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Abstract<\/span><\/strong><\/span><\/p>\n It is a known fact that any country\u2019s economic success largely depends on its energy sector since it is the backbone of the country and provides foundational support to several other industries in any economy. India didn\u2019t catch up to the success during the Industrial Revolution due to several reasons, one of the major reasons for its failure to catch up or for that matter to succeed in the Industrial Revolution was the lack of its energy needs being met adequately.<\/span><\/p>\n However, with the development of the Indian energy sector, legal complexities also increased. Even with an array of laws before the Insolvency and Bankruptcy Code of 2016, they failed to address not just the energy sector, but the insolvency, and bankruptcy issues of the companies in the Indian energy sector as well. Now, after the IBC came into the picture, the Indian energy sector to date continues to face issues with the procedure as established under IBC. The authors have first enumerated the development of the Indian energy sector, by giving the readers a picture of the pre-independence, and post-independence picture of the Indian energy sector, followed by the introduction of IBC to the country. Furthermore, the authors have then established the need for separate legislation\/sections under IBC by enumerating the reasons.<\/span><\/p>\n <\/span><\/p>\n History<\/strong><\/span><\/span>\u00a0<\/p>\n The development of this sector primarily started with the commissioning of the<\/span>130 KW hydroelectric plant in the hills of Darjeeling in 1897<\/a>, which was shortly followed by a steam power plant of 1 MW at Calcutta in 1899 by CESC, known as Calcutta Electric Supply Corporation.\u00a0<\/span><\/span><\/p>\n With the enactment of the<\/span>Calcutta Electric Lighting Act in 1895<\/a> by the then Government of Bengal, the first license initially encompassed an area of 5.64 square miles (14.6 km2<\/sup>). This license was secured by Kilburn & Co. in the year 1897. These were the agents of the Indian Electric Company Ltd. which then changed their name to the Calcutta Electric Supply Corporation Ltd. in the year 1897. This very corporation was registered in London with registered capital amounting to 1000 pounds.\u00a0<\/span><\/span><\/p>\n This was followed by a<\/span>4 MW hydroelectric plant<\/a> commissioned at Shivasamudram in 1902 along with a 78 VK 150 km long transmission line, the longest in the world back then. The capacity of this plant was gradually increased to 42 MW by the early 1930s.<\/span><\/a><\/span><\/p>\n While other notable developments<\/a> during that period were by CESC in Calcutta and by Tata Power Co. in the Bombay\u2013Poona area which led to the electrification of at least some of the developing metros during the British Rule of India, the potential of its expansion was realized much later by the Government of India, who then enforced regulatory control of the sector by enacting the<\/span>Indian Electricity Act, 1910<\/a>.\u00a0<\/span><\/span><\/p>\n The<\/span>Electricity Act, of 1910<\/a> which enumerated upon the foundation fundamental mechanism for the electric dispensing industry in India, governed the Indian power sector was at least fifty years. This act encompassed the provisions for the generation of electricity for both the public and private players in the sector, coupled with the requirements to procure a license for distribution of electricity in a particular area. Furthermore, the Electricity Act of 1910 also enumerates upon the technical functions, and safety policies of electricity, coupled with a legal structure for allied aspects which includes the<\/span>relationship between the licensee and the consumer.<\/span><\/a><\/span><\/p>\n Before Independence activities relating to power, the sector was restricted to private companies operating in urban areas only. The aggregate installed capacity at the time of independence of India in 1947 was around 1363 MW.\u00a0<\/span><\/p>\n When glancing over the power-generation in the post-independence India, we find the private players (like that of Calcutta Electric Supply Corporation or CESC<\/strong>) supplying more than 75% of the total power-generation capacity in the country. It is pertinent to note that this supply was limited to the cities, or the urban areas, with the rural areas dwelling in dark, without any electricity.\u00a0<\/span><\/p>\n Intending to rationalize its growth in post-independence India, the Government took a significant step to enact the<\/span>Electricity Supply Act, 1948<\/a> (ESA<\/strong>) entrusting the responsibility for the development of the sector to individual states, however, which did not lead to the performance that was desired and rather the sector deteriorated. Post-independence while the energy sector, particularly the power sector has grown with an increase in the generation of power and supply, the demand, due to a burgeoning population and a growing middle class, has always outstripped the supply, thus leading to shortages and a general lack of electrification across the country. Furthermore, Electricity, or rather control over resources that lead to the creation of energy for the country is a topic on the<\/span>concurrent list<\/a>, which means that it’s dealt with by both the central and state governments. In the initial decades, post-independence, the power sector was predominantly monopolized by the governments, both central and state. However, before we understand how the IBC plays out in the power sector, it is important to first get a glimpse into the history of the development of the power sector.