Financial Restructuring of State Electrical Distribution Companies Approved

In an attempt to restore purchasing power capacity of India’s debt ridden State Distribution Companies (or Discoms), the Cabinet Committee on Economic Affairs approved a Transitional Finance Mechanism whose measures include: Financial Restructuring, Tariff Setting & Revenue Realization, Financial Subsidies, Metering, Audit and Accounts Monitoring.

According to the press release on 25SEPT12, the $35 billion of debt (or RS 1.9 Lakh crore) of the Discoms will be partly taken over by the state governments. Specific features of the mechanism include:

1) 50% of the outstanding short term liabilities up to March 31, 2012 will be taken over by State Governments. Debt shall be first converted into bonds to be issued by Discoms to participating lenders, duly backed by State Govt guarantee.

2) Takeover of liability by State Govt from Discoms in the next 2-5 years by way of special securities. Repayment and interest payments will be done by State Govt till the date of takeover.

3) Restructuring the balance of 50% Short Term Loan by rescheduling loans and providing moratorium on principal as well as preferential rates.

4) For monitoring the progress of the turnaround plan, two committees at State and Central levels respectively are proposed to be formed

Important mandatory conditions specified in the press release included:

  1. State Governments shall convert all their loans to equity
  2. All outstanding energy bills of State Departments/Agencies as on 31.3.2012 to be paid  by 30.11.2012
  3. Elimination the gap between Average Cost of Supply and Average Revenue Realization within the period of the bond moratorium
  4. Involvement of private sector in state distribution sector through franchisee arrangements or any other mode of private participation to be prepared within a year by theDiscoms
  5. Tariff order to be notified by 30th April of each Financial year
  6. Fuel cost adjustment to be allowed as directed by APTEL
  7. FRP to include targets for progressive reduction in Short Term Power (STP) purchase by the State Discoms
  8. Subsidy should be paid upfront by State Govt.
  9. Prepaid meters to be installed by 31.3.2013 for all Government consumers
  10. Audited accounts for and up to FY 2010-11 by 30.9.2012 and of FY 2011-12 to be finalized by 31.12.2012.
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