Vollume II: Issue II January, 2014 Infrastructure and Energy Quarterly

Transcription

1 Fff i.e. Vollume II: Issue II January, 2014

2 Practice Areas Infrastructure Finance and Project About DSK Legal Banking and Finance Corporate & Commercial Real Estate Transaction Support Employment IT & Intellectual Property DSK Legal, a full service law firm, was established in Mumbai in April, In the last decade DSK Legal has expanded rapidly, and currently has a national presence with offices in Mumbai, Delhi and Bangalore. DSK Legal offers legal services to a host of both transnational and domestic clients in a range of fields including Corporate and Commercial laws, Energy and Infrastructure, Project Finance, Banking and Finance, Telecommunications, Real Estate, Capital Markets, Employment Laws, Insurance, Intellectual Property, Information Technology, Commercial Litigation and Arbitration, etc. DSK Legal is organized to focus on industry groupings, rather than solely on traditional legal competencies. Our Energy and Infrastructure practice comprises of a team with significant experience in handling Renewable and Non-Renewable Energy matters and Infrastructure matters. Litigation & Arbitration For more information about DSK Legal please visit our website Media & Entertainment Shipping Tax (Click on the practice area for more details about the practice and services provided) DSK Legal, Advocates & Solicitors 2

3 Contents Foreword ARTICLES INFRASTRUCTURE FUNDING: AN OVERVIEW 4 SHORT NOTES BRIEF OVERVIEW OF THE MODEL POWER SUPPLY AGREEMENT INFRASTRUCTURE 9 INVESTMENT TRUSTS: THE PROPOSED FRAMEWORK 11 OTHER REGULATORY UPDATES 13 It gives us great pleasure in bringing you this edition of our quarterly journal i.e. - Infrastructure and Energy Quarterly. The infrastructure and energy sector is the backbone of any economy and the inflow of investment forms the soul of any infrastructure development. However, in India, the sector has been experiencing a severe deficit since a long time. Although the Government of India under the Twelfth Five Year Plan aims to cover this deficit by increasing the inflow of investment and greater private participation, the participation by the private players and the inflow of investment has been slower than expected. In this issue we have analyzed the current scenario of infrastructure funding and have discussed the various avenues available for financing the sector. The Ministry of Power has issued a comprehensive regulatory framework in form of model bidding documents including a Model Power Supply Agreement in early November. We have, in this edition, reviewed the Model Power Supply Agreement and have provided a brief overview of the same in form of a short note. Further, we have also provided a brief overview of the consultation paper issued by the Securities and Exchange Board of India containing the proposed framework for the Infrastructure Investment Trusts. Several other regulatory frameworks and policies have been changed in the last quarter to give the infrastructure and energy sector the required boost for growth and we have also analyzed the same. We hope you enjoy reading this edition of i.e. and we would be glad to receive your comments and feedback on the same at the following ids: narendra.dingankar@dsklegal.com; or ajay.shaw@dsklegal.com. Infrastructure and Project Finance Team DSK Legal, Mumbai DSK Legal, Advocates & Solicitors 3

4 Infrastructure Funding: An Overview The infrastructure sector requires huge amount of capital investment and have long gestation periods. The twelfth five year plan ( ) has estimated a total investment of USD 1 trillion in the infrastructure sector. Of the total investments, 48% will have to come from the private sector as 52% is expected to come from the Government sector. Thus, the private sector along with the Government is required to play a key role in funding of infrastructure projects. The implementation of public private partnerships (PPP) for various infrastructure projects has so far taken huge load off the Government s balance sheet. In fact, the Government has recently gone one step further with the decision of 100% privatisation of six airports including Kolkata and Chennai. Financing of infrastructure projects is often on non-recourse or limited recourse basis. The development is carried out through special purpose vehicles where the financiers can only be repaid from the revenues generated by the project. However, the prevailing uncertainties as regards the regulatory and policy framework; delays in land acquisition and obtaining clearances; rising inflation; depreciation of the rupee; high interest cost; and higher prices of material and labour, have made execution of DSK Legal, Advocates & Solicitors 4

