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Down the Rabbit Hole

What the bankers arent telling you! ---------------------------------------------------------An Analysis of Lending Practices Adopted by Banks to Finance Developmental Projects in India

The Research Collective - PSA

February 2014

The Research Collective, the research unit of the Programme for Social Action (PSA), aims to facilitate research around the theoretical framework and practical aspects of development, industry, sustainable alternatives, equitable growth, natural resources, community & peoples rights. Cutting across subjects of economics, law, politics, environment and social sciences, the work bases itself on peoples experiences and community perspectives. Our work aims to reflect ground realities, challenge detrimental growth paradigms and generate informed discussions on social, economic, political, environmental and cultural problems.

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PROGRAMME FOR SOCIAL ACTION H 17/1, Malviya Nagar, New Delhi 110017. Phone Number: +91-11-26687725 | 26671556 Email: lakshmi@psa-india.net | trc@psa-india.net

ACKNOWLEDGEMENT
We, at PSA, are happy and excited that our work on scrutinising lending to mega projects, which was initiated in July 2011 and spanned over two years, is seeing the light of the day in the shape of this report. Down the Rabbit Hole What the Bankers Arent Telling You! is a consolidation of the preliminary work undertaken by The Research Collective of PSA. I thank the communities of people in Siang, Singrauli, Lohit, Dhenkanal and Shella for sharing their stories and trusting me with information. Vijay Taram, Ba Chyne, Awadhesh Kumar, Amulya Nayak and Bhakta Bandhu Behera - thank you for enabling my field visits to the project areas and introducing me to the communities. The final report was made possible only because of the critical inputs provided by a number of individuals who took the time to read through and provide feedback. I am grateful for the significant feedback provided by Appu Esthose Suresh, Ashish Kothari, Dunu Roy, Himanshu Damle, J John, Justin Guay, Kanchi Kohli, Nityanand Jayaraman, and Shripad Dharmadikari. Ram Wangkheirakpam, Persis Taraporevala and Himanshu Thakkar - thank you for your vital comments on the specific case studies. I thank Kavaljit Singh and Professor Arun Kumar for meeting with me to discuss the contents of the report and for providing their valuable feedback. For the many critical discussions, frequent feedback and prompt help, a special thanks to Himanshu Damle. I thank Alex, Sura, Joe and Bala for their assistance. Vijayan MJ, thank you for trusting and believing in the abilities of an individual with little experience and background in economics, finance and academia to pursue this study. I thank you for initiating this work, for the one million ideas, for having an ever-open ear, for being a constant support. And most of all, for helping shape this report! PSA Collective of friends and colleagues, thank you for standing by me while I struggled to comprehend the complexity of the crisis in the lending world and then all through the numerous phases of writing, structuring and restructuring of this report. And finally for owning up the work! Aashima Subberwal, thank you for rescheduling other work and numerous other meetings to ensure the completion of this report. I salute the struggles of the communities of people in Siang, Singrauli, Lohit, Dhenkanal, Shella, Mulshi and Velhe, Krishnapatnam and the thousand other places across the country. I earnestly hope that this work is useful and assists the process of bringing about responsible lending in the country. Lakshmi Premkumar The Research Collective Programme for Social Action

CONTENTS
Preface .... 7 Introduction . 9 Chapter ONE 1.1 Case Studies 12 1. GMR Kamalanga Energy .... 13 2. Athena Demwe Lower Hydro Electric Power .. 18 3. Sasan Power ... 23 4. Lavasa Hill City 30 5. Lafarge Surma ... 37 6. Coastal Andhra Power . 42 1.2 Flawed Mechanisms & Implications ... 44 Social Impacts of Projects .. 45 Environmental Impacts of Projects . 49 1.3 Financial Risks in Poorly Assessed Projects 53 Chapter TWO 2.1 The Project Finance Bug ... 60 2.2 What is a Bad Loan Worth? ......... 61 2.3 Banking Sector Reforms .... 67 2.4 Rewriting Development Finance - The Changing Trends .. 69 2.5 Reserve Bank of India (RBI) ... 70 Conflict of Interest at the Reserve Bank of India . 72 Chapter THREE 3.1 Public Sector Banks - A Pandoras Box! .... 73 3.2 Stonewalling Information - A Complete Lack of Transparency .. . 81 Chapter FOUR 4.1 Democratically Accountable and Publicly Transparent Investment .... 84 4.2 Global Mechanisms for Accountable and Transparent Investment...... . 85 4.3 Voluntary Guidelines Lack Teeth . 86 4.4 Regulation of Socio-Environmental Norms in Lending in India .. . 88 The Veil of Internal Guidelines .. 89 Chapter FIVE 5.1 Conclusion .. 93 5.2 Recommendations ... 97 Annexures Annexure 1 List of current Board of Directors at the RBI .. 99 Annexure 2 Information provided by eleven banks to applications under the RTI Act . .. 101 Annexure 3 SBI Circular on Credit Policy and Procedures Department; March 2008 .103 5

