Amendments for Private Sector Participation

The following are the details of the scheme to encourage greater private sector participation in the electricity generation, supply and distribution.

• The Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948 have been amended to bring about a new legal, administrative and financial environment for the private enterprises in the electricity sector
• Private sector can set up coal or gas based thermal projects, hydel projects and wind/solar energy project of any size
• Electricity projects with total outlay less than Rs. 250 million need not be submitted to the Central Electricity Authority for concurrence
• Private sector companies can set up enterprises to operate either as licensees or generating companies
• All private companies entering the electricity sector will be allowed a debt--equity ratio upto 4:1
• A minimum of 20% of the total outlay should be the equity component
• Promoters have to bring in at least 11% of the total cost of the project
• To ensure that private entrepreneurs bring in additionality of resources to the power sector, not less than 60\% of the total outlay for the project must come from sources other than public financial institutions
• Upto 100% foreign equity participation can be permitted for projects set up by foreign private investors
• The condition of dividend balancing by export earnings which is normally being applied to cases of foreign investment upto 51% equity will not be applicable to foreign investments in the power sector
• The rates for depreciation in respect of assets have been liberalised
• With the approval of the Government, import of equipment for power projects will also be permitted in cases where foreign supplier or agency extend concessional credit
• The customs duty for import of power equipment has been reduced to 20% and this rate has also been extended to machinery required for modernisation and renovation of power plants
• A five year tax holiday has been allowed in respect of profits and gains of new industrial undertakings set up anywhere in India for either generation or generation and distribution of power. The five year tax holiday will begin from the year of generation of power
• The excise duty on a large number of capital goods and instruments in the power sector has been reduced to a uniform lower rate of 5%
• Foreign investors are allowed to repatriate dividends entirely in dollar terms with full protection against adverse exchange rate fluctuation
• Upto 16% return on the foreign equity included in the tariff can be provided in the respective foreign currency.
• Insurance charges allowed in the project cost
• The private sector will be allowed to take over an existing public sector power utility if its revival is otherwise not possible
• Normative parameters under which generating companies will operate have been notified which inter alia provide for 16% rate of return on the paid up and subscribed equity
• Generating companies operating coal--based, gas--based and hydro projects can sell power on the basis of a suitably structured two part tariff
• The Union government may considerextending a counter guarantee for payment obligations of state electricity boards to the private power companies on the specific request of the state government subject to certain terms and conditions
• Licences of longer duration of 30 years in the first instance and subsequent renewals of 20 years instead of 20 and 10 years respectively as it was before
• Licencees are allowed special appropriations to meet debt redemption obligations
• The Foreign Investment Promotion Board constituted under the chairmanship of Principal Secretary to the Prime Minister considers all cases of foreign investment in the country, including those in the power sector
• A High Powered Board has been constituted under the Chairmanship of Cabinet Secretary to monitor and provide for faster clearance of private sector power projects and resolve outstanding issues thereof
• An Investment Promotion Cell has been set up in the Ministry of Power to provide information and assistance to prospective entrepreneurs in the electricity sector and take timely action for time bound clearances of the proposals

The following main changes took place subsequently :

• The weighted average of depreciation for coal--based thermal projects at 5.02% is enhanced to 7.5% and it is applicable to all thermal projects
• The operation and maintenance expenditure shall be computed at either 2.5% of the completed project cost or 2% of the completed/contracted cost plus actual insurance charges, subject to an overall ceiling of 3% of the completed/contracted cost
• In January 1995, additional incentives to private power projects were announced. The finance ministry relaxed the foreign debt--equity ratio for private power projects from 1:2 to 1:3. Such projects may not be granted counter guarantees by the Centre
• On 17 May, the Ministry of Environment and Forests announced norms for approval of power projects and flyash utilisation. Coal--based power plants with an installed capacity of 500 {\sc mw} and above will be granted environmental clearance only when they have a linkage with coal mines for the supply of washed coal. The norms prescribed for flyash utilisation indicated that power projects will have to start with a minimum of 20% utilisation in the first year of commissioning and increasing thereafter by at least 10% each year
• On 18 May, Finance Ministry announced a new guideline for external commercial borrowings for 1995-96. The guidelines forbid corporates from indulging in the practice of borrowings from the overseas market for financing requirements and then swapping the ECBs with another firm in need of foreign funds. Power sector has been allowed to use the borrowings for sourcing equipment from Indian companies