"We have decided to implement phase I of these projects with a higher equity contribution from BSES and will dilute it in the second phase," chairman and managing director RV Shahi said. The company plans to execute its strategy with an independent power plant which began commercial production last month. The 165mw plant in Kerala will be fully commissioned next year, the time phase II will be initiated.

The combined cycle power plant at Kochi is being developed by BSES Kerala Power (BKPL), a joint venture with the Kerala State Industrial Development Corporation, in which the Mumbai-based utility holds 89 per cent. BSES holds 70 per cent stake in BSES Andhra Power (BAPL) with Snehalata Power. It also holds 67 per cent in Tamil Nadu Industries Captive Power Company. Its equity needs for the capacity enhancement ofthese projects will be met from the premium generated by selling the stake, Shahi said.

"To get a higher premium on the investment, we will wait till the joint venture starts making profits," he said, adding that BSES will continue to retain 51 per cent in each venture. This strategy will help BSES maintain its debt-equity ratio at a comfortable level and keep its promise to its investors, Shahi said. "We have been telling them even in the past that the company will not bring down the debt-equity ratio beyond 1:1," he said. At present, it has a healthy 0.35:1 on its books.

BSES had earlier decided that almost 50 per cent of capacity addition would be directly promoted by the company and the balance through the joint-venture route. The joint-venture partners need to finance some independent power projects, he said. As for non-recourse finance, BSES can implement the project with 70:30 or even 80:20 debt-equity ratio. The idea is to ensure that the balance sheet is not diluted with this type offunding.

Besides, BSES roped in the joint-venture partners as it had acquired the existing company from them. In some cases--for instance, the Tamil Nadu and Andhra projects--the initial work was done by the partner. However, the proposed 495mw Palghar project will be done directly through the BSES balance sheet. Apart from this, the company is in talks with the Gujarat government for a 150mw plant at Dahej and the Maharashtra government for another 500mw project at Amravati, near Nagpur. If granted, these will also be done through the BSES balance sheet, Shahi said.

INSIGHT
Firm will earn a premium

BSES was earlier considering equity dilution to raise resources for its various expansion projects. Had the company chosen to do so, the stock markets would have viewed the development negatively and its share prices would have plummeted. However, its decision to sell part of its stake in its various joint ventures is likely to be viewed positively. Divesting equity in its ventures on theircommissioning should enable BSES to earn a substantial premium on its investments. Besides, by restricting the extent of divestment to ensure that it continues to hold at least 51 per cent stake in the projects will enable it to retain control. BSES' innovativeness needs to be applauded.

Sarad Saraf

BSES plans $125m convertible debenture issue

BSES plans to expand its equity through a convertible debenture issue of around $125 million. "There is a plan to go in for the convertible debenture issue. We will be taking shareholders' approval for other instruments as well," said Shahi.

The decision on the issue, however, will depend on the government's approval of the company's proposed 495mw naphtha-based power plant at Palghar, Maharashtra, as the money generated through the instrument will be used to part-fund the project. For the Rs 1,500-crore project, BSES will contribute Rs 500 crore through internal accruals. The company has begun preparatory work and will decide subsequentlywhether it should approach the foreign or domestic market for the issue, he added.

Considering the market trend, it appears that in the months to come, there will be an opportunity to get cheaper funds through a foreign convertible issue, he said. The company will approach the overseas market only if there is a significant difference in the cost of funding even after considering the currency exchange risk. The plan for a convertible debenture issue is based on the fact that BSES, with its comfortable debt-equity ratio of 0.35:1, does not need an immediate equity expansion while it has enough leverage to raise debt. We can raise cheaper debt, which has the option to be converted into equity only after three years," Shahi said.

Since BSES had earlier raised funds through global depository receipts (GDR) on attractive terms, it expects a good price for the proposed issue too.

Earlier, the funds were raised to part-fund the 500mw Dahanu power project and strengthen the distribution network.