets, which need a different kind of handling.
For more than a year, NTPC has been out in the market to acquire private players' distressed power plants, although it hasn't concluded a deal yet.
The ARC can help certain type of distressed assets that are stalled for resources or consents, providing relief to the promoters and banks, and use NTPC's expertise to turn around. Several power assets are, however, distressed for reasons such as adverse regulation or cost overrun that require other measures to become viable, Kameswara Rao, leader, utilities, energy and mining, PwC, told FE.
Of the Rs 3.3 lakh crore investments hit by fuel shortages, according to the Association of Power Producers (APP), Rs 2 lakh crore has been invested by private players like Adani, GMR, Lanco and Essar, while the balance belongs to the public sector, mostly state-owned utilities.
Fuel-wise, two-thirds of the distressed capacity is based on coal, whereas the rest is to be fired with gas. An APP delegation met power minister Piyush Goyal recently, seeking his intervention to bail out these beleaguered projects.
Sources told FE that the delegation suggested diverting coal to distressed generating stations from ageing and derated units that are unable to utilise allocated coal supplies.
Following a direction from the Cabinet Committee on Economic Affairs, Coal India has signed fuel supply agreements (FSAs) for coal supply to projects totalling at 73,000 MW scheduled for commissioning during April 2009-March 2015. It is expected to ink FSAs for another 5,000 MW capacity soon. Under the new FSA, CIL is required to meet 80% of power plants' coal requirements from domestic and overseas sources. Up to 65-75% of coal will be supplied from indigenous sources while the balance fuel requirement will be met with imports.
While there are not many takers for electricity generated from imported coal, domestic coal quantity available from CIL is hardly enough to run plants at 50% capacity. Because of that, viability of these projects is under a cloud.
FE had recently reported NHAI's proposal to set up an ARC for road projects where NHAI can subscribe to the seed money and commercial banks, IDFC, etc, can be roped in and take stakes in such a company. This ARC would be backed by NHAI and unlike other ARCs would also take the execution responsibility to complete the leftover work and bring the project into commercial operations, the proposal said.
NHAI had said that the current debt exposure of commercial banks to road sector borrowings is around Rs 1.6 lakh crore. Over a fifth of this is stuck in projects facing delays. Major developer facing a cash crunch include GMR, Soma Constructions, Lanco, IVRCL and Gayatri.
ARCs function is as follows: They create separate trusts to acquire individual (bad) assets, which in turn issue security receipts (SR) against the assets. Banks and other investors then buy the SRs. There are 14 ARCs in the country, but they have been facing a severe shortage of funds.
Typically, ARCs buy out bad assets of companies and retain them in the hope of them appreciating over a period of time. However, if they take management control of a company and want to turn it around, then they may need huge capital investments. Foreign investment up to 74% (a composite cap, including FDI and FII) is permitted in ARCs.