MUMBAI, June 25: The Tata group is all set to activate a multi-pronged book entry operation which will at once secure a higher stake for Tisco in Tata Power even while improving the former's cash flows.

This exercise, to which the financial institutions have expressed some reservations, will be operationalised once the TEC board meets on Friday to clear a Rs 100 crore preferential issue of shares and a Rs 200 crore bond issue by Tata Power that will be entirely subscribed by Tisco.

TEC will, in turn, use the proceeds from the Tisco subscriptions to finance the purchase of the 67.5mw captive power plant from Tisco at Jojobera, Jamshedpur.

When first mooted last year, the proposal was for Tata Power to float 56,82,000 preferential shares of the face value of Rs 10 at a premium of Rs 166. The prices may now vary depending on the current prices of Tata Power shares since the preferential issue will have to be made on the basis of Sebi guidelines.

The Rs 200-crore bond issue is also to be subscribed by Tisco. While the income and expenses of the project will be shared by Tata Power, Andhra Valley and Tata Hydro in the ratio 5:3:2, Tata holdings in Tata Power will move up by four per cent to 19.87 per cent—up from the current 15.76 per cent -- as a result of Tisco's subscription to the preferential issue of Tata Power.

For all practical purposes, Tisco itself will be financing TEC's purchase of its own 67.5 Mw power plant for Rs 300 crore. Also, without spending a rupee, Tata Power will get a readymade power plant. Tisco's shareholders will, however, see their company shell out funds to buy power from Tata Power.

The financial institutions had raised questions about Tisco's valuation of its captive power plant at Rs 300 crore.

"The whole exercise of Tata Power floating the Rs 100 crore preferential issue along with Rs 200 crore in bonds to Tisco basically amounts to Tisco itself financing the purchase of its own power plant by TEC.

And to the extent of Tisco's intended subscription to Tata Power's Rs 100 crore preferential issue of shares, it is a covert attempt at increasing Tisco's (Tata holdings) stake in the company.

We believe that Tisco has valued the power plant at Rs 300 crore because Tata Power will have a fair sub-limit for the preferential issue offer, which will help Tisco increase its stake in Tata Power," an institutional source said.

Documents of the institutional appraisal of the Tata plan, which The Financial Express had access to, show that TEC will recover fixed costs at a plant load factor (PLF) of 68.5 per cent and a return on equity (ROE) of 16 per cent at this level. The ROE will increase at the rate of 0.7 per cent for every 1 per cent increase in PLF over 68.5 per cent.

TEC's ROE will be 23 per cent at a PLF of 80 per cent. For TEC the deal is a good one as it will get a readymade power plant and will get further returns when Tisco buys the entire power from TEC -- a Bihar State Electricity Board approval is now being sought for this.

The institutions had set two conditions on TEC for this deal to go through: the appointment of two independent auditors to value Tisco's captive power nt, and a PPA with Tisco -- both subject to their approval. The Tatas failed to respond to The Financial Express' queries despite being given several days for it.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.