New Delhi: Several private project developers dressed up their accounts while approaching banks for funding and inflated capital expenditure to increase debt value, thereby reducing their equity contribution, according to analysts, project developers, equipment manufacturers and bankers.
Also, these developers placed equipment orders with manufacturers that quoted inflated order values and later transferred the balance back to the developers.
“Companies adopt unfair practices for setting up power plants. Small-time companies without sector experience, expertise or even requisite financial muscle, cosmetically dressed up their books to make them look financially attractive while approaching the banks for funding, with a memorandum of understanding signed with state governments for land, etc., being the proof of their plans for setting up the power plant,” said Amol Kotwal , associate director (energy and power systems practice) for South Asia and the Middle East at consulting firm Frost and Sullivan.
This would, for instance, involve a Rs.800 crore project cost being inflated to Rs.1,000 crore. Typically, for power projects, the debt-equity ratio is 80:20. With the capital expenditure inflated, banks would lend Rs.800 crore, thereby covering the equity portion of the project’s capital expenditure.
“Companies also adopted unfair practices for procurement of power plant equipment. While an inflated order value was shown by the manufacturer, the payment was made by the developer with the balance money routed back to the developer after deducting charges for taxes on the inflated value of the order,” added Kotwal.
The head of a power generation equipment manufacturing firm, who didn’t want to be identified, confirmed the practice.
This comes in the backdrop of the alleged scam in coal mine allocations in India where relatively unknown and small-time companies managed to acquire the balance sheet strength required to apply for captive coal blocks.
Frost and Sullivan’s conclusions seem to be common knowledge in power business circles, although Mint couldn’t immediately identify firms that indulged in such practices.
The chief executive officer of a private sector power firm, who spoke on condition of anonymity, also confirmed the modus operandi and said, “A lot of developers have done it. They have marked up project cost and taken loans on them. It has kind of become a normal practice.”
India has a power generation capacity of 207,876 megawatts (MW), of which private sector projects account for 60,320MW.
Two Delhi-based power sector experts, who also didn’t want to be identified, confirmed the practice.
Banks face the threat of defaults by power companies. The non-performing assets (NPAs), or bad loans, of Indian banks rose 46% to Rs.1.37 trillion in fiscal 2012. After declining to 2.4% in 2008, the proportion of bad assets to loans in the Indian banking system has risen to 2.94% in 2012.
While international competitive bidding practices lower the incentive for engaging in such practices, there are still many takers. Some developers engage in these practices as they have limited equity and want to bid for many projects.
“The preliminary expenses towards land acquisition are always a matter of concern at the time of due diligence. It is not usually clear and straightforward. Sponsors do use it for their advantage to pad up costs,” said Shubhranshu Patnaik, senior director-consulting (energy and resources) at Deloitte Touche Tohmatsu India Pvt. Ltd.
Banks concede that such practices do take place.
“For any project loan, there is a strict due diligence by banks. It is not that we agree to all proposals that come to us. We reject many proposals that we think are inflated; we even seek expert comments on some projects. Even after that, if there is any fraud, we really can’t help it. Fraud happens,” said a senior banker, who did not want to be named.
The Reserve Bank of India said in its Trend and Progress report released recently, “The spurt in NPAs could be attributed to the slowdown prevailing in the domestic economy as well as inadequate appraisal and monitoring of credit proposals.”
“For private finance to be an option, one needs to evaluate the robustness and the sustainability of the different financing options throughout the asset life,” said Deepak Mahurkar, director (oil and gas industry practice) at PricewaterhouseCoopers.
However, some banks defend the lending practices.
“When proposals come to us, we try to match them with international quotes. We have specialist teams to appraise projects, and they have a fair idea as to how much would be the cost of a particular project. Once they give the clearance, then only the sanctioning authority approves the loan,” said the chairman of a public sector bank who did not want to be named.
Anup Roy in Mumbai contributed to this story.