TABLES
Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9

Table 10 Table 11

Financial information of the six case study projects Status of the six case study projects Basic statistics of the eleven public sector banks Loans sanctioned by LIC, SBM, CBI and SBI to public sector undertakings (PSUs) and private sector companies (PSC) SBIs non-performing assets in public sector undertakings and private sector companies IB and SBMs non-performing assets in public sector undertakings and private sector companies Non-performing assets in Union Bank of India and Bank of India Losses suffered due to loan default by State Bank of Mysore Sectoral increase and decrease in loans and NPAs in the eight year period between 2003-04 and 2010-11 along with loans and NPA for 2010-11 at SBI Distribution of SBIs loans to private sector companies in selected sectors Distribution of SBIs NPA on loans to private sector companies in selected sectors

Page 54 Page 55 Page 73 Page 74 Page 75 Page 76 Page 77 Page 77 Page 78

Page 79 Page 80

ABBREVIATIONS
Cr Kms Ha M Ft MTPA MCFT MCM MLD MT MW PLF Rs USD - Crores - Kilo Meters - Hectares - Meters - Feet - Million Tonnes Per Annum - Million Cubic Feet - Million Cubic Metre - Mega Litre Per Day - Million Tonnes - Mega Watts - Plant Load Factor - Rupees in INR - US Dollar

PREFACE - A Robinhood Antithesis: The Great Indian Banking Scam

Why does the Reserve Bank of India have representatives of the Indian corporate sector1 sitting at the helm of its affairs? While small entrepreneurs, farmers and students are finding it difficult to get loans worth few lakhs, why are big corporations sanctioned loans worth hundreds of crores, even while topping the defaulters list? Why are banks not held liable for the bad loans they grant to disastrous projects? More importantly, why are banks funding projects that are inherently undemocratic, irreparably damaging the environment, displacing large number of people and ultimately, serving only to increase private profits? Bad loans in Public Sector Banks (PSB) shot up by more than 400 per cent in the last five years, hitting Rs. 1,64,000 Cr in March 2013! Accounting for the bad loans that are restructured and shown as good loans, this amount doubles to Rs. 3,25,000 Cr. In the five years between 2008 and 2013, PSBs transferred and adjusted Rs. 1,40,000 Cr from their profits to provision for bad loans. It is important to note that out of the Rs. 1,64,000 Cr bad loans in PSBs, Rs. 64,000 Cr or 39 per cent is only from the top 30 bad loan accounts!2 Corporate borrowers in India are demonstrating exemplary skills in taking huge loans from banks and not repaying them; rendering them bad loans or nonperforming assets (NPAs)! Today, corporations operate neither with their money nor with the money they generate from the market through shares. This aspect of corporatocracy must be understood for us to get into this study and realise its relevance. Corporates float Special Purpose Vehicles (SPV) and garner much of the finances required through Project Finance loans from financial institutions and banks. In India, flow of finance to corporations through loans is largely unregulated and based on sheer brand trust, often openly violating safety mechanisms and standard due diligence that should be performed before sanctioning of such loans. While serious questions need to be raised in the country about the endangering of our public finances by the banking sector, we must go beyond the evident to get to the root of the crisis. Social and environmental issues in projects, categorised by bankers as risks, form a substantial portion of the problem. Our banks have been lending to projects that do not even have necessary environmental clearances and assessment of social impacts. At a time when banks are not considering social and environmental issues as factors that could potentially change the fortunes of their capital risks to projects, the study Down the Rabbit Hole: What the Bankers Arent Telling You makes a case for it. It was on a journey during the monsoon of 2010 on a Mumbai suburban train that some of us first discussed this work concretely. Exploring and investigating the Indian capital market especially the financial institutions, had been in our minds for a long time. The discussions on that journey however provided us the much needed clarity and impetus as a collective to dive deep into the work, resulting in this study. We are grateful to the primary author of the study, Lakshmi Premkumar, for having taken on this expedition as a researcher, investigator and critical learner.
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The Board of Directors at RBI include GM Rao, YC Deveshwar, Kiran Karnik and Nachiket M Mor. C.H Venkatachalam, General Secretary of All India Bank Employees Association (AIBEA) Dec 2013

