PINC Quick Bite – Shunglu Committee Report

SHUNGLU COMMITTEE REPORT

The Shunglu Committee, constituted in July 2010, was formed to look into the financial problems of SEBs and identify corrective steps. SEBs witnessed losses due to lack of periodic tariff revision and high T&D losses which are in excess of 30%. Despite the SEBs being bifurcated into three entities, their ownership, maintenance, financial well being and cash flow continue to remain dependent on each other. The report goes further to note that Open Access has failed to take off. The committee highlights that a true and fair picture of the sector is not presented due to non- maintenance of books of accounts, inaccurate statements and unreliable information provided by the distribution utilities. The Committee recommends setting up of a Special Purpose Vehicle (SPV), in which RBI will hold 76% while PFC and REC will own the balance in equal proportion. The SPV will acquire the debts from PSU banks based on fulfillment of certain conditions. We believe the recommendations although in the right direction are long drawn and will take time before they start yielding results.

PINC View

We believe the recommendations proposed by the Shunglu Committee are in the right direction. However, implementing them could be long drawn before they start to yield results. Although Discoms may undertake regular tariff hikes, there is a greater need to reduce AT&C losses. Madhya Pradesh, Uttar Pradesh and Bihar reported highest AT&C losses - in excess of 40% - in 2010. Although the committee forecast losses to reduce to Rs221bn by 2017 against Rs270bn in 2010, accumulated losses (after subsidy) are expected to increase to Rs2.6trn from Rs825bn in 2010. Considering the financial health of the SEBs, we believe the way out is to restructure their debt. Some PSU banks have already initiated the process with PNB taking the lead. However, we see difficulty in executing the committee's recommendations as the tariff setting mechanism needs to shift to an independent regulatory body given the political complications. Also concerns arise from the State Governments ability to service and repay the debt as their finances are equally weak.

Source : Equity Bulls

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