PROJECT REPORT ON:

ACQUISITION OF POWER SECTOR COMPANY IN INDIA

SUBMITTED TO : Dr. Paritosh Basu

Submitted by:
Haran Thomas George (A003)
Riddhi Nim (A011)
Krutika Mahajan (A015)
MBA (LAW) 2nd Year
 INTRODUCTION

India’s power sector is one of the most diversified in the world. Sources of power generation
range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear
power to viable non-conventional sources such as wind, solar, and agricultural and domestic
waste. Electricity demand in the country has increased rapidly and is expected to rise further
in the years to come. In order to meet the increasing demand for electricity in the country,
massive addition to the installed generating capacity is required.
In May 2018, India ranked 4th in the Asia Pacific region out of 25 nations on an index that
measures their overall power. India is ranked fourth in wind power, fifth in solar power and
fifth in renewable power installed capacity as of 2018. India ranked sixth in list of countries
to make most investments in clean energy with US$ 90 billion.

TATA POWER COMPANY LIMITED:

Tata Power Limited is an Indian electric utility company based in Mumbai, Maharashtra,

India and is part of the Tata Group. The core business of the company is to generate, transmit
and distribute electricity. With an installed electricity generation capacity of 10,577 MW, it is
India's largest integrated power company. Tata Power has been ranked 3rd in 2017
Responsible Business Rankings developed by IIM Udaipur. In February 2017, Tata Power
became the first Indian company to ship over 1 GW solar modules.

JAIPRAKASH POWER VENTURES LIMITED:

Jaiprakash Power Ventures Limited (JPVL), a part of the Jaypee Group was incorporated in
1994. The company owns and operates 400 MW Vishnuprayag Hydroelectric project, at
District Chamoli,

The company is also implementing the 1320 MW (2X660 MW) super critical technology
boiler pit head based Nigrie Thermal Project at District Singrauli in the state of Madhya
Pradesh which is expected to commence operations in 2013.

In Madhya Pradesh the company has built and operates the 500 MW Bina Thermal Power
Project as well as the 1320 MW Nigrie Coal fired Thermal Power Plant. The Group has
developed 3300 MW of supercritical thermal power plants of which a 1980 MW power
station is in Bara in Uttar Pradesh.

VALUATION
AS ON MARCH
31, 2019

RATIOS TATA JAIPRAKASH KSK

POWER POWER VENTURES ENERGEN
LIMITED LIMITED VENTURES
LIMITED

EPS 2.43 0.62 9

DEBT-TO- 1.2 1.66 3.94
EQUITY
MARKET 57.95 1.84 0.5
PRICE PER
SHARE
PRICE-TO- 23.87 2.97 0.05
EARNINGS
LIQUIDITY 1.29 0.24 1.14
RATIO

Based on the above calculated ratios (data taken from balance sheet of the companies
available on the official website) it is advisable that acquiring the Jaiprakash power ventures
limited is the best available choice in the power sector industry in India for Tata Power
Limited.
1. Deal Thesis and rationale in alignment with Vision and Mission statement of the
acquirer;

VISION

To be the most admired and responsible Integrated Power Company with international
footprint, delivering sustainable value to all stakeholders.

MISION

Driving competitiveness by operating our businesses at benchmark levels.

Executing projects safely with predictable benchmark quality, cost and time.

Growing profitably across the power value chain and allied areas, in focus geographies.

DEAL THESIS

Deal thesis provided for this acquisition is :

 As on March 31, 2019 Jaiprakash Power Ventures Limited was in a deep distressed
condition and the company was exploring other options to attract investment.
 This would be the appropriate time for Tata Power Limited to acquire the current
distressed company to expand its business which will eventually be Scale Deal for the
company.
 The outstanding debt to equity ratio of the target company is 1.66 which is better than
the competitor of the target company (KSK Energy Venture Limited).
 Tata Power Limited can make use of the already existing infrastructure, plant and the
manpower to produce power at a larger scale.
 As the target company is a listed entity, well regulated and has a good brand image,
the acquiror company while acquiring the target company, reputational risk of the
new entity or the merged company will be less.
 The market share of the resultant company will be more after the acquisition
proceedings are done with the target company.
2. SWOT&C, PESTEL and Porter Five Analyses to the extent appropriate;
SWOT Analysis

Strengths:
 low rates of plant accidents
 safe nuclear waste removal or energy
 efficient turbine technology.
Weaknesses:
 increasingly costly electric grids,
 increasing rates of work-related employee illnesses
 decreasing investment in alternative energies.
Opportunities:
 lifted bans on off-shore drilling,
 increased tax incentives for energy-efficient automobiles,
 newly laid natural gas pipelines
Threats:
 increasing emissions regulations,
 less demand for oil and gas,
 climate change and increased public transportation options