For two years, we ran around like Alice in Wonderland, filing RTIs, appellate petitions, visiting different institutions for file inspections, scheduling hearings at the CIC office, arguing with bureaucracy, consulting investigative journalists and reading related books and articles. We tried to leave no stone unturned in this tedious process of collecting and collating information for this study. We were told that the information we were seeking was classified. Why, we wondered! If a corporation or a company does not want its basic financial information to be disclosed, they should not take huge loans from public capital. The All India Bank Employees Association (AIBEA) in December 2013 demanded that Peoples money (be used for) for peoples welfare, national savings (be used for) for national development and not for private corporate loot. The nationalised banks, a Robinhood antithesis, are lending public money to finance big corporate projects that are destroying the land, livelihood, environment and cultures of the very people whose money the banks survive on. Fortunately for the affected people and unfortunately for the project proponents and banks, many projects have been fatally delayed, or worse abandoned, due to social and environmental conflicts. State Bank of Indias 2008 internal circular attributes stalling of projects to poor management of social and environmental issues. The circular goes on to state, Management of social and environmental impacts by units have to be continuous and proactive. These have a cost aspect, which also has to be suitably factored into the project costs. Despite this warning, improper financial lending continues unabated and has become worse in the last 6 years! The introduction to this study has argued that the cases analysed in the study are not exceptions but the norm. The idea is not to expose a few cases and corporations but to point towards a larger malaise. Small European countries like Ireland are today paying an extraordinary price, in billions, for bank bailouts. The Indian Banking sector is going to witness a financial riot of an unprecedented kind in the coming years. The net loss and increasing Gross Non-Performing Assets (GNPA) are going to affect our day-today lives. The EIA consultants who copy pasted environment and social impact reports to seek easy clearance for projects, the ministry babus who took money for clearing projects, the bankers who cleared huge loans without adequate collateral from project proponents will all wash their hands off leaving us people to deal with the crises. Our economic dreams will become nightmares and the growth balloon will burst. This phenomenon cannot be tackled unless we start to discuss and oppose the policies which are drowning public money in poorly planned and undemocratically implemented projects. The first step is to publicly exposing such lending practices and its impacts. We hope this study paves the way. A news item this morning grabbed my attention. The Lilliput Kidswear Limited, a brand that sells childrens wear through a retail chain, was successfully sued by the Chinatrust Commercial Bank. The Delhi High Court has appointed a liquidator to take charge of all assets of Lilliput as it failed to fulfil its commitment to repay a Rs. 15 Cr loan to the bank. This figure is a paltry sum compared to the loans taken by Indias giant corporations from our national banks. I hope that enough wisdom is left in our institutions, RBI and the Government to act against the corporate loot of Indian public funds. Vijayan MJ General Secretary, PSA 08 January 2014

INTRODUCTION
India in the last decade has witnessed a boom in infrastructure and development projects propagated largely by private sector corporations. The sheer number and scale of highway, expressway, hydro power, airport, urban infrastructure, thermal power, steel, aluminium and mine projects are on the rise. The implementation of these projects requires large-scale resources of land, water, forests, minerals, material, labour, power and finance. This diversion of natural resources to private sector corporations, and in some cases the destruction of resources in the course of implementing projects, has lead to situations of conflict with communities of people whose lives and livelihoods have been dependent on the same resources for several generations or longer. Many of these projects which irrevocably harm human and environmental life are also in violation of national legislations and state policies. Most of all, the fact about these projects floated by mammoth corporations is that they are run on public finances; effectuated with loans sanctioned by financial institutions, especially public sector banks. In the course of lending, financial institutions, especially those in the public sector, cannot contradict the constitutional and democratic programme of the country. Banks and other financial institutions are negating their role in presuming responsibility as lenders for harmful and negative impacts of projects they finance. It is a shocker that the invisibility cloak donned by financial institutions, in the process of facilitating and actualising projects with devastating impacts, is being preserved as a public secret. On the one hand there is a dearth of work studying this aspect of lending in India and on the other hand there is little or no discussion within the Indian Government, Parliament, industry or public on the nontransparent and unaccountable lending patterns adopted by financial institutions, its impacts on natural resources, communities and economy, and the inexcusable absence of a central mechanism to holistically regulate and monitor lending to projects. In whose interest are public sector banks sanctioning huge loans to projects with negative impacts and to projects which do not meet the basic norms required by country laws? Are financial institutions biased towards corporate clients and if so, what determines this bias? Are they seeing greater returns from the loans to corporate projects? Are financial institutions publically accountable for the money they sanction as loans? Is there transparency in their lending? Do social and environmental issues in a project have a bearing on its loans? What policies do financial institutions have for ensuring due diligence and monitoring of social and environmental impacts in the projects they finance?

