NEW DELHI : The Union government is working on reforms to instil financial discipline at state-owned electricity distribution companies (discoms), including mandatory timely audits of accounts to be eligible for central funds and grants, power minister Raj Kumar Singh said.

The National Democratic Alliance (NDA) government also plans to tighten prudential lending norms of public sector lenders Power Finance Corp. Ltd (PFC) and Rural Electrification Corp. Ltd (REC) and bring them on a par with banks and financial institutions. This move aims to incentivize discoms to control their spiralling losses to retain their access to funds, given that these lending giants have $80 billion by assets and are the largest lenders to the power sector.

The power ministry has written to the corporate affairs ministry for tougher norms and regulations, possibly involving amendments to the Companies Act. This comes against the backdrop of discoms that collectively owe 73,246 crore to generation companies shying away from timely audits.

Many states do not pay discoms on time. Discoms, in turn, delay payments to developers, precipitating a crisis with ramifications across the economy, including in the struggling banking sector.

“We are coming up with a completely new paradigm. This situation has arisen also because of slackness on the part of the system. No bank or financial institution will finance loss-making discoms. They will say that these are poor credit risks. Here, our organizations such as PFC and REC have been extending loans to them. If PFC and REC had followed the same prudential norms that the banks follow, then the discoms would not have been able to access loans, even when they were making heavy losses," Singh said. “Then discoms and state governments would have been conscious enough to take steps to reduce and wipe out the losses," he said.

India’s average aggregate technical and commercial losses are at 21.4%, among the highest in the world. Discoms have so far been the weakest link in the electricity value chain.

“The prudential norms of PFC and REC are being revised to be on a par with prudential norms of banks, so that if you are making huge losses, then you will not be a good credit risk and you will not get financing. That is why we are saying that we will not close the tap but you have to draw up a plan to reduce the losses and with timelines. We have written about this to the states," Singh said.

These measures also come against the backdrop of India’s proposed distribution reform scheme, tentatively named Atal Distribution System Improvement Yojana, which aims to cut electricity losses to below 12%.

The 2.86 trillion scheme hopes to ensure uninterrupted power supply and may involve privatizing state-run discoms and multiple supply, network and distribution franchisees.

“You (discoms) are autonomous. You can decide not to get your accounts audited at all but then we can’t lend to you. Then we also can’t give you any grant. We can’t throw good money after bad. Basically it is the choice of discoms about what they want," Singh said.

Experts welcomed the move. “Focus on getting timely audited accounts and acting on qualifications of the auditors will go a long way in streamlining discom operations as it has been a recurring issue. It will also assist discoms to leverage financial markets for its lending requirements," said Sambitosh Mohapatra, partner, power and utilities, at PwC India.

My Reads Logout