5 infrastructure projects very difficult. This has led to delay in revenue generation for the project and has impacted cashflows and financial returns to the project developer; and thereby causing longer and lower cash conversion cycle for investors in the infrastructure projects. The Government is now increasingly exploring new sources of finance that can be made available to the infrastructure sector along with the prevalent sources of funding, as it clearly recognises that the growth of the infrastructure sector is key to the growth of India s GDP. SOURCES OF FINANCE Traditionally, the State has been the developer of the infrastructure projects with major portion of the finance coming from budgetary allocations and public sector banks. Over the period, innovative sources of finance have evolved to supplement the traditional ones. The Government of India, in conjunction with regulatory bodies overseeing the financial sector, has been creating an environment to enable the infrastructure sector to access newer sources of funding by way of regulatory and policy framework. The Securities and Exchange Board of India (SEBI) has granted special concessions to infrastructure companies for public issue of equity and debt. The Reserve Bank of India (RBI) is also promoting financing of infrastructure projects through various measures including granting of a special status to Non-Banking Finance Companies (NBFCs) proposing to undertake financing of infrastructure projects as their main object. A brief overview of some of the sources of finance is provided below. Viability Gap Funding Viability Gap Funding (VGF) is a Government grant which is typically provided in competitively bid projects where the project revenues are not adequate and attractive for private parties to participate in the development of the projects. Under VGF, the Central Government provides up to 20% of capital cost of a project being implemented in PPP mode by a central ministry, state government, statutory entity or a local body. The concerned State Government or project authority can also additionally contribute 20% of the project cost. The project is finally awarded to the person who quotes the least VGF. The Government has so far approved 159 projects eligible for VGF with a total (in-principle) approved grant of Rs. 16, crore [Source: PPP in India, Department of Economic Affairs, Ministry of Finance, Government of India: Commercial Banks In infrastructure projects where on an average, debt-equity ratio goes up to 3:1, the commercial banks play a significant role in meeting financing requirement for such projects. Projects are typically funded on limited recourse basis where the assets and revenues of the projects form security for such financing. The guarantee of the sponsor s parent company is also provided on case-to-case basis. However, the concerns relating to asset-liability mismatches, the exhaustion of sector limits and prudential norms restrictions put limitations on commercial banks ability to lend. Recently, on March 18, 2013, the RBI has relaxed the prudential norms applicable to loans to infrastructure sector, where it has decided that the loans to PPP project may be considered as secured by the lenders to the extent assured by the project authority in terms of the DSK Legal, Advocates & Solicitors 5

6 Concession Agreement. The move is expected to increase liquidity for the banks and the borrowing will become a little cheaper. However, the phased implementation of BASEL III norms will put stress on the long term project financing. Non-Banking Finance Companies NBFCs also play a critical role in the financing of long term debt requirements of infrastructure projects. RBI has created a specific class of NBFC i.e. Infrastructure Finance Companies (IFC) which are dedicated to finance infrastructure sector. RBI has extended some benefits to IFCs including relaxation in concentration of credit/investment norms, risk weight, raising external commercial borrowings under automatic route. Further, IFC can also raise debt by issuance of infrastructure bonds. External Commercial Borrowings Companies engaged in infrastructure sector can raise debt from external sources subject to the external commercial borrowings (ECB) regulations prescribed by the RBI. Infrastructure companies also enjoy certain special concessions under the ECB regulations. Typically, ECB can be raised for capital expenses and new projects. However, infrastructure companies can also raise ECB for Interest During Construction (IDC), subject to IDC being capitalized and forming part of the project cost. Refinancing of Bridge Finance (including buyers / suppliers credit) availed of for import of capital goods by infrastructure companies is also permitted under the ECB regulations. Further, unlike other NBFCs, IFCs are permitted to raise ECB under the automatic route up to 75 per cent of their owned funds, for onlending to the infrastructure sector. Further, the proposal for take-out financing arrangement through ECB are also considered under the approval route for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects. Equity Funding An important component of infrastructure funding is private equities (PE). However, raising of funding from PE has become extremely difficult in the present scenario given that the earlier investments made by the PEs in the infrastructure sector in most cases have not yet achieved the desired exit. However, PE investment in the infrastructure sector is likely to see activities once there is clarity in Government policies and regulatory framework. Securitisation Securitisation of future receivables by infrastructure companies is another technique to raise funds and spread financial risk among multiple parties. Although securitisation as a fund raising technique has not been much prevalent in infrastructure sector, a couple of Jaypee Group companies have raised money through securitisation for paying off its debt taken from banks for their 400 MW Vishnu Prayag Project and 300 MW Baspa Project. The securitisation can be undertaken by private issue and public issue of securitised papers. A public issue is subject to regulations prescribed by the SEBI. Take-out Finance by IIFCL The Government of India has set up the India Infrastructure Finance Company DSK Legal, Advocates & Solicitors 6