Who regulates the financial institutions and their lending to such projects? In case of violation of country laws by projects made possible through loans sanctioned by financial institutions, are there mechanisms for recourse in the lending framework? This report is an attempt to understand the lending framework for financial institutions in the country, particularly with regard to financing of mega development and infrastructure projects; transparency and accountability in financial transactions; and the mechanisms for monitoring and regulating social and environmental impacts arising from the projects financed by financial institutions. The study and work began with the straightforward idea of bringing out a set of case studies of development and infrastructure projects from across various sectors to understand the role of financial institutions in the projects they finance. The case studies were to detail social, environmental and financial aspects of the project, violations if any, and their legal repercussions. Each project was then to be traced backwards to identify the financial institutions which provided loans to the project, study terms and conditions of the loan, policies regulating the loan agreement and repayment of loan. Each of the selected case studies were to help in analysing loan policies within financial institutions, understanding the process through which loans to projects are sanctioned, the due diligence processes, the ensuing mechanisms for monitoring and regulating the loan and the ripple back effect of the projects distress on the quality and the repayment of the loan. This approach proved to be idealistic as it became evident that project specific financial information was next to sacrosanct and aggressively guarded. Financial institutions denied access to basic information on their lending to specific projects, sought through Right to Information (RTI) applications filed by the author of this report. As an alternative, RTI applications were shot off to eleven public sector financial institutions requesting general information on loans to companies, sector-wise distribution of loans, default on such loans, action taken on defaulters, credit risk management policies, procedures for sanctioning project finance loans and environmental and social guidelines for project finance. Analyses of the information received through RTI expanded the scope of this work to include the understanding of newer concepts in lending such as project finance, non-performing assets, restructuring of loans, ever-greening of loans, responsible investment, etc,. The RTI responses however did make clear that public sector banks were in a disadvantaged position with regard to loans sanctioned to projects of private sector companies and were largely unwilling to part with information that exposed this situation. This report of five chapters begins with six case studies - GMR Kamalanga Energy (GKEL), Athena Demwe Lower Hydro Electric Power (HEP), Sasan Ultra Mega Power Project, Lavasa Hill City, Lafarge Surma and Krishnapatnam Ultra Mega Power Project (Coastal Andhra Power). The narration of cases includes a profile of the project, environmental and social impacts, lending from financial institutions, financial issues and a rationale for its inclusion
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in this study. Chapter one concludes by summarising the social, environmental and financial issues which emerge from the six cases along with an analysis of their implications. The Second Chapter discusses tenets of lending, impacts of bad loans on public and private sector banks, trends in development finance and the authority of the Reserve Bank of India to regulate financial institutions. Moving on to the current situation of loans in financial institutions in India, the third chapter relies on information sought from the 11 public sector banks through Right to Information applications. The Chapter attempts to paint the canvas with trends in sanctioning of corporate and project finance loans, the extent and rise of defaults, lending percentages to public sector undertakings and private sector companies, sector wise classification of loans, exposure of banks to different sectors, and the lack of transparency within financial institutions. Chapter four critiques voluntary guidelines, soft law mechanisms and internal guidelines advocated for sustainable environmental and social practices while simultaneously articulating for democratically accountable and publicly transparent investment upheld through a legislative frame. The fifth chapter concludes the report with strong legislative and regulatory recommendations. The risks involved in financing of mega projects by banks are enormous and necessitate an in-depth understanding into their implications and repercussions. This report intends to explore consequences of unaccountable lending, due diligence oversights prior to sanctioning of loans to projects, social and environmental issues impacting loan quality and other weak links in the lending framework.