\u00a0<\/span>\u00a0<\/span><\/p>\n <\/u><\/strong><\/p>\n SEB\u2019s, Grids and the Story of Losses<\/strong><\/span>\u00a0<\/span><\/p>\n This led to the creation of state electricity boards (SEBs<\/strong>) in the 1950s and thus started the era of planned development nationally with the formulation of the First Five Year Plan in 1951. The performances of private companies notably<\/span>CESC<\/a> and Tata Electric Co. in the Calcutta and Bombay areas were taken into consideration and were thus not nationalized.<\/span><\/span><\/p>\n SEBs (State Electricity Boards) were expected to develop networks of transmission lines which till then had been largely underdeveloped so that they could be added to generation capacity and that electrification could be extended, which was till then limited only to the cities, across the country.<\/span><\/a><\/span><\/p>\n The Act under<\/a> its purview brought in state participation for power generation, transmission, and distribution facilities, thereby limiting the<\/span>ESA, 1910<\/a>.\u00a0<\/span><\/span><\/p>\n However, SEBs failed and by the early \u201970s started incurring severe losses because of factors such as political interference and mismanagement along with other reasons. The reason for the SEBs engulfing in crisis has been zeroed down to the politics which circumnavigated around the agricultural subsidies. This was not a one-way thing, rather it was a chain reaction. The story started with the Green Revolution, which required improved irrigational facilities for agricultural boom. Electricity played a crucial factor here as it was required to run the pumps for groundwater on farms. Now, apart from irrigation aiding in food security to the country, they did play an important role in formulation of vote banks amongst these farmers. This tussle of politics, and green revolution gave a huge setback to the energy sector,<\/span>which resulted in institutional lock-in within the sector.<\/span><\/a><\/span><\/p>\n While procuring the vote bank within the farmers, the aspect of \u2018electricity subsidy\u2019 was devised as an instrument to establish a victory in the post-emergency era elections. This was introduced for the first time in the state of Andhra Pradesh in the 1977 elections. However, contrary to the expectations of the farmers,<\/span>the subsidies were based on the capacity of the pump, than the measured consumption<\/a>. Due to this, subsidies in the power sector became routine political weapons all through the 1980s, especially in agriculturally rich states.<\/span><\/span><\/p>\n To provide for lower tariffs for the agricultural sector,<\/span>the tariffs on industrial and commercial consumers had to be increased through <\/a>cross-subsidization. But the differences in tariffs being charged in the industrial and commercial sector vis-a-vis, caused by increasing theft and leakages, poor accountability, loss of revenue, incorrect reporting, and growing losses of the SEBs made them highly dependent on budgetary support from respective governments which aided them in reducing their ability to add generating capacity, and most importantly to carry out the improvement in their asset quality and distribution. Given the<\/span>deteriorating financial performance and poor operating performance of SEBs<\/a>, the onus of setting up new generation capacities fell increasingly on the Union Government. It was in such a situation that to give a fillip to the power sector that a<\/span>major policy initiative<\/a> was taken to amend the ESA, thus initiating the path for the Union government into the sector of power generation.\u00a0<\/span><\/span><\/p>\n Thus, Central participation began with the creation of the government to set up two central public sector utilities: National Thermal Power Corporation Limited) for thermal generation (NTPC)<\/strong> and National Hydro Power Corporation Limited (NHPC<\/strong>) for hydropower.\u00a0<\/span><\/p>\n This was done because it was believed that there was a need for an integrated policy for the power sector, and as electricity was a concurrent subject, the advantage of freely framing the laws was an opportunity the Union Government could not miss.\u00a0<\/span><\/p>\n Also, among all other reasons, the need for an integrated policy was that the Union Government observed that there was a clear<\/span>lack of balance<\/a> since some states were resource-rich while other states were not. It was also noticed by the government that there were difficulties in connecting the plants of states. For example, one plant in any particular state could provide electricity to two or three neighboring states.\u00a0<\/span><\/span><\/p>\n This was followed by several public sector undertaking companies that entered and managed the space of thermal, hydel, and nuclear powers. In this sector, NTPC came to have a special distinction in emerging as one of the largest power-generating utilities in the world in a short period. The economic growth was at a snail\u2019s pace due to less generation capacity. It is an already known fact that for any country to grow, its power generation capacities must always meet the electricity supply. Failure of electricity generation leads to an impact on its industries.