Govt announces package to bail out power distributors

Moneycontrol.com Bureau

The government has approved a bailout for cash-strapped power distributors, a Cabinet minister said on Monday.The minister, who was speaking after a Cabinet meeting, spoke on condition of anonymity.
Years of populism, corruption and mismanagement have driven the power distributors, most of them state-owned, deep into the red. They had accumulated Rs 92,600 crore in losses by the end of the 2010-11, according to government data. Also Read: Link bailout to mandatory initiatives: Shahi
According to sources, there was a tussle between the power and finance ministries over the bailout for power distribution companies.The finance ministry wanted losses to be computed only after the states repaid their loans and added that the lossses would be reduced upon repayment of loans. The ministry also sought that the the debt was restructured on-a-case -by-case manner.
The ministry also demanded moratorium only for principal and not interest. The power ministry agreed to most of the finance ministry's demands though it warned that some of the states might not find the proposal attractive enough. Also Read: SEBs to benefit from holistic debt restructuring pkg: APP
CNBC-TV18 explains the final terms and conditions of the bailout package for discoms. The states shall convert all SEB loans into equity. States will have to defer recovery till lenders are paid. States will have to settle all power outstanding by November, 2012.
Discoms will have to eliminate gaps in revenue within the moratorium. Errant states or discoms will be barred from fresh short-term loans. Also Read: Losses accumulated due to bad governance: Anil Razdan
The package also proposes a three-year transitional finance mechanism (TFC) to provide liquidity support by way of grants only if losses are reduced by at least 25 percent. The package will also provide capital reimbursement support of 25 percent of principal.
The TFC norms are to be prepared by the finance and power ministries. The package also has made separate arrangement for four state SEBs. The Centre will also part-finance the operational losses of UP, Rajasthan, Tamil Nadu and Haryana.
The financial implication of TFC is at Rs 1,500 crore per annum and the states are to issue five-year bonds, with 10-year repayment period.
The govt has announced that the debt recast plan will be valid till December 31. The plan also mandates that 50 percent of the short-term loans that companies will be provided, will be guaranteed by the states. The government has also announced that the Centre will take over the state-discoms' liabilities in the next two-to-five years and the liability of special securities.
However, the discoms will have to repay their loans and interest till the takeover is initiated.
(With inputs from agencies)