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Chapter ONE
1.1 CASE STUDIES
The six case studies presented in this section illustrate social and environmental concerns and their implications on the finances of the project. The impacts of environmental and social issues on the progress of a project and subsequently on the loans sanctioned by financial institutions are established through the case studies. While numerous projects have been put on hold for multiple reasons, the cases presented here are those which have been stayed, delayed or stopped because of mass resistance by affected communities or proceedings and court cases stemming from environmental and social concerns and violations. Specific aspects of finance, environment, land, human rights, legalities and violations are presented in the different cases. The information relating to finance loan amount, date of sanctioning loan, period of repayment, interest on loan, quality of loan and restructuring of loan - is neither uniform for all cases nor complete in any one case owing to the limited access to the same. The case studies have been prepared on the basis of information available in public domain and have been cross checked for their reliability. The cases used in this report are GMR Kamalanga Energy (GKEL), Athena Demwe Lower Hydro Electric Power (HEP), Sasan Ultra Mega Power Project (UMPP), Lavasa Hill City, Lafarge Surma and Krishnapatnam Ultra Mega Power Project (Coastal Andhra Power). Three out the six projects used as case studies are coal fired thermal power projects. Though this might seem as a disproportionate reliance on power projects to illustrate the issues, it merely reflects the inexplicable expansion of power production and coal mining in the last decade. State Bank of Indias loans in the eight years between 2004 and 2011 grew 37 times in power industry and 16 times in coal mining. This rise is unparalleled in any other sector. While the cases were identified on grounds pertaining to lending, investigation revealed that all the six projects had severely violated social and environmental norms. The Athena Demwe Lower HEP is an out of the ordinary case as it establishes that loans are infact sanctioned by financial institutions prior to the granting of statutory clearance by Ministries. While Lafarge Surma establishes that independent safeguards within international financial institutions and banks are callously violated by the same institutions, GMR Kamalanga Energy draws our attention to the use of domestic financial institutions by International Financial Corporation (IFC) as intermediaries to route funding to projects to evade their environmental and social safeguards. Reliance Powers Sasan and Krishnapatnam UMPPs are classic cases of poor planning by the project proponent and Government and of due diligence lapses by financial institutions, leading to huge default and restructuring of loan. The Lavasa Hill City is a paragon for every real estate project gone wrong in the country the mega project with a cost of Rs. 1,68,000 Cr has violated every social and environmental legislation and obtained consents through bribery and corruption. Despite this and default and restructuring of loan, the banks continue to lend to the project!
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Case Study No.1 - GMR KAMALANGA ENERGY

Special Purpose Vehicle Project Cost Lenders to Project - GMR Kamalanga Energy Limited - Rs. 5733 Cr - Infrastructure Development Finance Corporation, State Bank of India, Andhra Bank, Bank of Baroda, Canara Bank, Central Bank of India, and IDBI Bank Indirect Lender - International Finance Corporation (IFC) Social Concerns - Improper public consultation; forced acquisition of land; low award as compensation for land; diversion of irrigated double crop land; acquisition of land in excess of approved extent; filing of false cases on affected people; poor R&R plan; nonemployment of local people in the project; rights of people were not recognised as per the Forest Rights Act 2006; acquisition of land without proper consent from gram sabhas. Environmental Concerns - Project is sited in a critically polluted area; false information in the EIA report; EIA consultant implicated in bribery case; violation of environmental clearance; diversion of irrigational canals; negative impacts on ground and surface water table. Legal Status - Pending cases in Bhubaneswar High Court against acquisition of land; complaint with the Compliance Advisor Ombudsman (CAO) of the World Bank found prima facie evidence against the project and the case is currently pending a full audit; pending complaint against environmental violations with the MoEF. CASE RATIONALE - GMR Kamalanga Energy exposes the weak regulatory mechanisms for Indian financial institutions which are used by international financial institutions to route funding to projects with severe social and environmental impacts. GMR Kamalanga Energy Limited (GKEL), a Special Purpose Vehicle3 (SPV) of GMR Energy, is setting up the 1400 MW coal based thermal power plant in two phases in Kamalanga village, Dhenkanal district, Odisha. The State Government of Odisha signed the Memorandum of Understanding (MoU) with GMR Energy Limited in June 2006. The environmental clearance for phase I (3x350 MW) was granted by MoEF in February 2008 and the proposal for phase II (1x350 MW) was cleared in December 2011. Shandong Electric Company of China has been awarded the engineering and construction contract and Lahmeyer International was appointed as technical consultant. While the MoU mandated that the plant be commissioned by June 2011, the first unit of the power plant was operationalised in January 2013.

A Special Purpose Vehicle is a legally independent entity set up by a company with the narrow purpose of executing a single project.