\u00a0<\/span><\/p>\n The concept of power grid, which proved to be a pivotal factor for the growth of Indian economy was started when power corporations like that of NTPC and NHPC were created with a mandatory commitment to provide power to various states in the country. However, there was one issue with this. The SEBs could not pay the power generation companies the rate at which the electricity supply was at place.<\/span>As a result of which<\/a>, issues like that of energy shortage, weak financial condition of SEBs, and the chain reaction of the agricultural subsidies took away a major part of their revenue for a large period during the 1980s. This was slowly taking a shape of a crisis in one of the important sectors in the country. The Government of India rose to action, and initiated to devise a plan to tackle such issue.<\/span><\/span><\/p>\n Many economists started advocating for the free market, which was already being pushed for even in developed economies such as the USA and UK. Their contention was simple. That the government ideally had no business to regulate and so any sort of business sense if demand and supply existed for services then the concepts of free markets should be allowed as that would even improve the pricing in the markets.<\/span><\/p>\n This type of economic thought was emerging globally and to de-regulate, further regulation was brought in for governments to step back, so that at the very least, the end-user was provided basic protection against corporate malpractices. Furthermore, when we look towards the present-day scenario, we find the governments changing their route from the sectors which could be taken care by the market forces themselves. Coupled with the above mentioned aspect, and the urgent requirement to tend to the fiscal deficit arising due to the crisis of balance of payments, the Government of India in 1990s introduced the reforms in the Indian electricity sector,<\/span>with the invitation to the Independent Power Producers (IPPs) <\/strong>in the sector as the major highlight.<\/span><\/a>\u00a0<\/span><\/span><\/p>\n The initiation of the reforms in the Indian energy sector<\/span>was also due to the ongoing Gulf War<\/a> at that time which resulted in hike in the fuel prices, and to meet the demand, the government had limited foreign exchange reserves which were almost emptied to meet previous demands. Furthermore, when the country was engulfed in a crisis where the imports were much higher than exports, the nation went to the World Bank, and the International Monetary Fund (IMF)<\/strong> to rescue the nation from such crisis.<\/span>One of the conditions, upon which the World Bank, and the IMF<\/a> agreed to sanction funds to India was the opening up of the private players in the Indian energy sector.\u00a0 As a result of which, the gates of investment for the private players in the Indian energy sector were opened in the electricity generation sector.<\/span><\/span><\/p>\n Although the government had opened up the gates for the private players, it still had to take cognizance of the views of the public regarding the private participation in various sectors, which was far from being positive. Hence, the government then opened power generation sector for the private players which made sure that the private players get a chance in the Indian energy sector, and the views of the public also remain neutral.<\/span><\/p>\n The reforms in the energy sector also gave<\/span>powers to the Government of India to decide the tariff<\/a> via <\/em>an amendment to the ESA Act of 1948. Prior to this, the tariff was set as per the discussions between the SEBs and the power generating companies. The government then initiated the process of<\/span>\u2018unbundling\u2019<\/a> to respond to the growing crisis in the energy sector in the mid-1990s. By this unbundling, the government bifurcated the aspects of SEBs into three parts- generation, transmission, and distribution. One of the major reasons for this bifurcation was to focus on the issues arising in the various aspects in an individual manner, rather than in a collective manner. This would lead to specific problem-oriented mechanisms and minimization of the loss of the utilities.\u00a0<\/span><\/span><\/p>\n This shift in the policies, and reforms in the Indian energy sector witnessed an evolution from a model (welfare based), where electricity as a necessity was given free of cost, and the allied subsidies were provided as an instrument to please the public. However, the present-day scenario puts a rather different picture where electricity has evolved as a \u2018commodity\u2019 which is packed and sold like other commodities. Thus, the typical model of power developed which is in existence today, that of starting with the generation of electricity, its transmission, and eventually distribution to the consumer.