NTPC has reportedly outbid Adani for Avantha’s 600 MW Jhabua power plant in Madhya Pradesh, offering to pay Rs 1,900 crore, two and a half times more than the rival bid. Jhabua is a new plant, commissioned in May 2016, only to fall sick for want of buyers for its output. It is a steal at a shade over Rs 3 crore per MW of generation capacity. Adani bid valued the unit at Rs 1.25 crore per MW. The bidding experience reveals three things. One, resolution assets under the Insolvency and Bankruptcy Code are going very cheap; two, the original costs were probably inflated (Avantha cost Rs 6 crore per MW); and it makes sense for the banks to create vehicles to buy out stressed assets at better valuations.
Banks would reportedly recover 38% of their loan if they accept the NTPC offer as the Avantha group owes more than Rs 5,000 crore to lenders. A 62% haircut for banks is fairly steep. To minimise haircuts, the need is to create deeper and competitive markets for stressed assets. The power sector is in a special category of its own. Its problems stem wholly from political failure. Only when the government finds the political courage to ask people to pay for the power they consume and clamp down on theft will the sector be restored to health. Only when the power sector turns healthy can power assets be sold at a decent price. In such a situation, the sensible thing is for the banks to supply the patient capital that would buy out the assets now, and sell them off at a handsome price once the sector turns viable. The banks would recoup a good part of the haircuts they sustain now, while cleaning up their books.
India’s big pension funds, the NPS and the EPF, could set up special opportunity funds to buy up such lucrative assets, too. The banks’ loss would be pensioners’ gain.