State electricity boards' 50% debt to be recast in bailout

The extensive and detailed proposal spreads over almost 150 pages odd. Sources say that according to the proposal, 50% loans will be taken over by the states, the other 50% to be rescheduled by the lenders. One of the key details in the proposal is the three year transitional finance mechanism (TFM) which essentially is means the package will fund the operational losses of the state electricity boards whose loans, short-term liabilities are going to be restructured.

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So, this is going to be essentially a two part comprehensive bailout. One will take care of the existing liabilities and losses that are now standing at around Rs 1.9 lakh crore at the end of the last fiscal year. The second will be a three year handholding mechanism where the financial implication is roughly to the extent of around Rs 25,000 crore.

Three years TFM will take care of operational losses, because even after the restructuring the state electricity boards may not be immediately in a position either to serve the old liabilities or continuing with existing operations.

What will the SEBs do now?

Four state electricity boards including Tamil Nadu, Rajasthan, Uttar Pradesh and Haryana are very crucial as they have a political significance attached. These SEBs will see a separate focus arrangement, the details of which are yet to be worked out, but the cabinet will authorize the Ministry of Power and the Department of Financial Services to go ahead and do something separately for them.

Meanwhile, it is unlikely that the other SEBs will be treated drastically different. As far as the details of the bonds that states goes, it will be five years bond with a 10-year repayment period.

The states will have to takeover the entire liability of these bonds in a phased manner within 2-5 years from the issuance of special securities which by the way will have to be within the state Fiscal Responsibility and Budget Management (FRBM) targets.

Besides, there are mandatory conditions including, one very important condition to periodically and automatically revise tariffs, which will make this package very different from the previous bailouts that have happened in the history of the power sector in India. Any state that goes ahead and benefits from this package which avails this overall bailout package will commit itself to doing periodic sustained revision of tariffs depending on input and fuel cost changes.