7 Limited (IIFCL) as a special purpose vehicle for providing long term financial assistance to infrastructure projects. IIFCL has been given a mandate for take-out financing (i.e. refinancing) of loans given by commercial banks to infrastructure companies. Takeout financing can be used to effectively address asset-liability mismatch of commercial banks arising out of financing infrastructure projects, which also frees up capital for financing new projects. IIFCL has framed a scheme called the Take-out Finance Scheme for financing Viable Infrastructure Projects. Under the said scheme, occurrence of the actual commercial operation date (COD) or provisional COD is mandatory for actual disbursement of take-out. Infrastructure Debt Funds To meet refinancing needs of infrastructure companies, the Government is promoting Infrastructure Debt funds (IDFs) with certain tax and other incentives. IDFs can be set up as an NBFC or as a mutual fund. IDFs are expected to channelize long term funds from insurance and pension funds, sovereign wealth funds, etc. to supplement lending for infrastructure projects by commercial banks which are increasingly being constrained by their asset-liability mismatch and exposure limits. The taking over of existing bank debts by IDFs will release an equivalent volume for fresh lending by banks to infrastructure projects. Proposed Infrastructure Investment Trusts framework by SEBI SEBI has recently issued a consultation paper on Infrastructure Investment Trusts. As per the said paper, an infrastructure investment trust could be set up as a mutual fund or under a separate framework. A brief overview of the said proposed framework is provided in a separate write-up in this issue. Company Law CERTAIN LEGAL ISSUES The Government of India has partially replaced the existing company law i.e. the Companies Act, 1956 (Old Company Law) with the Companies Act, 2013 (New Company Law). New Company Law comes with certain relaxation to infrastructure companies. The infrastructure companies may issue preference shares for a period exceeding twenty years subject to redemption of prescribed percentage of shares on annual basis. The draft rules which are yet to be finalised prescribe redemption of a minimum of 10% per annum from the 21 st year. Further, infrastructure companies have also been excluded from restrictions on limits applicable to companies under Section 186 (2), where loans and investments exceeding 60% of the paid up capital and free reserve require approval of shareholders. These enable a greater freedom in raising finance by infrastructure companies. However, the New Company Law has also come with new restrictions. Financing through equity not only adds up to the funds of infrastructure companies but also increases their capability to raise debt. Under the Old Company Law, unlisted companies had freedom in determining issue price with respect to further issue of shares and were not subject to any specific pricing guidelines. However, as per Section 62 of the New Company Law, such further issue of shares is required to be done at a price determined by a registered valuer. Further, under Section 186(1) of the New Company Law, a company will not be able DSK Legal, Advocates & Solicitors 7

8 to make equity financing through more than two layers of investment companies. This will prevent infrastructure companies from structuring their equity financing where special purpose companies for every project and multi-layer equity investment are important to separate risks of each project from other projects. Restructuring & Rescheduling Due to various regulatory and policy hindrances being faced by infrastructure projects, the restructuring of their debts has become utmost necessity. Restructuring of loans by banks and financial institutions are subject to prudential guidelines issued by the RBI. Recently from June 1, the RBI has tightened the provisioning norms. The provisioning on the new restructured loans has been raised to 5 per cent from 2 per cent. On May 30, 2013, RBI has permitted that mere extension of date of commencement of commercial operation (DCCO) will not be considered as restructuring if the revised DCCO falls within the period of two years for infrastructure projects. However, a mere rescheduling of loans is considered equivalent to restructuring and thus, attracting the same provisioning norms. As per media report, RBI is in the process of issuing a directive that a rescheduled infrastructure loan taken over by an IDF would be treated as standard asset and not as a restructured loan. Security Enforcement The issue of security enforcement is a tricky one. The banks and certain financial institutions can enforce security speedily by approaching Debt Recovery Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act, Further, they have also been given power to enforce security without intervention of a court under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, However, these benefits are not available to NBFCs, IDFs, ECB Lenders and other financial institutions. Thus, the enforcement of security by these lenders entails lengthy procedure of courts. Though a RBI working group had recommended that NBFCs should be brought under purview of SARFAESI Act, no action has been taken in this regard yet. This limits the ability of these lenders to provide long term financing. Realising the importance of promoting the development of the infrastructure projects in achieving the overall socio-economic development of the nation, the Government is trying to put together every bit and piece to promote private participation in infrastructure sector. It is also opening up new sources of finance for the infrastructure sector. DSK Legal, Advocates & Solicitors 8

