The Ujwal Discom Assurance Yojana (“UDAY”), a scheme for the financial turnaround of power distribution companies (“Discoms”), was approved by the Cabinet on November 5, 2015, with an objective to improve the operation and financial efficiency of State owned Discoms. The UDAY scheme intends to achieve this through (a) improving operational efficiencies of Discoms, (b) reducing the cost of power generation by Discoms, (c) financial turnaround of Discoms through State(s) takeover of Discoms debts, and (d) financing future losses and working capital of Discoms by State(s).

By way of brief background, Discoms are predominantly State-owned and have been financially distressed for several years despite reforms in the power sector aimed at unbundling power generation, transmission and distribution activities and functions into separate profit centres. Discoms have been historically plagued by transmission and distribution (“T&D”) losses (arising mainly from theft of electricity, subsidized tariff for agricultural consumption, leakages in transmission and distribution systems, etc.), and aggregate technical and commercial (“AT&C”) losses (primarily due to billing and collection inefficiencies). Discoms’ accumulated losses as at March 2015 is estimated at Rs. 4.3 trillion, a substantial part of which is debt funded by banks and financial institutions.

Salient features of the UDAY scheme

1. To improve operational efficiency, the UDAY scheme has identified specific areas for improvement (for example, compulsory feeder and distribution transformer metering, indexing and mapping of losses and quarterly tariff revisions) within a specified time frame, and measured against AT & C losses as per trajectory to be finalized by the Ministry of Power (“MoP”) and participating State(s).

2. Recognising costly power as a primary reason for the systemic financial distress of Discoms, the UDAY scheme has proposed steps to be taken to reduce cost of power. For example, increased supply of domestic coal, coal linkage and coal price rationalization, supply of washed and crushed coal by Coal India Limited (“CIL”) within specified dates, allowing coal swaps from inefficient plants to efficient plants, etc.

3. For the financial turnaround of Discoms, the UDAY scheme seeks:

• Participating States to take over 75% of the debts of Discoms (by way of grant), as on September 30, 2015 over a Silencil period of two years: 50% of such debts will be taken over in the financial year 2015-16 and 25% in the financial year 2016-17;

• Participating States to issue non-statutory liquidity ratio (“SLR”) bonds, including state development loan (“SDL”) bonds against Discoms’ loans, for subscription firstly by pension funds, insurance companies and other institutional investors. The balance bonds (not taken up by pension funds, insurance companies, etc.) to be offered directly to lender banks/financial institutions in proportion to their current lending to Discoms. Proceeds of such issues of bonds will be transferred to Discoms for paying off their loans to lender banks/financial institutions;

• Lender banks/financial institutions not to levy prepayment charge on Discoms’ debts. Lenders to also waive off unpaid overdue interest (including penal interest) on Discoms’ debt, and to adjust such overdue/penal interest paid since October 1, 2013; and

• 50% of Discoms’ debt as on September 30, 2015 (after any waivers as aforesaid), which remain with Discoms, to be converted into loans or bonds with interest rate not exceeding the concerned Bank’s based rate plus 0.1%. Alternatively, Discoms may issue State guaranteed bonds against the aforesaid debt at a rate not exceeding the bank’s base rate plus 0.1%. The State will take over 50% of the remaining 50% debt (i.e., 25%) in 2016-17 as aforesaid. The balance 25% remaining with Discoms will be dealt with through a mechanism to be development by the MoP.

4. For financing future losses and working capital of Discoms, States will take over and fund future losses of Discoms in a graded manner until the financial year 2020-21. Also, lender banks/financial institutions are no longer to advance short term loans to Discoms for financing losses but may finance Discoms’ working capital requirement by way of loans (or by letters of credit wherever possible), only upto 25% of the concerned Discom’s previous year’s annual revenue (or as per prudential norms).