Editorial: Peaceful exit

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Published: July 21, 2015 12:36:00 AM

Exit policy for UMPP promoters a good idea

A high-level panel tasked with reviewing the bidding norms for ultra mega power plants (UMPPs) is understood to be of the view that promoters must be allowed to exit the project at any point, even if commercial operations haven’t commenced. Given how exits are almost taboo in India, with promoters loathe to let go of their ventures for a number of reasons, the suggestion is almost a radical one. To understand why it is vital to allow exits, it is important to look at the counterfactual—if promoters have no funds but are not allowed to exit, the project remains stuck and banks lose the money lent to the project anyway. If the regulations had allowed for such exits all these years, it may have been possible to save many more projects. But putting in half a dozen caveats, as is the case right now, will defeat the purpose of such regulations, which is to ensure that the project gets completed without the costs getting out of hand. Which is why, it makes little sense to put in a rider that defines what kind of developer would be eligible to step in—the decision on the sale of the promoter’s stake should be left entirely to the lenders who are free to seek expert advice; since they face the biggest risks, the right to decide should be theirs alone.

The problem with the manner in which projects have been undertaken in India is that the lenders take on the bulk of risk, but are almost always left carrying the can, not only because promoters are mostly an opportunistic lot but also because the legal system is so skewed against bankers. To be sure, bankers too have not always done adequate due diligence; norms that allow promoters to walk out of projects would ensure that bankers also do a lot more homework while assessing the venture, especially the track-record of the promoters. It is possible that lenders will be intimidated by the task since the universe of power producers is a small one and the number of players with financial muscle very few. Already, banks are weighed down by the exposure to the power sector, and are understandably turning more risk-averse as was clear from the lack of takers for the Tamil Nadu and Odisha UMPPs. However, allowing a promoter to exit a project, at any stage, is a good idea and one that will encourage entrepreneurship; easier rules will make such projects less forbidding, especially for first-time players. That in turn, will help lenders spread their exposure across business groups, in a much-needed diversification of risk.

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