9 BRIEF OVERVIEW OF THE MODEL POWER SUPPLY AGREEMENT A BRIEF OVERVIEW OF THE MODEL POWER SUPPLY AGREEMENT ISSUED BY THE MINISTRY OF POWER ON NOVEMBER 8, 2013 ALONG WITH THE MODEL REQUEST FOR PROPOSAL AND THE MODEL REQUEST FOR QUALIFICATION TO BE ADOPTED BY DISTRIBUTION COMPANIES FOR PROCUREMENT OF ELECTRICITY FROM POWER PRODUCERS CONSTRUCTING AND OPERATING THERMAL POWER GENERATING STATIONS ON A DESIGN, BUILD, FINANCE, OWN AND OPERATE BASIS To improve the future prospects of private participation in the sector, the Ministry of Power issued a precise and comprehensive policy and regulatory framework in the form of a Model Request for Proposal, Model Request for Qualification and a Model Power Supply Agreement ( MPSA ) (collectively referred to as the Model Bidding Documents) on November 8, 2013 and further it issued Guidelines for Procurement of Electricity from Thermal Power Stations set up on Design, Build, Finance, Own and Operate ( DBFOO ) basis on November 9, The MPSA is a model draft to be used for procuring electricity from prospective power producers constructing and operating thermal power generating stations on a DBFOO basis. Although the MPSA is primarily for the purpose of new constructions that are to be undertaken, it contains provisions for power stations which are under construction or have already been commissioned. The financial viability of any power generating project depends inter alia on three elements namely, (i) contract period; (ii) fuel costs; and (iii) capital costs. The MPSA provides for pre-determination of the contract period and the fuel costs, therefore making the capital cost the variable factor that will determine the financial viability of a power generating station. Under the MPSA, the fuel cost is a pass through element that is to say that the fuel price is passed on by the supplier to the utility which in turn reflects such fuel costs in the distribution tariff. This pass through nature of the fuel costs accords the supplier protection against loss on account of the ever fluctuating fuel prices in national and international markets. The MPSA provides for alternative formulae for determination of the fuel prices depending on the source and pricing of fuel supplies. Supplies of fuel from Coal India Limited carry a regulated pricing, however the pricing of other supplies procured from captive mines or from the open market depends of various factors and therefore each is covered through a respective formulation. As a condition precedent, under the MPSA, the supplier is required to execute a Fuel Supply Agreement ( FSA ) containing the key provisions of the MPSA and this will provide requisite assurance to the utility for supply of fuel sufficient to generate a pre-determined quantum of electricity. Further, the supplier is required to maintain a minimum stock of fuel, sufficient for production of electricity and supply thereof to the utility for a continuous period of 7 days. DSK Legal, Advocates & Solicitors 9

10 Under the MPSA, the selection of supplier will be based on a two-stage competitive bidding process and project parameters such as concession period, technical parameters and performance standards to be disclosed upfront. The short-listed bidders will be required to quote their financial offer in terms of unit fixed charge, without any qualifications, and the bidder quoting the lowest unit charge will get the contract. The financial offer is required to be quoted for the 1 st year and the actual tariff payable to the supplier is required to be revised annually based on a predetermined indexation. One of the key characteristics of the MPSA is that it stipulates a fixed time frame for financial closure of the contract. The MPSA stipulates a time frame of 180 days for achieving the financial closure, which may be extended on payment of damages. Failing to achieve a financial closure within this time will lead to forfeiture of the bid security. This will not only significantly reduce costs but also ensure timely provision of the required infrastructure. The MPSA is designed to bring in a greater inflow of investments in the sector and accordingly, like other model agreements issued for projects under the PPP model, the MPSA provides provisions for substitution of the supplier. The project assets do not account for adequate security for the lenders and it is the project revenue streams that account for the security. The MPSA, to safeguard the lenders, provides for assignment and substitution so that in the event of failure of the developer, the concession can be transferred to another developer for completing the project successfully. This will prevent the power stations from becoming inefficient and also maintain the supply of power from the station. The MPSA also safeguards the supplier from force majeure situations and affords protection against political actions that may affect the project adversely. Unlike most other concession agreements relating to infrastructure projects which depend on complex formulations for determining the termination payment, the MPSA precisely quantifies the same and provides for a calibrated termination payment by the supplier or the utility as the case may be. The MPSA incorporates the best practices and provisions which will not only ensure a fair and transparent framework for private participation but will also attract greater private investments and will further ensure timely completion of the projects and greatly improve the power sector of India. DSK Legal, Advocates & Solicitors 10

