The decision followed a recommendation by the high-powered board which went into the entire gamut of domestic power projects' financing by financial institutions. In effect, institutions are now free to fix their own debt exposures in power projects.

According to the board, "While there was no bar on the extent of domestic debt raised by a project developer, subject to the need of maximising financing from external sources and prudential norms exercised by institutions, allowing a higher domestic debt component for indigenous plant and equipment would be more desirable".

The decision is expected to help domestic industry and also avoid foreign- exchange risk on foreign-currency loans. More important, it will enable power projects using plant and equipment manufactured locally to achieve their financial closures quickly.

Financial institutions were pleading with the finance ministry for the cap's removal, hamstrung as they were in accessing foreign-currency loans after the US and Japan imposed sanctions and international credit ratings agency Moody's downgraded the country. The government rules allowed for a maximum of 40 per cent fund- and non-fund-based debt resources in power projects. Private power projects are financed on a limited recourse basis, having a debt-equity ratio of 70:30. Thus a minimum of 30 per cent of project debt has to be obtained from overseas markets.

The government move comes in the wake of several projects heading for financial closures. Power producers had argued for a greater domestic rupee component in their projects in view of high interest rates prevailing in international markets.

Financial crunch had stunted the growth of private power generation in the country. During the Eighth Plan period, for example, as against a target of 2,810 mw of power generation, a meagre 1,430 mw could only be achieved. According to the latest figures, private projects aggregating 3242 mw are in different stages of construction.

According to prime minister's office sources, the response to the government's policy on private sector power generation is encouraging. In all, 125 private power projects are currently being monitored by the government, amounting to 67.221 mw of installed-generation capacity. These included 95 proposals on the MOU/LOI route (costing more than Rs 100 crore) and 30 proposals on the competitive bidding route (costing more than Rs 1,000 crore). In addition, there were several projects under the private sector with the approval of the concerned state governments.

In the government's view, the package of incentives in the policy comprehensively covers legal, administrative and financial environment to make private investments in the sector attractive.

It is believed the cap of 40 per cent debt exposure on FIs had a negative impact on private power producers, which could not reach their financial closures on time, needlessly increasing their costs.