Foreign Direct Investment In Power Sector

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Foreign Direct Investment In Power Sector
By Swarnima Bhardwaj
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Intent and Objective of FDI

• It is the intent and objective of the Government
  of India to attract and promote Foreign Direct
  Investment in order to supplement domestic
  capital, technology and skills, for accelerated
  economic growth.
• Foreign Direct Investment, as distinguished from
  portfolio investment, has the connotation of
  establishing a lasting interest in an
  enterprise that is resident in an economy other
  than that of the investor.
• The Government has put in place a policy
  framework on Foreign Direct Investment, which is
  transparent, predictable and easily
  comprehensible.

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Equity Inflows to India
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Power Sector Indian Position

• The power sector ranked sixth among the leading
  sectors of the Indian economy.
• It attracted US 4.6 billion in Foreign Direct
  Investment (FDI) since 2000, according to the
  Ministry of Commerce and Industry's Department of
  Industrial Policy Promotion (DIPP).
• In India, up to 100 FDI is allowed in respect of
  projects relating to electricity generation,
  transmission and distribution, other than atomic
  reactor power plants.
• There is no limit on the project cost and quantum
  of foreign direct investment.

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Present Position

• As per extant policy, Foreign Direct Investment
  (FDI) up to 100 is permitted in the power
  sector, under the automatic route, for
• i) Generation and transmission of electric
  energy produced in hydro
  electric, coal/lignite based thermal, oil based
  thermal and gas based thermal power plants
• ii) Non-Conventional Energy Generation and
  Distribution iii) Distribution of elective
  energy to households, industrial, commercial
  and other users
• v) Power Trading

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Revised Position

• The Government of India has reviewed the position
  and decided to permit foreign investment, up to
  49, in Power Exchanges, registered under the
  Central Electricity Regulatory Commission (Power
  Market) Regulations, 2010, as below
• Such foreign investment would be subject to an
  FDI limit of 26 per cent and an FII limit of 23
  per cent of the paid-up capital
• (ii) FII investments would be permitted under the
  automatic route and FDI would be permitted under
  the government approval route
• (iii) FII purchases shall be restricted to
  secondary market only
• (iv) No non-resident investor/ entity, including
  persons acting in concert, will hold more than 5
  of the equity in these companies and
• (v) The foreign investment would be in compliance
  with SEBI Regulations other applicable laws/
  regulations security and other conditionality.

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FDI INFLOWS IN POWER SECTOR (from Apr 2000 to
Oct 2012)
Subsectors Amount of FDI inflows Amount of FDI inflows
Rupees (in crores) US (in million) age with total FDI inflows in Power Sector
Power 35,159.94 7655.60 4.04
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Major players
Foreign Players Indian Partners
1. Steag energy Services Hinduja Energy India
2. Mitsubishi Heavy Industries Ltd., Japan LT ,Gujarat
3. Hitachi, Japan BGR, Tamil Nadu
4. Toshiba, Japan JSW, Tamil Nadu
5. Alstom, France Bharat Forge, Gujarat
6. Ansaldo Caldie, Italy Gammon, Tamil Nadu
7. Babcock Wilcox, USA Thermax, Maharashtra
8. Hitachi Power Europe GmbH (Germany) BGR, Tamil Nadu
9. Doosan, Korea (100 FDI) -
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Power Sector Advantages

• Economic growth- This is one of the major
  sectors, which is enormously benefited from
  foreign direct investment.
• Employment and skill levels- FDI has also ensured
  a number of employment opportunities by aiding
  the setting up of industrial units in various
  corners of India.
• Technology diffusion and knowledge transfer- FDI
  apparently helps in the outsourcing of knowledge
  from India especially in the Information
  Technology sector. It helps in developing the
  know-how process in India in terms of enhancing
  the technological advancement in India.
• Linkages and spillover to domestic firms- Various
  foreign firms are now occupying a position in the
  Indian market through Joint Ventures and
  collaboration concerns. The maximum amount of the
  profits gained by the foreign firms through these
  joint ventures is spent on the Indian market.

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Power Sector Disadvantages

• Profit distribution, investment ratios are not
  fixed
• An economically backward class person suffers
  from price raise
• Retailer faces loss in business
• Market places are situated too far which
  increases traveling expenses
• Workers safety and policies are not mentioned
  clearly
• Inflation may be increased

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INCREASE IN EQUITY INFLOWS IN POWER SECTOR
STARTING FROM APRIL, 2000 IN A PERIOD FROM
JAN-OCT, 2012
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INCREASE IN PERCENTAGE (with total FDI) OF EQUITY
INFLOWS IN POWER SECTOR STARTING FROM APRIL, 2000
IN A PERIOD FROM JAN-OCT, 2012
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Investment Policy Updates

• The Ministry of Power, Government of India has
  initiated several policies to promote and garner
  investments in the power sector.
• Some of the prominent policies which have boosted
  the private player's confidence in the sector
  are
• National Electricity Policy
• Ultra Mega Power Project Policy
• Mega Power Policy
• CERC Policy (Central Electricity Regulatory
  Commission)
• Tariff Policy

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National Electricity Policy
National Electricity Policy

• Aims and Objectives

• Availability of Power - Demand to be fully met by
  2012. Energy and peaking shortages to be overcome
  and adequate spinning reserve to be available.
• Supply of Reliable and Quality Power of specified
  standards in an efficient manner and at
  reasonable rates.
• Per capita availability of electricity to be
  increased to over 1000 units by 2012.
• Minimum lifeline consumption of 1
  unit/household/day as a merit good by year 2012.
• Financial Turnaround and Commercial Viability of
  Electricity Sector.
• Access to Electricity - Available for all
  households in next five years
• Protection of consumers interests.

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Ultra Mega Power Project Policy

• There are 5 major ultra mega power projects
• Sasan Ultra Mega Project
• Mundra Ultra Mega Project
• Akaltara Ultra Mega Project
• Karnataka Ultra mega project
• Maharashtra Ultra Mega project

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CERC policy

• The Commission intends to
• promote competition, efficiency and economy in
  bulk power markets
• improve the quality of supply
• promote investments
• advise government on the removal of institutional
  barriers to bridge the demand-supply gap and
• foster the interests of consumers

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Tariff Policy

• The objectives of this tariff policy are to
• Ensure availability of electricity to consumers
  at reasonable and competitive rates
• Ensure financial viability of the sector and
  attract investments
• Promote transparency, consistency and
  predictability in regulatory approaches across
  jurisdictions and minimize perceptions of
  regulatory risks
• Promote competition, efficiency in operations and
  improvement in quality of supply.

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Conclusion

• The Indian power sector, marked by years of under
  investment and ever increasing demands can
  leapfrog by infusion of FDI.
• India has the potential to attract far more FDI
  in the power sector as compared to less than 4
  of the nation's total FDI that it attracts at
  present.
• The root of the problem is as much a question of
  inadequate reforms as it is of insufficient
  investment inflow.

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