The government is moving forward with the establishment of an asset reconstruction company (ARC) aimed at maintaining the value of stressed power projects until the demand for power rebounds. This initiative has been christened as the ‘Pariwartan’ scheme and is set to make significant changes in both the power and finance sectors.
Background on Power Sector Stress
In India, the power sector ranks as one of the most heavily strained, with almost ₹1 trillion of loans having become non-performing. Close to 66 gigawatts (GW) of capacity experience varying degrees of financial distress, which includes 54.8 GW of coal-based power, 6.83 GW gas-based power, and 4.57 GW of hydropower. The decision to establish an ARC was triggered by the Allahabad high court’s refusal to grant interim relief to power companies that challenged RBI’s directive regarding bad loans.
A Controversial Court Order
This directive permitted lenders to trigger insolvency proceedings against defaulting debtors if they failed to develop a resolution plan within 180 days, with the deadline expiring on August 27. To prevent distressed assets from being sold under the Insolvency and Bankruptcy Code, the state-operated Rural Electrification Corp. Ltd (REC) took the lead in proposing the establishment of the ARC named Power Asset Revival through Warehousing and Rehabilitation, more commonly known as Pariwartan, to the Reserve Bank of India (RBI).
The Pariwartan Scheme Details
Following its registration with the RBI, the Pariwartan ARC will be authorised to remove stressed assets from the liquidation track under the NCLT and put them on the asset reconstruction route. REC has identified projects with a cumulative debt of around ₹1.8 trillion to be included in the Pariwartan scheme. They have specifically targeted projects that lack power purchase or fuel supply agreements or are confronting a shortage of funds.
The ARC Composition and Functioning
The ARC will incorporate borrowers, power PSUs, banks, and NTPC, all potentially holding stakes in the ARC and conducting operations and maintenance (O&M). A professional O&M agency, preferably NTPC, will manage the distressed asset. The government lends its support by ensuring coal supply. This arrangement will safeguard the value of the asset and generate cash flow to the ARC, enabling full or partial debt servicing.
Auctioning of the Assets
Once demand peaks, the asset will be auctioned. However, no asset will be retained by the Pariwartan ARC for longer than 60 months. The ‘Pariwartan’ initiative is modelled after the Troubled Asset Relief Programme, or TARP, a scheme activated in the US during the 2008 financial crisis.