PESTEL Analysis

Political/Government policies Analysis:

In India, the subject of electricity is covered under the Concurrent List in the
Constitution of India, implying that both the central government and state governments
have the power to make legislation for the sector. As a result, all major issues affecting
the power sector require concurrent action by the central government and state
governments. The allocation on power development during the first four Five Year Plans
(FYP) was very low i.e. 10-15 percent of the total outlay. The low allocation of budget in
power sector hampered the rural & urban electrification, and power generation capacity.
With rapid industrialization and extensive demand for power both in rural and urban
 areas, the country has been reeling under severe power shortage and the country’s
production effort has been severely curtailed by load shedding almost in all parts of
country
The recently established Central Electricity Regulatory Commission is empowered to
regulate the central power utilities in accordance with the Electricity Regulatory
Commission Act, 1998. The central power utilities include the National Thermal Power
Corporation (NTPC), the National Hydroelectric Power Corporation (NHPC), and the
Nuclear Power Corporation (NPC), which are engaged in generation, and the Power grid
Corporation, which is engaged in interstate power transmission. The Government also
owns financing institutions devoted solely to power sector lending such as the Power
Finance Corporation Limited (PFCL) and the Rural Electrification Corporation.
Recently, the Government established the Power Trading Corporation (PTC), to be
responsible for power trading among states and between states and central power
utilities.

Economic analysis:

To accelerate the growth of the economy, government allocated the 28% of the budget in
seventh FYP and 23.3% of the budget to the power sector in ninth FYP. But this has
come too late and power shortage has become a serious constraint to economic
development of India.
The state government policies about the subsidies hamper the growth of the power
sector. Total subsidy for the Central and State governments taken together amount to Rs.
9886 crore in 1994-95., which is 1% of GDP at market prices. The share of Central
government in this is 37%, i.e. roughly half of corresponding State government
subsidies. The recovery-rate for the Centre, in the case of power subsidies, is 36.8%,
which is somewhat higher than the corresponding figure of 15% for the States. The total
power subsidies for the year 1994-95 amounted to 1% of GDP at market prices, resulting
in a combined fiscal deficit of 0.73% for the Centre, States and Union territories.
(Source: Government of India, Ministry of Finance, Discussion paper, Government
Subsidies in India, May 1997)
Sociological analysis:

The new hydropower plant adversely affected the human being and the other animals.
The core problem in displacement is people’s loss of livelihood and their potential
impoverishment. The forcibly displacement of communities, create hamper the
production system. Many jobs, much valuable land, trees and other income generating
assets are lost. Link between producers and their customers are severed and local labor
market disrupt. The most common social risks are
 Landlessness
 Joblessness
 Homelessness
 Food insecurity
 Poor health level
 Loss of assets

Environmental analysis:

Thermal power plants use the low variety of coal for power generation which causes
many environmental effects
Air Environment:
Emission of SO2, NO2, and Black carbon from power plant is harmful for the people
living in surrounding area. The above pollutant of the thermal power plants causes
dense / intense fog, haze and smog that cause the respiratory disorder.
Water environment:
As we know that water slurry is used to take the ash from the power plant to the ash pond
for disposal. The water may contain harmful heavy metals like boron, which have a
tendency to leach out over a period of time. Due to this the ground water gets polluted
and becomes unsuitable for domestic use.
Noise & Land Environment:
 The exposure of employees to high noise levels is more in the Coal based thermal power
plant. The natural soil becomes more alkaline due to the alkaline nature of fly ash
thereby damaging the agriculture / agricultural sector.
Biological Environment:
The effect on biological environment can be divided into two parts, viz. the effect on
flora and the effect on fauna. Effect on flora is due to two main reasons land acquisition
and due to flue (combustion exhaust) gas emissions. Land acquisition leads to loss of
habitat of some species. .
Socio-Economic Environment:
Hydro power plants create the following problem i.e. resettlement and rehabilitation,
effect on local civic amenities and work related hazards to employees of the power
plants.

Legal and regulatory analysis:

In the Electricity Act 1910, the rights were given to the state government for generation,
transmission and distribution of electricity. But if government had not sufficient
resources to develop these projects, it has option to issue the license to others for those
projects. In this way regulation restricted the other organization to enter into this
business. There was legal frame work for laying down wires and other works but there
was no regulation regarding the tariff, power generation, and infrastructure development.
There were some provisions to maintain the relationship between licensee and consumer
but there was no regulation for efficiency of power plant, tariff, environmental issues,
and infrastructure development.

