Major financial institutions and private equity firms such as Cornell Capital and Actis are likely to join hands with leading domestic power sector financing company Power Finance Corporation (PFC) to set up an equity consortia for funding power projects in the country.
The state-owned institution would identify power projects needing equity support and provide lucrative investment opportunity to consortia partners. The new initiative would be run by the newly set up arm of PFC, Power Equity Capital Advisors Pvt Ltd (PE-CAP).
Other institutions and PE firms that may become part of the consortia include Sansar Capital Asia, Nexent Ventures, Capital Management Advisors and Highfield Capital Management.
“This equity consortium will have both international and domestic financial institutions. While PFC will develop the standard appraisal criteria, the other members will infuse capital in the domestic power projects. This is a major step towards securing a safe and permanent line of equity for the fund-starved power projects in the country,” a senior PFC official told ET.
As per government estimates, an investment of over Rs 10.5 lakh crore is expected in the 11th Plan in the power sector. After exploring all possible avenues of funding, there is still a huge gap of over Rs 4 lakh crore. While PFC would meet debt requirement, the new initiative would strive to meet the equity shortfall. It would also provide avenues to PE firms to get a foothold in the Indian power market.
To get the equity consortia running, PFC is also in talks with a list of heavyweights in the domestic financial sector, which include banks and insurance majors such as State Bank of India, Axis Bank, Bank Of India, LIC, HDFC, ICICI, Bajaj Allianz, Tata AIG and Oriental Insurance.
“We are close to reaching an agreement with a number of these players and other global investment companies,” said the official. “The plans of having a private equity fund were shelved because there are tax implications both at the fund level and at the investor end,” he added.
The advantage with the consortium is that there will be no cap on the investment amount that can be generated. After the assessment done by PFC, the members of the consortium may even finance the whole project depending on their financial strength,” he added.
Apart from others, the new initiative would also provide avenues to PFC to make its own equity investments in power projects. This is an area that is being actively pursued by the company.
According to PFC, the equity consortia would be a big boon for the domestic power sector as it would help to bring down the overall cost of funds and subsequently result in lower tariff for consumers.
The average cost of debt varies between 12% to 15% based on the project feasibility. A mix of equity and debt support is considered ideal for making projects viable on a longer term.
Source: Economic Times