Insolvency and Bankruptcy Code (IBC) provisions are “fully applicable” to state-run electricity distribution companies, and the corporate insolvency resolution process (CIRP) can be initiated against them, the power ministry said, potentially allowing creditors to turn the screws on indebted discoms.
Cash-strapped distribution firms across states currently owe around ₹1 trillion to power generation companies, according to data on the power ministry’s PRAAPTI portal. Non-payment of coal dues by gencos on account of payment delays by discoms also have a knock-on effect, limiting supplies, depleting fuel stocks at power plants and prompting concern over power shortage.
Discoms have traditionally been the weakest link in the electricity value chain, plagued by low collections, increasing power purchase cost, inadequate tariff hikes and subsidy disbursement, and mounting dues from government departments.
The Union power ministry’s stand was communicated to the law and justice ministry on Monday.
The clarification implies that state distribution utilities can be taken to the National Company Law Tribunal (NCLT) for defaulting on payment of ₹1 crore, the threshold for initiating bankruptcy action by financial or operational creditors.
In the past, some of the central public sector power producers had to go to the extent of threatening to cut power supplies to distribution companies to get back some of their dues.
The five-year-old IBC has been used effectively by operational creditors like vendors and other business partners to recover their dues.
“IBC does not distinguish between state-owned and private enterprises in the initiation of the corporate insolvency resolution process. However, rarely has a government owned enterprise been admitted to CIRP since the enactment of the code,” said Pavan Kumar Vijay, founder of consulting firm Corporate Professionals Group. In certain cases, operational creditors have chosen IBC provisions and were able to receive funds from such companies prior to admission. “Even NCLT has been reluctant to proceed with admission of such companies under IBC and provide reasonable opportunities for settling the matters before admission,” said Vijay.
The power ministry, in a communication to the department of legal affairs on Monday, cited a 2019 Supreme Court order to point out that the only exemption from IBC was to statutory bodies having a sovereign function. Mint has reviewed the communication.
The Union power ministry wrote, “MoP is of the considered opinion that in the light of the aforementioned judgement of the Hon’ble Supreme Court and settled position in multiple judicial precedents of NCLT and NCLAT, the provisions of IBC, 2016, are fully applicable to the state-owned discoms like TANGEDCO and that CIRP can be initiated against such discoms and that there is no overlap between the Electricity Act and IBC.”
A power ministry spokesperson did not immediately respond to queries by Mint.
Source: Mint