PORTER’S FIVE FORCES MODEL

Buyer power:

Based on the following parameters it can be said that Overall the buyer has weak power.
 Low Switching Cost – switching cost for the buyers is low as of now but is supposed
to increase when new players come in the market as the product in not differentiable.
  Buyer size – Very small.
 Oligopoly Threat – Very Low.
 Undifferentiated product –electricity is undifferentiated product, so this increases
buyer power.
 Tendency to switch – Buyers will switch to the supplier who is efficient and cost
effective.
 Price sensitivity – Not much price sensitive
 Buyer independence – Low as of now but if more suppliers come into picture as Govt.
has sought competition in this market, the buyer power will increase.
 Product dispensability – Very Low

Supplier power:

Based on the following parameters it can be assessed that the supplier Power is High
 Supplier size – Very Large
 Oligopoly threat – Small number of suppliers enjoy monopoly, thereby contributing to
the supplier power.
 Switching costs – Very high, as only large govt. companies are the suppliers.
 Player independence – Low
 Substitute inputs – As no substitute inputs, so the firms have no choice.
 Player dispensability – High

Threat of new entrants:

The Threat of new entrants is moderate based on the following parameters.

 Low Switching Cost – Switching cost for the end-user is low, so it increases
opportunity for the new entrants.
 Undifferentiated product – Product is not differentiable i.e. electricity, so the users
have the incentive to switch to the low cost supplier. This increases the opportunity
for the new efficient entrants.
 Fixed costs – High fixed cost acts as a barrier to entry for new entrants.
 Little regulation – Delicensed generation and multiple licenses in the distribution in
the same area of supply acts as an opportunity for the new entrants.
  Distribution accessible – Increasing the threat of new entrants.
 Suppliers accessible – Increasing the threat of new entrants.
 Market growth – High, leading to great opportunities for new entrants.

Threat of substitutes:

The Threat of substitutes is Weak as per the following parameters.

Low Switching Cost – The cost of switching to substitutes like gas, solar penal, etc. is
high.

Rivalry among existing firms:

The rivalry among existing firms is low as per the following parameters.
 Competitor size – Very Few companies very large in size like NTPC, NLC, NHPC,
NPCIL, PGCIL etc.
 Number of players – Very few.
 Hard to exit
 Ease of expansion – Difficult because of lack of investment and resources

3. Any special event in the economy, sector and / or the company which has significant
impacts;

Indian power sector is undergoing a significant change that has redefined the industry
outlook. Sustained economic growth continues to drive electricity demand in India. The
Government of India’s focus on attaining ‘Power for all’ has accelerated capacity addition in
the country. At the same time, the competitive intensity is increasing at both the market and
supply sides (fuel, logistics, finances, and manpower).
Wind energy is estimated to contribute 60 GW, followed by solar power at 100 GW by 2022
and 15GW from biomass and hydropower. The target for renewable energy has been
increased to 175 GW by 2022.
Total installed capacity of power stations in India stood at 364.96 Gigawatt (GW) as of
October 2019. Electricity production reached 658.55 BU in FY20 (As of September 19).
Government Initiatives:
The Government of India has identified power sector as a key sector of focus so as to
promote sustained industrial growth. Some initiatives by the Government of India to boost
the Indian power sector:

 Government plans to establish renewable energy capacity of 500 GW by 2030.

 The Pradhan Mantri Sahaj Bijli Har Ghar Yojana- Saubhagya, launched by the
Government of India with the aim of achieving universal household electrification by
March 2019
 As of September 2018, a draft amendment to Electricity Act, 2003 has been
introduced. It discusses separation of content & carriage, direct benefit transfer of
subsidy, 24*7 Power supply is an obligation, penalisation on violation of PPA, setting
up Smart Meter and Prepaid Meters along with regulations related to the same.
 Ujwal Discoms Assurance Yojana (UDAY) was launched by the Government of India
to encourage operational and financial turnaround of State-owned Power Distribution
Companies (DISCOMS), with an aim to reduce Aggregate Technical & Commercial
(AT&C) losses to 15 per cent by FY19.
 As of August 2018, the Ministry of New and Renewable Energy set solar power tariff
caps at Rs 2.50 (US$ 0.04) and Rs 2.68 (US$ 0.04) unit for developers using domestic
and imported solar cells and modules, respectively.
 The Government of India approved National Policy on Biofuels – 2018, the expected
benefits of this policy are health benefits, cleaner environment, employment
generation, reduced import dependency, boost to infrastructural investment in rural
areas and additional income to farmers.