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The total land requirement for the project is 1050 acres as per stipulations by Ministry of Environment and Forests (MoEF) and Central Electricity Authority (CEA). Coal for the first three units of 1050 MW is to be sourced from the Thalcher Mahanadi Mine while the fourth unit is dependent on imported coal. The project has been sanctioned supply of water from River Brahmani, which is 2 kms away from the plant site. By December 2011 GKEL had tied up 85% of power sale through Power Purchase Agreements (PPA) with GRIDCO (Formerly Grid Corporation of Odisha), Haryana Power Trading Corporation (HPGCL) and PTC India Limited (Formerly Power Trading Corporation of India Limited). Social Impacts from GKEL The total number of project-affected persons is 5053. This population belongs to 11 villages in Mangalpur Panchayat of Dhenkanal district. Private agricultural land, forest land and community grazing lands have been acquired for this project. The affected communities contend that the project has violated basic environmental and social norms leading to loss of livelihood, loss of land and damage to environmental and natural resources. According to Negotiating Power, a November 2012 report4 on the socio-economic impacts of GKEL on project-affected families, there was no informed public consultation with the affected people, as mandated by the Environmental Impact Assessment Notification 2006. The villagers alleged that the state administration did not hold public consultations on the project and its impacts before the process of land acquisition began. The Odisha State Pollution Control Board records that the public hearing5, as per the norms of the Environmental Impact Assessment notification, was held on 13 August 2007 at the Meeting Hall of the Block office, Odapada, Dhenkanal. Villagers contend that very few of them had known about the public hearing and participated in it. Families report being coerced and threatened into parting with land at very low prices. Land has been forcibly acquired from Adivasi and Dalit communities after destroying the standing crops in the presence of paid goons. Cases against acquisition of land for GKEL, filed by affected families, are pending before District Courts and the Bhubaneswar High Court. The MoEF clearance for Phase I of the project states that the land requirement for the project shall not exceed 1050 acres for all activities / facilities of the power project including colony (45 acres) and ash pond (474 acres). The MoEF clearance for phase II (1x350 MW) states that no additional land for the expansion will be acquired. The Negotiating Power report however contends that GKEL could be acquiring land in excess of 1050 acres and in violation of the environmental clearance. And since acquisition of lands for a railway line, road and water pipeline for GKEL is currently ongoing, this contention seems correct.

Negotiating Power: Socio-economic Study in the GKEL Project Affected Area, Dhenkanal, Odisha. November 2012. The Research Collective. 5 According to the Environment Impact Assessment (EIA) Notification 2006, project proponents are mandated to hold a public hearing, with the affected community, facilitated by the State Pollution Control Board.

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The R&R Action Plan put out by GMR Kamalanga Energy is vague and does not contain any measures to rehabilitate affected families. The only real measure mentioned in the Action Plan is disbursement of compensation for land acquired for the project. Under Vocational Training and Self-employment Schemes it is stated that some options may be considered. The District Collector has stated on record that the socio-economic survey submitted by GKEL is inconsistent with the state guidelines for the same. While the District collector has stated that information provided by the company has not allowed the state to determine the extent of land already lost to GKEL, the company is proceeding with further acquisition of land for laying water pipe line, railway line and link road. A number of affected families filed cases in the Bhubaneswar High Court against this new acquisition of land for GKEL. The award fixed for land acquired for the GKEL project is Rs. 3.5 Lakhs plus solatium at 30 per cent for an acre of land and Rs. 5 Lakhs plus solatium at 30 per cent for an acre of land with a house on it. A common price for land of different types, irrigated and un-irrigated, had been paid to land owners. The 2009 benchmark valuation, issued by the District SubRegistrar, fixed the land price for Mangalpur Gram Panchayat at Rs. 7.5 Lakhs per acre. The mean average rate for agricultural land in Mangalpur in the 3 years prior to acquisition was Rs. 3,99,638 per acre almost a Lakh higher than the amount paid by GKEL to Mangalpur residents. This contention has also been confirmed by the Comptroller and Auditor General of India (CAG) in the 2010 Audit Report (Civil) which investigated irregularities in the land acquisition process for projects in the State of Odisha. In the case of GKEL it was reported that there was under-assessment of compensation due to erroneous fixation of market value of land which was mainly due to ignoring the highest sales statistics close to the date of publication of notice under section 4(1) and considering the same for earlier periods. According to the survey in the Negotiating Power report, while over 90 per cent of the affected families had been promised employment, only 11 per cent received jobs at GKEL, that too under sub-contracts. According to GKELs MoU with Government of Odisha and the Rehabilitation and Periphery Development Advisory Committee (RPDAC) plan, the project was to employ local labour for 90 per cent of unskilled and semi-skilled work, 60 per cent of skilled work and 30 per cent of supervisory and managerial positions. The CAG is currently investigating employment positions in projects by independent power producers in Odisha State due to increasing concerns of locals being neglected for jobs in such projects. The audit will verify whether projects, including the GKEL, have abided by the employment clause stated in the MoUs. Communitys rights over forests were not recognised according to the provisions of the Forest Rights Act 2006 (Scheduled Tribes and Other Traditional Forest Dwellers Recognition of Forest Rights Act) and land was acquired without seeking consent for diversion of forest land for non-forest purposes from Gram Sabhas as mandated by MoEF6.
6