11 INFRASTRUCTURE INVESTMENT TRUSTS: THE PROPOSED FRAMEWORK A BRIEF OVERVIEW OF THE NEW CHANNEL OF INFRASTRUCTURE FINANCING INFRASTRUCTURE INVESTMENT TRUSTS AS PROPOSED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA The capital market regulator Securities and Exchange Board of India (SEBI) has, on December 20, 2013, issued a Consultation Paper on Infrastructure Investment Trusts (consultation paper) proposing a new avenue of finance for the infrastructure sector. In the past, SEBI has framed different structures such as the Infrastructure Debt Fund under the SEBI (Mutual Funds) Regulations, 1996 and Infrastructure Fund under the SEBI (Alternative Investment Funds) Regulations, 2012, to give impetus to financing of the infrastructure sector. The Infrastructure Investment Trusts (InvITs) are proposed for the financing and refinancing of the infrastructure sector on a long term basis. The consultation paper notes that this will free up current developer capital for reinvestment into new infrastructure projects and to refinance/ take-out existing high cost debt with long term low cost capital and help banks free up/ reduce loan exposure. In the consultation paper, SEBI has mulled two options, namely, (1) InvITs as mutual funds; and (2) InvITs under a separate framework. We have very briefly discussed the main elements of these proposed structures. INVITS AS MUTUAL FUNDS Under this option, an InvITs will be set up as a trust under the Indian Trusts Act, 1882 like any other mutual fund, and shall procure registration with SEBI after fulfilling the eligibility criteria. The InvITs are proposed to acquire shares of special purpose vehicles (SPVs) in primarily public private partnerships (PPP) projects and may also be expanded to include non-ppp projects. The InvIT can be sponsored by an infrastructure developer or an SPV holding a concession. The sponsor shall transfer the majority shareholding in the SPV into the InvIT and will be required to hold a minimum percentage of units. It is proposed that the InvIT will hold at least 75% equity in the SPV. The original concessionaire shall be responsible for project management but the InvIT will play active role in the development of the project through its advisory board. It is proposed that the InvITs shall mandatorily bundle the portfolio of infrastructure projects with a mix of pre Commercial Operations Date (COD) (at least 50% developed) and post COD infrastructure projects. The InvITs will be sector specific and infrastructure projects DSK Legal, Advocates & Solicitors 11

12 under one sector can only be bundled. For acquisition of shares of the SPV, valuation would be based on the Discounted Cash Flow (DCF) method. An InvIT would acquire a post-cod project from a developer at a discount and a pre-cod project from a developer at a deeper discount rate, subject to negotiations and a shadow book-building exercise with potential investors. An InvIT shall be allowed to raise funds from both domestic and foreign investors. All non-resident investment in the InvIT units would, however, be subject to a lock in period of three years. However, all nonresident investors can trade amongst themselves within this lock in period of three years. As at present the foreign investment in trusts require approval from FIPB, this proposed framework will require amendment in the foreign investment policy. INVITS UNDER A SEPARATE FRAMEWORK Under this option, the InvIT will be regulated by a separate framework, namely, SEBI (Infrastructure Investment Trusts) Regulations. An InvITs shall be set up as a trust and shall raise funds through public issue and/ or private placement. However, the trust will not be eligible to launch schemes under the trust. The trust shall procure registration with SEBI either as (1) Category I InvIT where the InvIT may invest in multiple infrastructure projects, whether pre-cod or post-cod; or (2) Category II InvIT where the InvIT shall invest only in one year post-cod revenue generating projects. Under Category I, funds shall only be raised from institutional investors, both domestic and foreign, through private placements and the subscription amount shall not be less than Rs. 5 crore. Under Category II, funds may be raised from any investor, investing not less than Rs. 10 lakh. Under Category II, funds may be raised by way of initial public offer and further issued may be made by follow-on offers, rights issues, bonus issues, preferential allotments or any other route as may be prescribed by SEBI. The InvIT will be sponsored by the promoter of the SPV. Unlike mutual fund framework, this framework provides that the sponsor shall be required to transfer all of its shareholding in the SPV to the InvIT and the sponsor shall hold at least 24% interest in the InvIT at all times. The InvIT shall invest in only one sector. The projects shall be managed by project managers appointed in accordance with concession agreement. On an overview of the consultation paper, many differences can be observed between the mutual fund structure and the separate framework structure. Though, both structures will be in trust form, the logic behind these differences is unclear. It seems that the consultation paper is half-baked and requires a lot of clarity. SEBI has called for comments and suggestions from the stakeholders by January 20, 2014 after which it will take its final decision and issue a comprehensive policy and regulatory framework for the proposed InvITs. DSK Legal, Advocates & Solicitors 12