<\/span><\/a><\/span><\/p>\n Initially, when an array of policies<\/a> which were specifically designed to lure the private investors was introduced, the private players came in numbers to invest in the Indian energy sector. However, with time, these policies to attract the private investors failed to establish a concrete outcome as the disparity between the government and the private investors became unfeasible. As a result of this, an unrest started bubbling amongst the private players, which lead to the government cancelling the licenses of the private players. However, the need of IPPs in the country grew rapidly as the SEBs were in a sick financial position, owing to non-payment of dues by the 1990s.<\/span><\/a><\/span><\/p>\n In 1998, regulatory commissions at the central and the state level<\/a> called Central Electricity Regulatory Commission (CERC<\/strong>) and State Electricity Regulatory Commission (SERC<\/strong>) were established respectively under the Electricity Regulatory Commissions Act, 1998.<\/span><\/a><\/span><\/p>\n Under this Act<\/a>, the tariff was to be set by regulatory commissions rather than the government. The government distanced itself from tariff regulation as part of the reform strategy but primarily because it did not want to be seen on the wrong side of the consumers.\u00a0<\/span><\/span><\/p>\n The functions of these commissions were to regulate the tariff of generation and transmission utilities and the tariff determination for consumers. The most important contribution of the government to the Indian energy sector would be the enactment of the<\/span>Electricity Act of 2003<\/a>.\u00a0<\/span><\/span><\/p>\n The year 2003 ushered in a new dawn for the Electricity Sector in India with the enactment of the Electricity Act of 2003, and replacing the legal framework for the energy sector in India which was under the provisions as mentioned under the<\/span>Electric Supply Act of 1948<\/a> and the<\/span>ERC Act of 1998<\/a>.\u00a0<\/span><\/span><\/p>\n The new Electricity Act of 2003 introduced a slew of changes. Under the new act, the power generation was delicensed, and the novel producers were given the permission to construct \u2018captive generation plants\u2019 which are the energy plants constructed by a company to serve its own needs within its proximity. The other highlights of the Electricity Act of 2003 include:<\/span><\/p>\n 1. The Electricity Act of 2003 provided for private transmission licences, and allowed the distribution licensee to take generation and vice versa.<\/span><\/p>\n 2. The Act further disabled the mandatory power sales that the IPPs had to undertake to the SEBs. This was hailed as one of the moves, which removed the biggest barrier in the way of the IPPs.<\/span><\/p>\n 3. Companies under the new act have been provided with stricter guidelines to reorganise themselves in such a manner that they appoint directors to supervise the functioning of the company. Hence, a formal approach was put in place by the new Electricity Act of 2003.<\/span><\/p>\n 4. Under the new act, appropriate Appellate tribunals were created which catered to disposal of appeals against orders of regulatory commission.\u00a0<\/span><\/p>\n Looking towards the growing investments in the Indian energy sector, the Government of India brought in an array of regulatory changes after the enactment of the Electricity Act in 2003 like the<\/span>amendments to the bill<\/a> in the years 2005 and 2014, which focused on the needs of the sector from time to time. The amendment to the Act made in the year 2005 was concerned with- electricity safety, and categorizing the offence of theft of electricity, electric lines, and interference with meters as cognizable offences. Furthermore, the amendment also highlighted the requirements for captive generation plants and distribution systems. On the other hand, the amendment made in the year 2014 made it mandatory for the entities to acquire electricity from a market specifically for renewable energy sources.<\/span><\/span><\/p>\n <\/u><\/strong><\/p>\n The Path of Electricity<\/strong><\/span>\u00a0<\/span><\/span><\/p>\n Earlier, there used to be difficulty in the availability of resources such as coal.\u00a0<\/span><\/p>\n After the reforms (where the focus was more on generation), there was a phenomenal growth in capacity addition that in fact, the government has gone on to state that there is surplus electricity.\u00a0<\/span><\/p>\n While the sector started producing almost 84 GW in 1996-97, it, however, was still falling short of its capacity addition targets. However, since the early 21st<\/sup> century,<\/span>the installed capacity has grown by almost<\/a>four-time<\/a> which the private sector had an enormous role to play.\u00a0<\/span><\/span><\/p>\n With the addition of renewable energy alternatives, there has been a further increase in generation with the segment expected to witness exponential growth over the next few years.<\/span><\/p>\n As of the present-day scenario, the major loss in the Indian energy sector could be pinpointed in the energy distribution sector.\u00a0 The aggregate losses have increased ten-fold since 1996-97, from 113 billion to 1.12 trillion rupees in 2014-15. This is because of the agricultural subsidies, pilferage, tampering with meters, electricity theft, inefficient and corrupt administration, etc.