Tag Archives: FDI
Maintaining the 49 percent foreign direct investment (FDI) cap for power exchanges and the petroleum and natural gas refining sector, the government Tuesday changed the invesment route for companies to automatic.
Under the existing policy, investment proposals in these two sectors were to be approved by the Foreign Investment Promotion Board (FIPB)
In petroleum and natural gas refining, FDI up to 49 percent is allowed in case of public sector undertakings without involving any divestment or dilution of domestic equity.
For power exchanges also, the 49 percent cap remains but approvals now will be through the automatic route.
Automatic approval is available through Reserve Bank of India A company is only required to report to RBI within 30 days of receipt of foreign equity or allotment of shares.
Source: Business Standard
Considering that FDI up to 100%, under the automatic route, is permitted in the power sector (except atomic energy) for generation, transmission, distribution of electricity and power trading, is the recent decision to permit foreign investment up to 49% in power exchanges a forward-looking step? Or, as the present policy does not provide any specific dispensation for foreign investment in power exchanges, is it only a weak attempt to plug this gap?
To answer these questions, we need to take a quick look at what is happening in electricity markets. Development of the market in electricity remains at the heart of power sector reforms, especially after the enactment of the Electricity Act, 2003. The electricity regulators are called upon to play a pivotal role in this endeavour.
Power exchanges in India have greeted the government’s decision to allow 49% foreign investment in the sector, as it will help inject capital and global practices in the vital interface between buyers and sellers of electricity, and make the market more competitive.
But the troubles of the power sector and regulatory issues involving exchanges may dampen the impact of the government’s decision on Friday to allow 49% foreign investment, with a limit of 26% on direct investment and 23% on institutional investment, for power trading exchanges.
The Union Minister of State for Power, Shri K.C.Venugopal, informed Lok Sabha today in a written reply that 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; and
iv) Power Trading.
The Minister further informed that accordingly, any foreign investor can enter power sector through FDI route. Moreover, the Electricity Act creates a conducive environment for investments in all segments of the industry, both for public sector and private sector, by removing barrier to entry in different segments. Section 63 of the Act provides for determination of tariff by competitive bidding process which will encourage private sector investment…..
The government will soon allow foreign investment in the country’s fledgling power exchange business. The Foreign Investment Promotion Board (FIPB) and the department of industrial policy and promotion (DIPP) have come around the view that the overall foreign investment in the sector may be capped at 49%, on a par with the level for the commodity exchanges. Of the 49%, 26% will be foreign direct investment (FDI) and the balance, foreign institutional investment (FII).
The DIPP is likely to issue a press note to this effect in the next few days, official sources said.
The policy is expected to give comfort and clarity to foreign investors and help existing bourses get funds to scale up their operations. Currently, there is no clarity on whether foreign investment is allowed in power
exchanges as this activity
is not defined in the note on foreign investment in commodity exchanges. The proposed press note will remove this ambiguity.
The commodities exchanges also have sub caps for FDI (26%) under the
overall foreign investment cap of 49%.
However, the DIPP is likely to stipulate that private power trading companies wanting to accept FDI must comply with the Central Electricity Commission’s (CERC) power market regulations of 2010. Also, the FDI proposals will be routed through the FIPB.
The proposal of ex-ICICI Ventures head Renuka Ramnath to pick up minority stake in Jignesh Shah-promoted Financial Technologies’ Indian Energy Exchange (IEE) is likely to be the first FDI proposal in the sector to come up before the FIPB.
At present, India has two functional power exchanges, the other being National Stock Exchange-promoted Power Exchange India.
The central electricity regulatory commission (CERC) is thinking of introducing some innovative, power exchange-based electricity trading instruments that would deepen the short-term electricity market and encourage investment in merchant power generation capacity. The regulator is also mulling a move towards capacity trading to reduce the incidents of low grid frequency and improve the quality of power supply.
For example, the CERC is planning to introduce instruments like shorter bidding time block for day-ahead trading at power exchanges that would overcome the problem of transmission network congestion and make it easier for buyers to forecast their electricity demand. Currently, only generated power is traded. But now the CERC wants to usher in trading of power capacity.
The volume of power sold through inter-state trading licensees has increased from 12 billion units (2.16% of total generation) in 2004-05 to 59 billion units (11.54% of total generation) up to October 2011, representing more than four-fold growth in seven years. During the current year, the transactions comprise about 88.5% through long-term, 8.2% through trading (6.4% bilateral and 1.8% power exchange) and 3.3% through balancing market.
The government has set the ball rolling for foreign direct investment (FDI) in power exchanges. The finance ministry has asked the department of industrial policy and promotion to design a FDI policy for power exchanges on the lines of commodity exchanges.
“There is a need for clear FDI regime for power exchanges. And since these are akin to commodity exchanges a similar structure should be considered,” said an official privy to the deliberations.
The finance ministry, that houses the foreign investment promotion board, has written to the DIPP, that formulates the FDI policy on this issue, the official said, adding that the forthcoming FDI circular due in a month could indicate the policy direction.