The Road Ahead

The Government of India has released its roadmap to achieve 175 GW capacity in renewable
energy by 2022, which includes 100 GW of solar power and 60 GW of wind power. The
Union Government of India is preparing a 'rent a roof' policy for supporting its target of
generating 40 gigawatts (GW) of power through solar rooftop projects by 2022.
Coal-based power generation capacity in India, which currently stands at 229.40 (As of
October 2019) GW is expected to reach 330-441 GW by 2040.
India could become the world's first country to use LEDs for all lighting needs by 2019,
thereby saving Rs 40,000 crore (US$ 6.23 billion) on an annual basis.
All the states and union territories of India are on board to fulfil the Government of India's
vision of ensuring 24x7 affordable and quality power for all by March 2019, as per the
Ministry of Power and New & Renewable Energy, Government of India.

v. Identified areas of synergy benefits and process of ascribing value as per the deal

For any merger, synergies and resulting premiums are a crucial part, the following analysis
concludes that scale synergies as well as operational ones are of significance and manifests
primarily in power generation and distribution functions. Subsequent synergy expectations
are however supposed to differ from realised ones, due to political nature of synergies.

Following are the synergy benefits Tata Power Limited will realise post acquisition:

 COST SYNERGY:
The upstream sectors require scale to lower the cost per customer. Thus the focus is
laid upon commodity, low margin and high volume aspect. By acquiring the target
company, Tata Power Ltd will be able to gain cost synergy.

 REVENUE SYNERGY:
If both the companies are merged , the resultant company will be able to produce
more volumes of power and can eventually sell more output and as a result there will
be an increase in the revenue of the resultant company.

 OPERATIONAL SYNERGY:
It occurs by achieving economies of scale in the production, which increases the
resultant companies efficiency. In this deal, economy of scale can be achieved by
utilising existing plants and infrastructure of the target company to its full potential.

PARTICULARS RESULTANT VALUE OF THE DEAL

EPS 1.81
TOTAL NO OF SHARES 4922320175
TOTAL EARNINGS 890.93 Crores
SWAP RATIO (Tata Power to Jaiprakash 1:0.03
Power Ventures Ltd)
4. Identified areas of risks management and whether the deal could achieve the
same?

In India risk management in the energy sector is its infancy stage, but is expected to gain
significance due to deregulation and privatization. In an arena where so much is it stake,
there’s little margin for error. Exposure market volumetric credit, delivery risk power
trading business. The application of advanced hedging and risk management techniques
have led to increased trading volumes, complexity and risk. For emergence of
competitive market risk management techniques are to be available. So that these
competitive market, to hedge against volatility in purchasing power from the spot market
to hedge against volatility in purchasing power from the spot market by signing a futures
contract or that pays the buyer is the price of power in the market is higher than an
agreed level. Risk has uncertainty associated with it. The electricity act 2003 allows for
trading of electricity i.e. purchase of electricity for further sale.

RISK MANAGEMENT:

Risk are correlated to exposure to one risk may lead to another, so that real mantra lies in
successfully managing the risks in a proactive and integrated manner, then automatically
profits follow. Risk management practices like a. Hedging transactions exposure b. Bank
& Financial institutions use duration analysis, Gap analysis whereas Non banking
finance companies use simulation analysis. c. Derivatives like foreign exchange forward
contracts, Swaps, options, Futures, commodity bonds, are used in managing risks.
This deal has a potential to mitigate the current risks existing in the power sector
Acquisition.
5. Findings from due diligences of both sides and consequential impacts on
valuation

When undertaking the acquisition of any asset, as opposed to shares in a company, one
of the first stages of the process is the conducting of the due diligence exercise: what are
you buying, what state is it in, and will you encounter any problems following the
acquisition? The answers to all of these questions will help determine the price offered.
Following are the brief headings of the desktop due diligence to be made before
acquisition of the current deal:

1. Question of materiality
2. Financing Arrangements
3. Contractual Arrangements and Reporting Obligations
4. Service provisions
5. Hedging Arrangements
6. Consents and Approvals
7. Environmental Considerations
8. Insurance
9. Anti-Bribery and Corruption
10. Employee Benefits
6. Need for restructuring the target and / or acquiring company before or after the
deal.

The target company has an outstanding debt of Rs 11,000 Crore against the Debt to
Equity Ratio of 1.66. Earnings per share of the company is (0.62) which indicates losses
incurred in FY19 . Hence the calculated ratios suggest that the target company needs
restructuring after the deal.

7. Major compliance requirements of Laws and Regulations, protection of minority

interest, etc.

 Mergers and acquisitions in India are governed by the following main legislation:
a. The Companies Act 2013
b. The Competition Act 2002
c. The Foreign Exchange Management Act 1999 (In case of cross border merger).
d. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
e. SEBI (Listing Obligations and Disclosure Requirements) Regulations 2011
f. The Income Tax Act 1961
g. Indian Stamp Act 1899
Government regulators and agencies play key roles in the process of merger and
acquisition in India:
a. Registrar of Companies and Regional Director under Ministry of Corporate Affairs
b. National Company Law Tribunal (NCLT)
c. Competition Commission of India (CCI)
d. Securities and Exchange Board of India (SEBI)
e. Reserve Bank of India (RBI)
f. The Income Tax Department (ITD)