The government is considering a proposal to raise the individual cap on foreign investment in power exchanges to 15% from the current 5%, but only for serious players having technical know-how or experience in running/managing power bourses overseas, official sources told FE. However, for others, the individual cap of 5% would remain, unlike stock and commodity exchanges where the ceiling was raised to 15% in 2016 for all sorts of foreign investors. The finance ministry believes that power exchanges, which primarily deal with spot electricity contracts, can’t be compared with stock or commodity bourses where futures and other derivative products are also traded and are adequately regulated by Sebi. Any move to raise the individual cap would brighten the chance of Indian Energy Exchange (IEX), which accounts for over 95% of the exchange-traded electricity market in the country, in attracting foreign power bousres if it so desires. At present, foreign corporate bodies together hold 22.9% in IEX. “Hiking the individual limit of foreign investment up to 15% for all would be unwise, unless a clear business case is established and adequate regulatory mechanism exists,” said one of the officials. Currently, trading in power exchanges are regulated by the Central Electricity Regulatory Commission. “The foreign investment policy for stock/commodity exchanges shouldn’t be equated with that for power exchanges. So, while approving the list of foreign institutional players for investing in power exchanges, we may consider what category of foreign investors would be interested and who could provide technical know-how,” said another official.
The only foreign investors who may be interested and who may bring in technical know-how are foreign power exchanges (pure spot exchanges) and utility and power trading companies, and not pure financial players like securities depositories, banks or insurance companies, or even financial derivatives exchanges, he added. The finance ministry’s opposition comes at a time when the short-term power market, in which exchanges have a sizable share, is expected to rise at a compounded annual growth rate of 20% between FY17 and FY22, according to a Crisil report. As such, the share of power exchanges in short-term volumes market has more than tripled in the last 7 years — to 34.5% in FY17 from 10.9% in FY10.
Some analysts have been arguing for a higher cap on grounds such a move would encourage large global exchanges or institutional investors, who were earlier shy of investing in India due to the low ceiling for a single foreign entity in power exchanges. In the Budget for 2016-17, finance minister Arun Jaitley had said the individual investment limit for foreign entities in Indian stock exchanges (and commodity bourses that are deemed as stock exchanges under the Securities Contracts Regulation Act, 1956) would be enhanced to 15%, on a par with that for domestic institutions. Later, the decision was notified.
Earlier, the Indian private equity and venture capital association had represented to the government on clarity regarding raising the limit in power exchanges in accordance with the Budget announcement and subsequent notification in 2016. Kameswara Rao, partner, PwC believes that raising individual cap to 15% from the current levels of 5% would help accelerate foreign investment. “Our power market now has good liquidity and a large number of individual users, making it ready for new term products,” Rao added.