Governed by its constitution and derivative laws, a country speaks through its policies. Sound economic and regulatory policy creation coupled with effective implementation encourages investor confidence and forms the fundamental basis of attracting large volume and consistent investment. This is even more essential in the power sector, which is characterized by capital intensive requirements, the need for long-term cash flow and substantial gestation periods.
Policy uncertainty has without a doubt adversely impacted the country’s stressed power capacity which was reported in 2018 as being 40,130 MW, with 24,405 MW having been commissioned and 15,725 MW under construction. Of late, sanctity of contracts has emerged as a significant contributor to the sectoral headwinds, as witnessed most noticeably in the spate of unilateral tariff reductions by the government of Andhra Pradesh (AP), which tried to reduce the solar and wind tariffs of already executed and operative power-purchase agreements. This attempt was ultimately quashed by the Andhra Pradesh High Court, which held that the government cannot intervene in tariff matters. The case is presently being appealed on the limited issue of a single judge directing AP distribution companies (discoms) to approach the state regulator to seek revision in concluded tariffs, while in the meantime directing that interim payments be made. Similarly, the new Maharashtra government has declared its intention to review the 508.17 km Mumbai–Ahmedabad high speed rail corridor, which is technically owned and financed by the government of Japan.
Such rollbacks are in direct conflict with the declaration made by the central government in 2018–19 that top-level policymakers must ensure that policy actions are predictable, consistent and reduce ambiguity and arbitrariness in their implementation. The Supreme Court in the case of Mahabir Auto Stores and Ors v Indian Oil Corporation and Ors held that “every state action must be informed by reason and it follows that an act uninformed by reason, is arbitrary”. Also, in the case of State of Tamil Nadu & Ors v K. Shyam Sundar and Ors, the Supreme Court held that the state cannot change its stand merely because another political party has come into power, unless the earlier action is contrary to statute, unreasonable or against public interest. It is indeed unfortunate that these and other decisions of the Supreme Court escaped the attention of the decision makers and their advisers.
Projects entailing long gestation periods must have certainty, which gives comfort to financial institutions including public sector banks. Inevitably, failure of debt service leads to haircuts in resolution within or outside the Insolvency and Bankruptcy Code, 2016 (code). Such resolution processes can also deal with regulatory hurdles such as in the case of the acquisition of the Prayagraj Power Generation Company Limited, a 1,980 MW thermal power project in Uttar Pradesh, declared a non-performing asset by its lenders. This led to the first resolution process undertaken by the State Bank of India and other lenders under the umbrella of Reserve Bank of India guidelines outside the code, setting a precedent for the larger industry. In this instance, the Appellate Tribunal for Electricity (APTEL) granted relief to the bidders, ruling that tariffs forming the basis for the auction could not be altered pursuant to the bidding process. Lending certainty to similarly placed resolution processes, the Supreme Court refused the leave to appeal against the decision of APTEL.
With the target of a US$5 trillion economy and a planned infrastructure investment worth ₹102 trillion (US$1.42 trillion) over the next five years, the government must ensure that its policy framework is predictable and offers the promise of no changes over its horizon period. Using as an analogy the principle of attornment in which a change of land ownership does not give the new owner as landlord any additional rights over an existing tenant, including termination of the lease, policies and contracts should be drafted to acknowledge and accept continuity and certainty in the future. Further, the administration involved in policy assessment and decision-making must be sensitive to the need to abide by its own decisions and their legal repercussions. A dictatorial fiat reneging on a policy or binding contract will unsettle the banking and financial sector, in turn risking public money.
A state characterized by frequent policy U-turns must be prepared for disengagement and a lack of faith on the part of its investors. It may be that the aggrieved have rights of legal action, as happened in the case of the AP government, but time-consuming litigation and little or no return on investments aggravated by chronic uncertainty will not outweigh a promise well kept.
Shreshth Sharma is a partner and Molshree Bhatnagar is a principal associate at HSA Advocates.
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