13 OTHER REGULATORY UPDATES PROPOSED AMENDMENT TO THE TARIFF POLICY NOTIFIED UNDER SECTION 3 OF THE ELECTRICITY ACT, 2003 MODEL BIDDING DOCUMENTS FOR THERMAL POWER STATIONS SET UP ON DESIGN, BUILD, FINANCE, OWN AND OPERATE (DBFOO) BASIS The Ministry of Power, since September 12, 2013, has been contemplating to amend the Tariff Policy as is notified under Section 3 of the Electricity Act, Some of the key changes proposed are: the requirement of the provision to be reexamined every five years has been removed; the formula for calculating the cross-subsidy surcharge is proposed to be modified and is to be calculated based on the average cost or bottom 5% costs instead of cost of power purchase of top 5% as a factor; in case of outages of generator supplying to a consumer on open access, charges may be decided by mutual agreement between the open access consumers and the distribution companies; the procurement by distribution licensees for future requirements shall be done, as far as possible, through competitive bidding process under Section 63 of the Electricity Act, 2003 within suppliers offering energy from same type of nonconventional sources. In the long-term, these technologies would need to compete with other sources in terms of full costs and in the short term procurement through purchase of Renewable Energy Certificates (REC) or at preferential tariffs. The Ministry of Power has sought comments and suggestions from the stakeholders on the draft it has issued containing the proposed amendments to the tariff policy before it notifies the amended tariff policy under the Electricity Act, A draft Model Power Supply Agreement was issued on May 9, 2013 seeking comments from the stakeholders. Thereafter based on the meeting held with the state governments, distribution companies, lenders, traders, APPs, CII and FICCI on June 11, 2013 and the meeting of the Inter-Ministerial Group held on July 19, 2013, a revised draft Model Power Supply Agreement was circulated seeking comments from the stakeholders. After much deliberation the Inter-Ministerial Group finalized the draft Model Power Supply Agreement, the draft Model Request for Qualification and the draft Model Request for Proposal (collectively referred to as the Model Bidding Documents) on October 11, 2013 for construction and operation of Thermal Power Stations set up on Design, Build, Finance, Own and Operate (DBFOO) for long term procurement of power. The Ministry of Power in its letter dated November 8, 2013 laid down that it will issue certain guidelines under Section 63 of the Electricity Act, 2003 to enable the use of the said Model Bidding Documents and upon issue of the same all power utilities intending to invite prospective power producers to construct and operate thermal power stations set up on DBFOO basis for supply of electricity for long term may use the Model Bidding Documents. The said guidelines have been notified in the Gazette of India on November 9, DSK Legal, Advocates & Solicitors 13

14 AMENDMENT TO THE GUIDELINES FOR TARIFF BASED COMPETITIVE- BIDDING GUIDELINES FOR TRANSMISSION SERVICE The Ministry of Power vide its resolution numbered 15/1/2010-Trans published in the Official Gazette on December 9, 2013 amended the Guidelines for Tariff based Competitive-bidding Guidelines for Transmission Service. The Guidelines were originally notified vide resolution number 11/5/2005-PG(i) dated April 13, 2006 and has been amended from time to time under the provisions of the Electricity Act, The key amendment notified on December 9, 2013 is the Time Table for the Bid Process in para The said amendment lays down a suggested time-table for the bid process as is indicated below. The Bid Process Coordinator may give extended time-frame based on the prevailing circumstances and such alterations shall not be construed to be deviation from these guidelines. Events Publication of RFQ Submission of Response to RFQ Short listing based on responses and issuance of RFP Bid clarification, conference, Final clarification and revision of RFP Technical and price bid submission Short listing of bidder and issue of LOI Signing of Agreements Elapsed time from Zero Date Zero Date 30 days 60 days 85 days 120 days 135 days 145 days SCHEME FOR PROMOTION OF GRID INTERACTIVE POWER GENERATION PROJECTS (WIND POWER PROJECTS) BASED ON RENEWABLE ENERGY TECHNOLOGIES TO BE CONTINUED DURING THE 12TH FIVE YEAR PLAN ( ) The Ministry of New and Renewable Energy issued a notification dated November 28, 2013 wherein it conveyed the sanction of the President of India for the continuation of the Scheme for Promotion of Grid Interactive Power Generation Projects based on Renewable Energy Technologies for Wind Power Projects of the Ministry of New and Renewable Energy during the course of the 12 th Five Year Plan ( ). The said scheme will be implemented during the 12 th Five Year Plan ( ) as per the same funding norms, guidelines and provisions as were applicable during and issued vide sanction letter numbered 14/8/2004- SHP dated December 26, 2006 and continued vide order numbered 53/9/2011- WE dated December 16, Under the scheme the Ministry of New and Renewable Energy will continue to provide financial support for carrying out Wind Resource Assessment, organization of seminars, symposiums, workshops, training programs, strengthening of technical institutions, testing facilities, engaging consultants, undertaking studies etc. on a case to case basis. Further, the release of subsidy/ Central Financial Assistance during the period will continue to be governed as per the provisions which governed the same during DSK Legal, Advocates & Solicitors 14