F. No. 11-9/1998-FC (pt). 30.07.2009. Ministry of Environment and Forests (FC Division) Circular.

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Environmental Impacts from GKEL The project is located in an area identified by the Central Pollution Control Board (CPCB) as a Critically Polluted Area7 (CPA) in the country. Based on a 2009 CPCB report, the MoEF placed a temporary moratorium in January 2010 on consideration of environmental clearance for projects located in 43 critically polluted areas. This moratorium was lifted in March 2011 from Angul-Dhenkanal, on the assurance that Odisha State Pollution Control Board had implemented an action plan to improve the environmental quality in the area. Conversely, the 2011 CPCB Interim Assessment Report of Environmental Pollution Index, released in May 2012, divulged that pollution levels had significantly increased in Angul-Dhenkanal. It is now the second most critically polluted area. GKELs proposal for expansion of 350 MW was cleared after the moratorium was lifted. The environmental clearance from the MoEF for GKEL was based on false information submitted in the Environmental Impact Assessment8 (EIA) report. While the projects EIA report, prepared by SS Environics, claims that no irrigated land was acquired, 455 ha of ayacut9 land under the command area of Rengali Canal and another 16.72 acres of land which was an intrinsic part of the Rengali Irrigation Project were acquired for the project. In the course of construction, GKEL has altered the alignment of minor and sub-minor canals of the Rengali Irrigation Canal, which was laid to improve agriculture in the area. The company has also illegally extracted ground water from deep bore wells for construction activities. Both these acts are in violation of the clearance and have severely impacted ground and surface water in the area. A complaint entailing the environmental violations has been filed with the MoEF by the affected community. In January 2013, the Central Bureau of Investigation (CBI) indicted SS Environics, EIA consultant for GKEL, for allegedly obtaining clearances by bribing an Environment Ministry official. The CBI is currently investigating past projects related to SS Environics. Financial Issues in GKEL The total project cost of the 1400 MW project is Rs. 5733 Cr; Rs. 4540 Cr for Phase I and Rs. 1193 Cr for Phase II. The project achieved financial closure10 in May 2009. Finance for Phase
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The 2009 CPCB environmental assessment in 88 industrial clusters across the country was based on calculations of Comprehensive Environmental Pollution Index (CEPI). Angul ranked as the seventh most polluted area with a CEPI score of 82.09. CEPI is a scientific method to evaluate and rank critically polluted areas where air, water and land pollution exceed the assimilative capacity of the environment, affecting human health. CEPI was devised with the objective to prepare remedial action plans to facilitate pollution abatement and restore environmental quality of respective industrial clusters. The 2011 CPCB Interim Report of Environmental Pollution Index, released in May 2012, revealed that pollution levels increased in many of the critically polluted areas. Angul is now the second most critically polluted area with a CEPI score of 89.74. 8 The EIA Notification mandates project proponents to assess the probable impacts of proposed project on the community, local economy, environment and culture. 9 Area served by an irrigation project such as a canal, dam or a tank. 10 Financial closure is a stage when all conditions of a financing agreement are fulfilled and funds are committed by lender(s) to the borrower.

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I was met with a Debt Equity Ratio11 of 75:25, with the equity portion of Rs. 1135 Cr tied up between GMR Energy and IDFC. The debt component of Rs. 3405 Cr is secured from 13 banks, including State Bank of India, Andhra Bank, Bank of Baroda, Canara Bank, Central Bank of India, IDBI Bank and Infrastructure Development Finance Company (IDFC) as the lead lender and debt arranger. Investigation into the GKEL project by local and Delhi-based groups disclosed that GKEL was financed by the International Finance Corporation (IFC) through an intermediary, India Infrastructure Fund (IIF), which is managed by IDFC. IFC, the private sector lending arm of the World Bank Group, has a Sustainability Framework which promotes sustainable development; sound environmental and social practices; and transparency and accountability towards positive development impacts. All projects financed by IFC are mandated to adhere to the framework which includes Policy on Environmental and Social Sustainability, Performance Standards and Policy on Access to Information. IFCs Access to Information Policy claims to provide accurate and timely information regarding investments. However, until local activists in Odisha and Delhi discovered IFCs role in th e project through their investigations, no information was made public. The IDFC or IIF do not have any social or environmental safeguard policies12. Had this project been directly funded by the IFC, it would have been in violation of some of IFCs key performance standards and disclosure requirements. Had IFC approached the project directly or voluntarily disclosed its association with the project, the funding may not have even come through. Nonetheless, even if GKEL is financed through an intermediary, the IFC is still accountable to communities raising concerns regarding the project. On 15 April 2011, the Odisha Chas Parivesh Sureksha Parishad and Delhi Forum lodged a complaint against the GKEL project, with the Compliance Advisor Ombudsman (CAO). The CAO is the independent recourse mechanism for IFC which addresses concerns of communities who are affected by projects financed by IFC. This complaint made to the CAO raises concerns on the funding model of using financial intermediaries and highlights the fundamental standards that have been flouted by GKEL failure to disclose fundamental information to the community, social and environmental problems and harassment and intimidation by the company. On finding prima facie evidence in support of the complaint, the matter is now pending a full audit with the compliance unit of CAO. If the CAO audit were to find that IFCs finance to GKEL is not consistent with IFCs Performance Standards, their recommendations to the World Bank could potentially have damaging impacts on the GKEL project in particular and GMR projects in general.
11

