New Delhi: Private equity (PE) firms such as Blackstone Group LP, 3i Group Plc and Warburg Pincus India Pvt. Ltd may see their investment in power sector firms come unstuck on uncertainty over captive coal mines.

The Supreme Court on 25 August said allocations of coalfields by the government between 1993 and 2010 were illegal, but is yet to take a final decision on cancelling the allotments.

“The future of several private power developers is likely to plunge into darkness following the Supreme Court verdict on cancellation of captive coal block allocation," said Amol Kotwal, director, energy and environment practice, South Asia, Middle East and North Africa, at consulting firm Frost and Sullivan. “This could have a cascading impact on investors (which include PE firms) who have invested in these companies having captive coal block allocation, with their investments potentially running the risk of going down the drain."

PE firms invested in companies such as Monnet Power Co. Ltd, GVK Energy Ltd and Diligent Power Pvt. Ltd on the basis of captive coal mines supplying fuel for their power plants.

“Most PE funds assumed that a power plant with an access to a coal block was a low risk-high return investment," a New Delhi-based power sector analyst said, requesting anonymity. “In reality, none of these decisions created long-term value for investors."

Blackstone bought a 12.5% stake in Monnet Power in July 2010 for $59.2 million. Monnet Power was allocated the Gare-Palma-IV/5, Utkal-B2 and Mandakini blocks in Odisha. Blackstone also acquired in July 2011 a 25.2% stake Visa Power for $111 million, which was allocated the Fatehpur East block in Chhattisgarh. The PE firm cancelled the deal in 2012.

3i India Infrastructure Fund acquired a 14.1% stake in GVK Energy Ltd for $180.5 million. GVK Energy has been allocated the Tokisud North and Seregarha coalfields in Jharkhand. Warburg Pincus India bought a stake in Diligent Power, a unit of the Dainik Bhaskar Group, in May 2011. DB Power Ltd, in which Diligent Power has a majority stake, had been allocated the DurgapurII/Sarya block in Chhattisgarh.

Queries emailed to Monnet Power, GVK Energy and Diligent Power remained unanswered till press time. A Blackstone Group spokesperson confirmed that it has invested in Monnet Power. A Warburg Pincus spokesperson couldn’t be immediately contacted.

A 3i Group spokesperson declined to comment about its alternative plan if allocations to these coal blocks are cancelled.

As power, mining, and banking firms wait for the final verdict in the Supreme Court, ongoing transactions in the Indian power sector and related infrastructure such as ports have come to a halt, with asset values dropping further.

Forty listed Indian banks had gross bad loans of 2.52 trillion on 30 June, up 21% from 2.08 trillion a year ago. Banks’ exposure to the capital-intensive power sector is estimated at 3 trillion, more than the total amount of gross bad loans in the banking system.

“The market conditions for private equity firms have been challenging due to valuations not being in line with expectations and exit routes having constraints for public investment appetite," said Dipesh Dipu, an associate professor at Administrative Staff College of India. “Disinvestment in government-owned entities planned may continue to crowd out such plans for at least the short term. Some investments may have to be held in their portfolio for longer than the normal time horizons the PE firms typically target."

The apex court’s ruling capped a recent spate of setbacks for power companies. The court in a separate judgement on compensatory tariffs stayed an order by the Appellate Tribunal for Electricity allowing Tata Power Co. Ltd and Adani Power Ltd to charge higher prices for electricity produced from their plants in Mundra, Gujarat.

“Around 2007-08, the Indian power sector was offering tremendously lucrative opportunities and no one wanted to miss out and this set of investors included private equity guys," said a Mumbai-based power sector analyst. He declined to be named.

“It can also be argued that many of these owners of captive coal blocks had proper paperwork to prove that they case is genuine. Hence, it may not have been really easy for a PE investor to know the modalities and intricacies of this coal block allocations per se," the analyst said. “How would they have known if at all there could be an issue in future?"

PE firms have an important role to play in India’s power sector, analysts say.

“If India has to make $100- 150 billion of investment in the infrastructure sector including power, apart from debt, funding of equity is a major challenge for Indian promoters," said Debasish Mishra, senior director of consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd. “Private equity has been filling up a critical funding gap in that respect."

Of India’s installed power generation capacity of 250,257 megawatts (MW), 60%, or 149,178.39MW, is coal-based. The production of coal has been unable to match the growing demand for fuel in a country where the power sector consumes nearly 78% of the domestic output of the mineral.

“PEs typically view infrastructure investments as low return, low risk. However, given the level of legal, policy and regulatory uncertainties in India, PEs will either shy away from future investments or seek much higher returns," Mishra said. “This does not augur well for development of infrastructure sector."

There have been two recent transactions in the Indian power sector. Reliance Power Ltd, controlled by Anil Ambani’s Reliance Group, agreed to buy the hydropower assets of Jaiprakash Power Ventures Ltd for an undisclosed amount. Adani Power, controlled by billionaire Gautam Adani, acquired Lanco Infratech Ltd’s 1,200MW Udupi power plant in Karnataka.