15 GUIDELINES FOR MANAGEMENT OF LOCAL AREA DEVELOPMENT FUND IN RESPECT TO THE CENTRAL SECTOR HYDRO-ELECTRIC PROJECTS The Ministry of Power vide its notification dated October 23, 2013 issued the draft Guidelines for Management of Local Area Development Fund in respect of the Central Sector Hydro-Electric Projects and invited comments from the stakeholders. The National Hydro Power Policy of 2008 which was notified on March 31, 2008 has provisions for earmarking 1% free power from every hydro-electric project for local area development. The said policy of 2008 also recommended that the host State Governments also provide a share to this fund. The Guidelines for Management of Local Area Development Fund in respect of the Central Sector Hydro-Electric Projects are issued for effectuating these provisions of the policy of POLICY GUIDELINES FOR EXPLORATION OF SHALE GAS AND OIL BY NATIONAL OIL COMPANIES UNDER THE NOMINATION REGIME On October 14, 2013, the Ministry of Petroleum and Natural Gas issued a letter wherein it laid down that the Government has approved the policy guidelines for exploration of shale gas and oil by national oil companies under the nomination regime and the said policy guidelines will be applicable to the onshore oil and gas nomination acreages with the national oil companies. The terms and conditions of the said policy are laid down in the model permission letter, a copy of which was annexed to the letter dated October 14, The policy guidelines also provide tax incentives to the national oil companies in form of income tax benefit, full exemption from basic customs duty and additional duties of customs for specified goods required for petroleum operations undertaken under petroleum licenses or mining leases issued on nomination basis for exploration and exploitation of shale gas and oil and also full exemption of excise duty for all goods supplied against international competitive bidding subject to such goods being fully exempted from basic customs duty and additional duty of customs when imported into India. Some of the other key provisions are that the national oil companies will be required to undertake a minimum work program mandatorily in a fixed time frame for shale gas and oil exploration and exploitation; the national oil companies have to, on a monthly and annual basis, submit a report regarding the production and sale of shale gas and oil to the Director General of Hydrocarbons; the holder of PML/ PEL shall be responsible for ensuring health, safety, environment, site restoration and adoption of best industry practices and obey statutory requirements for all purposes under the license and mining lease. AMENDMENTS TO THE PETROLEUM AND NATURAL GAS REGULATORY BOARD (AUTHORIZING ENTITIES TO LAY, BUILD, OPERATE OR EXPAND NATURAL GAS PIPELINES) REGULATIONS, 2008 PROPOSED BY THE PETROLEUM AND NATURAL GAS REGULATORY BOARD The Petroleum and Natural Gas Regulatory Board had issued the draft of the proposed amendments to the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008 on July DSK Legal, Advocates & Solicitors 15

16 27, 2012 and invited comments from the stakeholders. The comments received were thereafter discussed with the stakeholders who submitted their comments and it was decided to de-link the proposed amendments related to Tie-in Connectivity from the Expansion/Extension of Natural Gas Pipelines. Thereafter GAIL India Limited and Reliance Gas Transportation Infrastructure limited submitted additional comments. The main issue raised by GAIL India Limited is regarding the requirement of separate authorization for laying of spurlines to the existing natural gas pipelines. Subsequently, the Ministry of Petroleum and Natural Gas vide letter dated October 15, 2013 opined that no separate authorization is required for laying spurlines originating from the authorized natural gas pipelines within its economic life, so long as the usage/purpose of the pipeline already authorized is not changed subject to the spur-lines meeting all requirements provided in Regulation 2(o) of the Petroleum and Natural Gas Regulatory Board (Determining Capacity of Petroleum, Petroleum Products and Natural Gas Pipeline) Regulations, While determining the above, five alternative views emerged as regards to the issue of spur-lines and the Petroleum and Natural Gas Regulatory Board vide its Public Notice dated November 28, 2013 invited further comments/views within a period of 30 days from the date of the Public Notice from the stakeholders on the issue of spur-lines before it finalizes the proposed amendments to regulations in this regard. DIRECTIONS UNDER SECTION 5 OF THE ENVIRONMENT (PROTECTION) ACT, 1986 The Ministry of Environment and Forests vide its notification dated November 13, 2013 issued certain directions under Section 5 of the Environment (Protection) Act, The Western Ghats is a global biodiversity hotspot and is an important geological landform and harbors several endemic species of flora and fauna. The Western Ghats are also an important centre of economically important domesticated plant species and further, certain zones of the Western Ghats are also included in the UNESCO World Natural Heritage List. The Ministry of Environment and Forests constituted a High Level Working Group under the Chairmanship of Dr. K. Kasturirangan, Member (Science), Planning Commission vide office order dated August 17, 2012 to study the preservation of the ecology, environmental integrity and holistic development of the Western Ghats. The High Level Working Group submitted its report to the Ministry of Environment and Forests on April 15, 2013 and thereafter public comments were invited on the same and thereafter the Ministry of Environment and Forests accepted the report in principle with certain stipulations. The High Level Working Group identified this 37% of natural landscape having high biological richness, low forest fragmentation, low population density and containing Protected Areas (PAs), World Heritage Sites (WHSs) and Tiger and Elephant corridors as an Ecologically Sensitive Area (ESA). Thereafter the Ministry of Environment and Forests vide its notification dated November 13, 2013 issued and notified the following directions under Section 5 of Environment (Protection) Act, 1986: The following category of new and/ or expansion projects/ activities shall be prohibited in the Ecologically Sensitive Areas from date of issue of these directions except those cases which have been received by Expert Appraisal Committees/ Ministry of Environment and Forests or DSK Legal, Advocates & Solicitors 16

