The finance ministry has opposed raising the individual cap on foreign investment in power exchanges to 15% from the current 5% by treating them on a par with stock and commodity exchanges. The department of economic affairs (DEA) argues 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 the Securities and Exchange Board of India, a senior finance ministry official told FE. “So raising the individual limit of foreign investment up to 15% would be unwise unless a clear business case is established and a strong and adequate regulatory mechanism exists,” said the official. Currently, trading in power exchanges are regulated by the Central Electricity Regulatory Commission.
Pitching for a higher cap, some analysts have said any move to raise the ceiling would encourage large global exchanges or institutional investors, who were earlier shy of investing in India due to the low cap for a single foreign entity in power exchanges, to explore the possibilities more seriously now. Also, a favourable decision would allow foreign investors that already hold stakes in Indian power exchanges to raise their individual shareholding should they so desire. At present, foreign corporate bodies together hold 22.9% in Indian Energy Exchange (IEX), which accounts for over 95% of the exchange-traded electricity market in the country. Two of these investors — Westbridge Crossover Fund and Rimco (Mauritius) — hold 4.75% and 4.5% in IEX, respectively, just below the 5% threshold allowed for each foreign investor.
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. The DEA’s decision comes on a representation from the Indian private equity and venture capital association regarding raising the limit in power exchanges in accordance with the Budget announcement and subsequent notification last year.
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.