\u00a0<\/span><\/p>\n Successive governments have tried to fix the problem through three bailout packages out of which two failed miserably while the third one, the<\/span>UDAY scheme<\/a>, is expected to improve the problems in the sector.\u00a0<\/span><\/span><\/p>\n The distribution segment remains largely in the hands of the States and is yet to see any concrete efforts since no state has adopted the outright privatization model. Political considerations and the financially insolvent state of the SEBs have proved to be the key impediments in the privatization process.\u00a0<\/span><\/p>\n The changes in the electricity production, transmission, and distribution process have opened the power generation sector to private players and have driven the sector on a high growth trajectory. However, the fault lines in the sector lie elsewhere i.e., in the distribution sector. That while the government in its case of misplaced priorities, has focused primarily on capacity addition rather than improving the distribution segment or improving the last mile connectivity when it comes to electrification.\u00a0<\/span><\/p>\n The government realizes that the key to removing all the inefficiencies in the sector is by improving the distribution aspect, as that is the broken link in the entire journey of electricity, even though the government has gone to claim that this is a surplus, however, till today more of the half of the country does not receive electricity. It is due to these reasons, the government from time-to-time has prioritized the revival of DISCOMs, their commitment to shift towards the renewable energy sources, and rural electrification as their key agendas.\u00a0<\/span><\/p>\n To achieve these objectives, the incumbent government is taking some steps, one of which is the UDAY scheme, where after several failures in revival, the government has initiated this scheme to provide another chance at the revival of the DISCOMs. The scheme is a financial turnaround package for DISCOMs, in which the States are to<\/span>pay 75% of the debt of DISCOMs by selling bonds, while the DISCOMs will pay the remaining 25% by issuing securities.<\/span><\/a> The UDAY scheme highlights the government\u2019s new approach towards the financial restructuring of the DISCOMs. The new approach is based on two pillars- primarily the UDAY scheme is formulated in such a manner where it improves the operational efficiency of the DISCOMs, reduces the cost of power purchase, and enforces a fiscal discipline by aligning itself with the finance of the states. Secondly, it enumerates upon a phase-by-phase takeover of the debts of DISCOMs by the state governments.\u00a0<\/span><\/span><\/p>\n Though the UDAY scheme has been applauded, the two key issues of uniformity and consistency amongst the states in India continue to haunt the scheme. The major concern relates to a moral hazard, which involves all such schemes where there is the structuring of debt. Will, there be an incentive to continue doing what they are doing, as eventually there will be a revival package in case the scheme fails\u00a0<\/span><\/p>\n Because till now, massive bailouts have been organized for state-run utilities thinking that they will fall in line, but the losses have kept mounting and this is probably why there has been no fiscal discipline on their part as they keep on anticipating bailout packages from the government at the Union level.\u00a0<\/span><\/p>\n States now are responsible for the actions of the DISCOMs, as future losses will have to be progressively taken on by the state. Hence, it is of utmost importance that for DISCOMs to survive, they have to be cost-efficient and mitigate their losses and eventually revise tariffs. However, governments have always been wary of revising tariffs due to political pressure, thus even today there remains the risk of DISCOMS still failing. That while the UDAY scheme has taken a good start, still, a lot of ground remains to be covered.<\/span><\/p>\n <\/u><\/strong><\/p>\n Insolvency and Bankruptcy Code and the Indian Energy Sector<\/strong><\/span><\/p>\n Before the commencement of IBC,<\/span>there were an array of laws<\/a> to aid in the winding-up process of the firm. These laws included: The sick Industrial; Companies (Special provisions) Act of 1985, The Provisional Insolvency Act of 1920, the Presidency Towns Insolvency Act of 1909, the Civil Procedure Code of 1909, and the SARFAESI Act of 2002. However, none of these laws were able to address the issues concerning the rapid growth in the NPAs (Non-Performing Assets) of the companies. After many tussles, the Insolvency and Bankruptcy Code was enacted in May 2016.<\/span><\/span><\/p>\n The Insolvency and Bankruptcy Code of 2016 (hereafter referred to as \u201cIBC\u201d<\/strong>) is legislation, which<\/span>combines the features<\/a> of the provisions as mentioned under the SARFAESI Act of 2002, the<\/span>Recovery of Debts Due to Banks and Financial Institutions Act of 1993<\/a>,<\/span>CPC 1908<\/a> et cetera. This Act is creditor-friendly, rather than debtor-friendly as the previous acts were. Now IBC is enacted to provide a framework for resolution of insolvency with regards to the corporations, partnerships firms, and individuals promptly which seek the problem of the growing NPAs. With the onset of IBC, the laws in India regarding insolvency have gone through a paradigm shift. It has induced the concept of<\/span>