Lenders told to take criminal action against gold-plated power projects
Banks also asked to file cases in NCLT against companies that inflated project costs to raise more debt
The government is nudging bankers to take criminal action against private power producers that have inflated project costs, said a top government official requesting anonymity.
According to several industry experts, many private sector developers inflated project costs to raise a higher amount of debt to cover their equity component—a practice called gold-plating.
“For example, if a project’s actual cost was Rs70 with a debt to equity ratio of 70:30, the equity to be borne by the developer was Rs21. To avoid making this equity contribution, developers raised project cost to Rs100, thereby raising Rs70 as debt—enough to cover the total project cost. This allowed them to not make good their equity commitment of Rs30,” said a senior partner with one of the Big Four accounting firms, requesting anonymity.
This comes against the backdrop of the banking sector going through a crisis of confidence with one of the largest scams to hit public sector banks.
“Bankers have been told clearly to take action… Whoever has done gold-plating should be caught and punished. The instruction is to take them to the NCLT (National Company Law Tribunal) plus take criminal action against them,” said the official cited earlier.
In an interview to Mint after assuming charge in September, power minister Raj Kumar Singh had said that the government plans to investigate whether private developers gold-plated project costs.
A total of 34 coal-fuelled power projects, with an estimated debt of Rs1.77 trillion, have been reviewed by the government after being identified by the department of financial services. Issues faced by these projects include paucity of funds, lack of power purchase agreements and absence of fuel security. Of these 34 projects, totalling around 40,000MW, it was found that 10,000MW couldn’t be rescued.
“The projects were broadly put in four baskets. One basket was where Shakti (a scheme to provide assured coal supply) solved the problem. That’s over. One basket is where bankers are trying to solve the problem wherein coal and PPA (power purchase agreement) are not an issue there. But those are plants which are largely commissioned. Then there are plants where there is a plant and no PPAs, which we are trying to help. There is a fourth basket where nothing is there. While around Rs6,000 crore has been invested in some projects, there is nothing on the ground,” said the official.
The Cabinet Committee on Economic Affairs on 17 May last year approved a new policy for the allocation of future coal linkages in a transparent manner for the power sector to meet fuel requirements. This policy was christened Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India, or Shakti.
“These projects are nowhere near completion. Those people can be straightaway put behind bars… As far as the power sector is concerned, that is not a plant. We can help others but not this 10,000MW capacity,” added the official.
Queries emailed to spokespersons for the ministries of power and finance on 2 February remained unanswered.
Experts say systemic interventions are required to clean the system.
“Without commenting on the merits of individual cases, I believe the government needs to avoid knee-jerk reactions to specific events or trigger points. We need a more systematic strengthening of the entire lending, investment and project monitoring process. We can expect a vibrant power sector that attracts domestic and foreign investors only if we have a transparent and fair allocation of projects/resources, and a strong mechanism to prevent wrongdoings in the entire process,” said Abhishek Poddar, a partner at consulting firm AT Kearney Ltd.
Power sector lenders said they are taking action to revive the projects.
“We are yet to receive a formal communication on the same. It is for the lenders to take a decision whether to take criminal action or not. Wherever it is possible, we are trying to revive the project,” said the head of a power sector lender, who asked not to be identified.