At present, FDI in power exchanges is not explicitly banned but the rules not specifically provide for foreign investment on the lines of commodity exchanges. FDI is permitted in power exchanges up to 49%.
Experts say such a clarification is required to provide certainty but said there is a need to relook at the negative list concept followed in the FDI policy as the foreign exchange management act works on positive list concept.
“The current scheme of FDI policy contemplates the concept of negative list… In light of the evolving business scenario, the negative list itself needs to be relooked,” the official said.
Negative list stipulates that sectors not mentioned in it are the ones in which FDI is permitted.
The trigger for the finance ministry’s missive was a recent FDI proposal from Multiples Private Equity, promoted by Renuka Ramnath, to pick up minority stake in Financial Technologies-promoted Indian Energy Exchange(IEX). The proposal, which was put on hold, may get FIPB’s green signal anytime soon, the official said.
But, the industry favours up to 100% FDI in the exchanges. “Trading on the exchange is 100% physical delivery based and only 2% of the total generation is traded through any exchange,” said an official with an exchange. Moreover, he said sector was under close regulation of the Central Electricity and Regulatory Commission.
Currently, India has two power exchanges, the other being National Stock Exchange-promoted Power Exchange India.
The thinking among the policymakers is that FDI policy should be rationalised and simplified to encourage overseas investment in sectors as the country needs foreign capital to support a 9% growth. Infrastructure sectors such as power are receiving government’s special attention.
Though, the government backtracked on FDI in multibrand retail, it is expected to put it on the front burner once the assembly election to key states are over.
A private equity fund, based in Mauritius and promoted by an Indian, has shown interest in investing in a power exchange in India, sparking off a debate on whether the government needs to clarify rules on foreign investment in such enterprises.
Multiples Private Equity, promoted by Renuka Ramnath, has sought government approval for acquiring a minority stake in Indian Energy Exchange(IEX), promoted by Financial Technologies (India).
“We have put in an application with IEX for acquiring a minority stake in the company through the FDI route, subject to government approval.” She declined to divulge details.
Foreign investment in power exchanges is not banned but there are no specific rules or guidelines for promoters to follow unlike commodity exchanges where overseas investors are capped at 49%. It is also not clear whether an approval is required from the Foreign Investment Promotion Board.
Light speed Venture Partners and Bessemer Venture Partners did not seek permission when they bought a small stake in IEX in 2010. A person close to the deal said that Multiples Private Equity had approached the FIPB as a matter of “abundant caution”.
Pramod Deo, chairman of Central Electricity Regulatory Commission, (CERC), said that the government is still discussing with people on the issue and no rules have been framed yet. “There is no stated policy on FDI in power exchanges. We have received a letter from the government today (Tuesday) asking us for our view on FDI in power exchanges,” he added. CERC is the regulator for the country’s two power exchanges.
CERC, the central regulatory body which regulates the power exchanges, plans to study the models adopted by Securities and Exchange Board of India and Forward Markets Commission, which allow a total of 26% FDI each in exchanges under their purview. They would also take into account that India allows up to 100% FDI in power generation projects.
India currently has two operational power exchanges which provide generators and buyers with a platform for short term trades, financial Technologies (India) promoted IEX and National Stock Exchange-promoted Power Exchange India (PXIL).
Both exchanges have power finance companies, generators and trading companies as co-promoters. “Power markets started operating in the mid-eighties all over the world and were launched domestically threeand-a-half years ago; support through strategic investments by overseas players would be welcome,” said Jayant Deo, managing director and chief executive officer, Indian Energy Exchange (IEX).
Rupa Devi Singh, managing director and CEO of PXIL, said that a policy on FDI would give comfort and clarity to foreign investors and help existing bourses get investment. But she added, “The market has been frozen for the past 12 months and does not have room for more exchanges. The regulator should focus on deepening the market instead of increasing the number of players.”
Loss-making power distributors have been opting for power cuts over buying expensive electricity from the short term market. Increasing uncertainties in the short term market and government’s stance of allocating coal to power generators with long term power pacts has discouraged merchant power producers.
The Cabinet Committee on Economic Affairs (CCEA) gave the green signal to Grid Equipment for bringing in FDI to the tune of Rs 4,500 crore, an official release said.
Energy Grid Automation Transformers and Switchgears India’s proposal for Rs 2,000 crore FDI was also approved.
These proposals are for “downstream investment” and transfer of entire equity shares of Grid Equipment and Energy Grid from Areva T&D India Limited and other resident shareholders.
Equity shares of the two entities — Grid Equipment and Energy Grid — would be transferred to “Alstom Grid Finance and other foreign collaborators and their nominees,” the release said.
Alstom in India is mainly into power generation equipment while Areva T&D India is a leading transmission & distribution player.
The global business of Areva T&D were acquired by consortium of Alstom and Schneider Electric in June 2010.
Following the buyout, Alstom Schneider Electric in December last year said they had assumed operational control of AREVA T&D India.