These measures need to be supplemented with registration of funds with the state electricity boards (SEBs) to tap multilateral financing without FIPB approval, offshore capital markets and export credit agencies, says a study conducted by the Associated Chambers of Commerce and Industry of India (Assocham) to identify alternative sources of finance for power projects.

The study estimates the investment requirements for the sector to increase to Rs 1,60,980 crore during the Ninth Plan and to Rs 4,91,824 crore by the end of the Tenth Plan.

Since equity investment in power has a high risk element because of the poor financial position of power purchasers, adequate equity resourcesfrom the capital market would be forthcoming if 100 per cent tax relief to equity investments is provided, opines Assocham.

Unlike bonds, commercial lending by banks is not expected to be the main source of debt finance because banks are resistant to provide funds of long-term maturities, while the money of provident and pension funds is not allowed to be invested in infrastructure sector.

However, with the development of an active and liquid market for securitised corporate debt, not only the debt instruments, but also charitable and religious trusts can become an important source of mobilising funds, the chamber feels. Another way of making the debt market more responsive to power sector lending could be by providing credit enhancements for lenders.

The total exposure of FIIs is not permitted to be in excess of 40 per cent of the total project cost. The funding gap can be raised to provide greater flexibility in sourcing capital, especially in the current scenario where foreign debt from internationalsources has become limited, the paper notes.

The FII savings of the household sector constitute an important source of funds for mobilising debt and equity finance. As the savings are invested in the form of bank deposits, life insurance, provident funds, small savings, corporate equities, debentures and mutual funds, steps need to be taken to widen the base of these debt instruments so that they become more effective once they are permitted to invest in power projects, according to the chamber.

In spite of this, an additional debt to the order of Rs 2,57,565 crore will have to be raised to fund debt requirements. The options, therefore, are to tap multilateral financing agencies by registering the funds with SEBs (similar to the scheme for FIIs). This would obviate the need for obtaining FIPB approvals on a case-to-case basis, the study notes.

Offshore capital markets can prove to be an important source of raising debt for power projects. One of the popular instruments used to tap resources in the UScapital market is the American Depository Receipts. ADRs are certificate of deposits that enable foreign companies to raise equity capital on the US markets without the need for listing on a US stock market and with simple settlement and transfer mechanism.