It’s Official: LoUs from State-Run Financiers to Serve as Bank Guarantees for Solar Tenders
REC, PFC, and IREDA can issue the undertakings
October 6, 2020
The Ministry for New and Renewable Energy (MNRE) issued amendments to its guidelines for the tariff-based competitive bidding process to procure power from grid-connected solar projects. The amendments address the minimum period of controlling shareholding to be maintained by the developers and the alternative arrangement for deposits and bank guarantees in the form of a letter of undertaking (LoU).
Minimum paid-up share capital
If the successful bidder is a single company, its shareholding in the special purpose vehicle or company executing the power purchase agreement (PPA) should not fall below 51% in one year from the commercial operation date (COD) of the project. Earlier, this time frame was three years. Similarly, for a consortium, the members’ combined shareholding should not fall below 51% in the one year from the COD.
Many developers had shared their discontent with Mercom that the timeline to maintain the controlling shareholding (51%) for three years was too long and unreasonable, restricting short-term equity investment in the sector. The new amendment is good news for the developers.
Further, the successful bidder should ensure that its promoters would not cede control of the bidding company or consortium in one year from the COD, which was earlier set at three years.
Deposits and Bank Guarantees
As per the amendment, bidders should furnish the earnest money deposit (EMD) in the form of a bank guarantee or an LoU. If the solar power generator fails to execute the PPA within the stipulated period, the procurer will forfeit the EMD. Earlier, the EMD was only considered through bank guarantees.
Recently, the Union Power Minister R.K. Singh approved the proposal to accept letters of undertaking from three non-banking financial institutions that can be used like bank guarantees in renewable tenders. These three lenders are the Indian Renewable Energy Development Agency Limited (IREDA), Power Finance Corporation Limited (PFC), and REC Limited (REC). Such letters will serve the same purpose as a bank guarantee issued by any public sector bank. The terms and conditions would also be similar to any bank guarantee that promises to pay the procurer on demand within a given timeline.
The Ministry of New and Renewable Energy (MNRE) had been considering an alternative to the earnest money deposits and performance guarantees. The ministry had given the implementing agencies time to provide their comments.
Stranded EMDs and performance bank guarantees have been adding to the liquidity problems for developers. This alternative arrangement could bring in the much-needed relief to the developers.
Recently, the MNRE clarified that performance bank guarantees could be released to solar project developers as long as they do not have any defaults in their contractual obligations or to those who have claimed relief under the force majeure clause of their agreements. The notice was issued regarding projects stuck due to the ongoing COVID-19 situation.
This article has been corrected to state that the minimum paid-up share capital needs to be maintained for one year “from” the COD which was miswritten as “before”
Rahul is a staff reporter at Mercom India. Before entering the world of renewables, Rahul was head of the Gujarat bureau for The Quint. He has also worked for DNA Ahmedabad and Ahmedabad Mirror. Hailing from a banking and finance background, Rahul has also worked for JP Morgan Chase and State Bank of India. More articles from Rahul Nair.