Tata SteelNSE 1.29 % has started the process of cancelling power purchase agreements (PPAs) between Bhushan SteelNSE 0.18 %, a company it acquired through bankruptcy resolution proceedings, and Bhushan Energy in a bid to cut costs.
Scrapping the agreement for Bhushan Steel to buy power from Bhushan Energy will save India’s second-largest steel maker Rs 30-40 crore every year, two people with knowledge of the development said. The Tatas had earlier revoked an office lease agreement between Bhushan Steel and its former promoters. The cancellation of the power purchase agreements was part of the Rs 35,000-crore resolution plan approved by the National Company Law Tribunal on May 15, 2018. The Bhushan Energy (BEL) resolution professional had opposed the cancellation and had sought the company’s inclusion as an operational creditor of Bhushan Steel (BSL).
“We have sought reasons through a notice to BEL why the PPAs between BSL and BEL cannot be terminated,” one person said. BEL is a subsidiary of BSL, promoted by Neeraj Singal, and is under bankruptcy proceedings. Tata Steel has decided to cancel the PPAs because BSL can buy power from the grid at a lower cost, as it has to keep paying the
network a certain amount even if it purchases electricity from BEL, the people said. They indicated that the move to cancel the PPAs can bring the current or future BEL management to the negotiating table to work out terms that are more favourable to BSL.
The resolution professional for BSL, Deloitte Consulting refused to comment on the development. Tata Steel spokesperson Kulvin Suri did not respond to an emailed questionnaire and phone calls seeking comment. There may well be a case for more favourable terms for BSL. The NCLT order of May 15 revealed some details of the PPAs, including a clause stipulating that in case the agreement is cancelled, BSL will help BEL route the power to the grid. It requires BSL to compensate BEL if it incurs a loss of revenue by selling power to a third party. The PPA states BSL will make a certain minimum payment to BEL to enable it to keep operating and such payments would be adjusted against future power purchases.
In June 2017, BEL had written to BSL seeking to revise tariff upwards, with effect from April 1, 2017, to meet lenders’ demands. Last year, before BEL went into insolvency, it presented claims in excess of Rs 114 crore to the resolution professional of BSL. Some stock market experts said BSL’s new owner has no option but to ramp up production and cut costs.
“BSL is a perfect fit for Tata Steel, especially when you compare this to the cost of a new plant… all they need to do now is to ramp up production and weed out whatever was wrong at Bhushan, like the inter-promoter group lease agreement or the inter-group PPAs,” said Sudip Bandyopadhyay, founder of Inditrade Capital, a financial services firm. “While BSL is a good fit, I feel they are better off without Bhushan Power & Steel.” Tata Steel and rival JSW Steel are fighting a legal battle to purchase Bhushan Power & Steel from the bankruptcy court.
