When a power company is financially distressed, its creditors can initiate an insolvency resolution process where IBC in the Power Industry play important role, to either restructure the debt or find a new investor to take over the project. This framework facilitates a more streamlined approach to managing financial difficulties within the power sector, which is particularly relevant when dealing with large debts owned by companies.
Understanding the Power Sector’s Financial Challenges
The Indian power sector faces significant financial challenges primarily due to the poor financial health of Distribution Companies (DISCOMs), delays in payments, and other complexities in this sector.
Suggested Reading : Section 33 of IBC – Insolvency and Bankruptcy Code
High Debt Levels:
DISCOMS are burdened with high operational costs, large consumer debt, and inadequate infrastructure, which leads to substantial losses and the inability to pay power generators on time. Such companies often accumulate large debts due to their inability to recover consumer costs, putting further strain on their finances.Â
Payment Delays:
When DISCOMs fail to pay generating companies (GENCOs) on time it leads to financial losses and cash flow problems for both DISCOMs and GENCOs. This could be due to the poor economic performance of DISCOMs, operational inefficiencies, weak payment security mechanisms, and delayed payments by state governments to DISCOMs.
Sectoral Complexities:
The wide gap between the average cost of supply and revenue realised has led to outstanding dues to DISCOMs. Further, the high industrial or commercial tariffs and the cross-subsidy regime have affected the competitiveness of such sectors. The heavily regulated pricing structures and reliance on government policies complicate the resolution of financial issues.
The Application of IBC in the Power Industry
The IBC was enacted in 2016 to revive financially distressed companies, across different industries, in a time-bound manner while balancing all the interests of the stakeholders. It can be used to resolve issues in the IBC in the Power Industry, such as stressed power assets and power purchase agreements (PPAs). The insolvency framework in India can be helped to resolve the financial issues of a power company, benefiting its consumers, creditors, and power procurers. However, its application to IBC in the Power Industry companies has been controversial due to the sector’s criticality to the economy.
Key Cases in Power Sector Resolutions
A landmark case in IBC in the Power Industry resolutions is the insolvency proceedings faced by RattanIndia Power Limited, filed by its financial creditors and government-owned companies, REC Ltd. and Power Finance Corp. (PFC). This case was the first resolution of a stressed power asset outside the IBC mechanism, showcasing the challenges of applying a uniform insolvency framework to sector-specific issues.
Suggested Reading :Section 9 of IBC – Insolvency and Bankruptcy Code, 2016
There is a doctrine of essential services in the IBC, which protects the supply of essential goods and services to a corporate debtor during the moratorium period. The doctrine is intended to help the corporate debtor continue its daily operations and preserve its value. The power generation and distribution are classified as essential services, thereby limiting the ability to suspend operations during insolvency proceedings.
In the Gujrat Urja case, an application was filed against AstonField Solar Gujrat Private Limited, and Gujrat Vikas Nigam Limited moved to terminate the PPA. The main issue involved the losses due to fuel cost escalations and tariff disputes The court held that the going concern status of the corporate debtor would be compromised by the termination of its sole contract. As a result, in instances, where termination of a particular contract is solely on the ground of admission of insolvency proceedings and the contract is central to the corporate debtor as a going concern. This case highlighted the need for tailored insolvency solutions for the power sector.
The IBC in the Power Industry needs to be exempted from the proceedings . Power is fundamental to national development and economic growth, thereby applying IBC indiscriminately could disrupt critical services. The IBC has an insolvency process that applies to all companies. However, the interconnected nature of generation, transmission, and distribution complicates resolution, meaning the IBC process may not resolve all the issues of a company operating in the power sector.Â
Challenges of Applying IBC to the Power Sector
Applying the IBC in the Power Industry presents several challenges due the nature of power projects, the involvement of multiple stakeholders, regulatory hurdles, and valuation complexities:
Creditor-Driven Process:
The insolvency framework prioritises the financial creditors of the company. The IBC in the Power Industry debts often involve state guarantees which complicates negotiations. As a consequence, the IBC may not be suitable for resolving the financial issues faced by companies in the power sector.Â
Limited Investor Interest:
When any becomes insolvent, investors have an important part in reviving it by the end of the insolvency process. However, investors remain hesitant to acquire stressed power assets due to regulatory uncertainties and low profitability.
Long Resolution Timelines:
There are several operational inefficiencies and regulatory hurdles that are involved. Complex disputes over tariffs and state subsidies prolong the resolution process, which is contrary to the IBC’s objective of time-bound resolution.
The Way Forward for Power Sector Resolutions
The IBC in the Power Industry continues to sustain massive financial losses owing to unsustainable cross-subsidies and a lack of political will among the governments to solve the problem.Â
The IBC may combine the IBC provisions with sector-specific frameworks for faster and more equitable resolutions. This involves early intervention to take suitable corrective and remedial measures to preserve the value of the company’s assets. Further, the intervention of the government can promote the resolution of distressed companies before it initiates the proceedings in the IBC. For instance, schemes like UDAY can address financial distress before initiating insolvency proceedings. There is also a requirement for enhancing the coordination between the stakeholders, particularly financial creditors, regulators, and State governments, to ensure sustainable resolutions.
Role of Insolvency Professionals in the Power Sector
Insolvency professionals can help resolve financial issues in the power sector by managing the insolvency process of struggling power companies. Their expertise can facilitate a structured debt restructuring and identify potential buyers for distressed assets of a company in the power sector. They work with the company’s creditors to find viable solutions to revive financially troubled power plants. Ultimately, they aim to minimise their losses and maintain the power supply stability within the sector.
Frequently Asked Questions (FAQs)
1. Why is the power sector seeking exemption from IBC?
There are sectoral inefficiencies that can directly be attributed to the state and are responsible for the sector stress in power production. Therefore, the IBC in the Power Industry needs to be exempted framework.
2. What are the alternatives to IBC for resolving power sector distress?
There are a few alternatives to the IBC for resolving financial issues in the power sector:
Pre-requisites can be introduced for initiating insolvency proceedings, such as higher default limits.
The IBC can apply to assets or segments that are financed by the private sector, like generation and transmission, unlike in the case of distribution of companies which are mostly government-owned.
Approach other legislations that may be more suitable to this sector, such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
3. How can insolvency professionals contribute to power sector resolutions?
Insolvency professionals can provide their expertise in power sector regulations, tariffs, and policies and ensure alignment between creditors, state governments, and regulatory bodies.
Conclusion
The IBC is prescriptive and mandates a certain course of action without making any distinction between sectors or the causes leading to the financial situation. The specific existential realities of the power sector require a nuanced approach, which the IBC currently does not provide. The power sector is heavily regulated, with multiple stakeholders and intricate pricing mechanisms, which can complicate the insolvency process under the IBC. Therefore, there is a need to implement sector-specific amendments to the IBC to better address the challenges of the power sector.