[Opinion] Resolving Power Sector Distress vis-a-vis IBC

Tanmay Rai & Sumeet Chimbalkar – [2024] 159 taxmann.com 346 (Article)

Introduction

The power sector holds paramount importance for India’s economy, serving as a cornerstone for its growth and stability. It is instrumental in driving industrialisation, developing infrastructure, and advancing societal well-being. Reliable and cost-effective electricity supply fosters innovation, boosts productivity, and elevates living standards, cementing its indispensable role in India’s sustainable progress and global competitiveness. India is on the road to become a 5 trillion economy and to achieve that target a robust infrastructure & Power sector is the need of the hour. The government has overhauled the power sector with a series of reforms beginning from the liberalization period to open the floodgates for private investments by bringing landmark changes through amendments in the Electricity Act. The power sector in India was segmented pursuant to the Electricity Act, 1998. The 2003 amendment act further deregulated power generation companies, as the central licenses and techno- economic clearances were done away with. And also permitting private planes to set-up captive power generating plants.

The sector segmented into 3 sub-divisions is as follows:

1. Power Distribution companies
2. Power Transmission Companies
3. Power Generating Companies

These changes led to a number of private players’ entry in the sector only to be plagued by a state owned monopoly which controls the distribution.

Power Distribution Companies

The primary role of these companies is to distribute electricity to the end users, transmitted from power generating companies by the transmission companies.
Electricity distribution companies are facing significant financial strain primarily because of substantial outstanding payments, with the majority owed by the government for unpaid subsidies. A smaller portion of the pending receivables comes from retail customers and losses due to theft.

It’s worth noting that all distribution companies, except those in Delhi and Mumbai, are state government-owned entities, hence mismanagement and political interference goes without saying.

Although reeling with huge debts, the distribution companies have not yet been admitted into insolvency due to the peculiarities involved in its functioning.

For instance,

1. The regulatory authority has the discretion to determine whether to allow the Selected Resolution Applicant to retain the license for continuous operations, introducing an element of uncertainty in the approval of the license for the Selected Resolution Applicant.
2. The difficulty lies in the fact that addressing the default reasons, such as tariffs, becomes notably challenging for the Successful Resolution Applicant (SRA) due to regulatory constraints.
3. Additionally, structural challenges such as delayed collections, theft, delays in subsidy payments, cross-subsidisation, and insufficient and irregular tariff revisions exacerbate the existing problems.

All this leads to the uncertainties and complexities that need to be addressed for a successful resolution of distribution companies under the Insolvency and Bankruptcy Code (IBC).

Recently Madras High Court, has rightly affirmed that it is neither mentioned in the Electricity Act nor in the Insolvency and Bankruptcy Code that companies having substantial shareholding by the government will be exempted from initiation of insolvency under the Code and allowed the application for insolvency against the DISCOM with NCLT.

With regard to this case it has been affirmed by the Ministry of power in a recent letter to the department of Legal Affairs that the state owned power distribution companies defined under section 2(45) of Insolvency Bankruptcy Code will be hit by section 3(7), therefore insolvency proceedings can be initiated against such company as it is a non-government (corporate) entity performing a non-sovereign function, so no exemption will be available to them.

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