17 State Expert Appraisal Committees/ State Environment Impact Assessment Authorities before the date of putting the High Level Working Group report on the website of the Ministry, that is April 17, and which are pending with Expert Appraisal Committees/ Ministry of Environment and Forests or State Expert Appraisal Committees/ State Environment Impact Assessment Authorities. Such projects will be dealt under the guidelines and rules applicable at the time of application before the respective Expert Appraisal Committees/ Ministry of Environment and Forests or State Expert Appraisal Committees/ State Environment Impact Assessment Authorities. Apart from such cases, no pending case or any fresh case shall be considered by the Expert Appraisal Committees/ Ministry of Environment and Forests or State Expert Appraisal Committees/ State Environment Impact Assessment Authorities from the date of issue of these directions. a) Mining, quarrying and sand mining; b) Thermal Power Plants; c) Building and construction projects of 20,000 sq. m. area and above; d) Township and area development projects with an area of 50 ha and above and / or with built up area of 1,50,000 square meters and above; and e) Red category of industries. FINANCING OF INFRASTRUCTURE DEFINITION OF INFRASTRUCTURE LENDING MODIFIED The Government of India has updated the Harmonized Master List of Infrastructure sub-sectors vide Gazette Notification dated October 7, 2013 and two new sub-sectors have been added in the Master List, namely, (i) hotels with project cost of more than Rs.200 crores each in any place in India and of any star rating; (ii) convention centers with project cost of more than Rs.300 crores each. Accordingly, an updated list of sub-sectors for infrastructure lending by banks and select All India Term-Lending and Refinancing Institutions is issued by the Reserve Bank of India vide its circular dated November 25, 2013 and is illustrated below. The new sub-sectors will get classified as Infrastructure for the purpose of lending by banks and select All India Term-Lending and Refinancing Institutions from the date of the circular issued by the Reserve Bank of India. List of Sub-Sectors for Infrastructure Lending Category Infrastructure Sub-Sector Transport 1. Roads and bridges 2. Ports (Includes Capital Dredging) 3. Inland waterways 4. Airports 5. Railway tracks, tunnels, viaducts, bridges (Includes supporting terminal infrastructure such as loading/unloading terminals, stations and buildings) 6. Urban Public Transport (except rolling stock in case of urban road transport) Energy 1. Electricity Generation DSK Legal, Advocates & Solicitors 17

18 2. Electricity Transmission 3. Electricity Distribution 4. Oil pipelines 5. Oil/Gas/Liquefied Natural Gas (LNG) storage facility (Includes strategic storage of crude oil) 6. Gas pipelines (Includes city gas distribution network) Water and Sanitation 1. Solid Waste Management 2. Water supply pipelines 3. Water treatment plants 4. Sewage collection, treatment and disposal system 5. Irrigation (dams, channels, embankments etc) 6. Storm Water Drainage System 7. Slurry Pipelines Communication 1. Telecommunication (Fixed network) (Includes optic fibre/cable networks which provide broadband / internet) 2. Telecommunication towers 3. Telecommunication & Telecom Services Social and Commercial Infrastructure 1. Education Institutions (capital stock) 2. Hospitals (capital stock) (Includes Medical Colleges, Para Medical Training Institutes and Diagnostics Centres) 3. Three-star or higher category classified hotels located outside cities with population of more than 1 million 4. Common infrastructure for industrial parks, SEZ, tourism facilities and agriculture markets 5. Fertilizer (Capital investment) 6. Post harvest storage infrastructure for agriculture and horticultural produce including cold storage 7. Terminal markets 8. Soil-testing laboratories 9. Cold Chain (Includes cold room facility for farm level precooling, for preservation or storage of agriculture and allied produce, marine products and meat) 10. Hotels with project cost 8 of more than Rs.200 crores each in any place in India and of any star rating (Applicable with prospective effect from the date of this circular and available for eligible projects for a period of three years; Eligible costs exclude cost of land and lease charges but include interest during construction) 11. Convention Centres with project cost 8 of more than Rs.300 crore each (Applicable with prospective effect from the date of this circular and available for eligible projects for a period of three years; Eligible costs exclude cost of land and lease charges but include interest during construction) DSK Legal, Advocates & Solicitors 18

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