Debt Equity Ratio is the proportion of debt and shareholders equi ty used to finance a project by a company. According to Investopedia, a high Debt Equity Ratio means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense . 12 In June 2013, IDFC adopted the Equator Principles, a voluntary guideline to regulate and monitor investments to mitigate environmental and social risks in project finance transactions.

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Case Study No.2 - ATHENA DEMWE LOWER HYDRO ELECTRIC POWER

Special Purpose Vehicle Project Cost Lenders to Project - Athena Demwe Power Limited - Rs. 13,144.91 Cr - Power Finance Corporation and Rural Electrification Corporation; other lenders are not known Social Concerns - Lands have been acquired in violation of the 6th Schedule of the Indian constitution; public hearing for the project was not conducted properly; affected communities have lost agricultural land, community forests, reserved forests and river bed forests; impacts of this project on the local communities have been under estimated in the EIA; over 5767 ha of land to be used for Catchment Area Treatment (CAT) have not been assessed for human and animal impacts; rights of the people have not been recognised as per the Forest Rights Act 2006; acquisition of land without proper consent from gram sabhas. Environmental Concerns - Projects EIA did not factor downstream impacts and cumulative impacts from 6 mega hydro projects sited on Lohit River; unnatural daily flow fluctuation in Lohit River to have adverse impacts on fishing, agriculture, communities, ecology, biodiversity and endangered species; misrepresentation of facts and details in its application for wildlife clearance; granting of wildlife clearance despite recommendations against clearing of project from experts within Wildlife Board. Legal status - The environmental clearance granted to the project stands challenged in the National Green Tribunal. CASE RATIONALE Banks sanctioned loans to this PPP project without assessing environmental and social impacts of the project and prior to the granting of mandatory clearances by concerned Ministries. The case of Athena Demwe narrates a reversal of logic. Instead of sanctioning loans subsequent to following due diligence and the sanction of clearances by relevant Ministries, clearances are being requested to save the deteriorating quality of loans granted in unwise haste. The Government of Arunachal Pradesh (GoAP) awarded the Demwe Hydro Electric Project (HEP) under Public Private Partnership (PPP)13 through bidding on build, own, operate and transfer basis to Athena Energy Ventures Private Limited (AEVPL). The Government of Arunachal Pradesh holds 26 per cent equity and after 40 years the project will revert to the State Government. The project, whose scheduled date of commissioning (or beginning operations) is April 2016, is to provide 12 per cent of the power free of cost to the state.
13

A public private partnership (PPP) is a venture or project, funded and operated through a partnership between the government or a public sector authority and one or more private sector companies.

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AEVPL formed the Athena Demwe Power Limited (ADPL), a Special Purpose Vehicle (SPV), for implementation of the project. AEVPL is a Joint Venture between AIP Power Private Limited (formerly Athena Infraprojects Private Limited), PTC India Limited (formerly Power Trading Corporation), Infrastructure Development Finance Company Limited (IDFC) and Industrial Finance Corporation of India (IFCI). Athena Demwe Power, a public limited company, is executing the Demwe Lower HEP and Demwe Upper HEP. ADPL signed a Memorandum of Agreement (MoA) in July 2007 with the State Government of Arunachal Pradesh. The Demwe Lower run-of-the-river HEP sited in Parasuramkund, Lohit district, Arunachal Pradesh, is to have an installed capacity of 1750 MW (5x342 MW + 1x40 MW) with diurnal storage14, a Catchment Area15 of 20,174 sq km and a full reservoir level of 424.80 m. The Demwe Lower project was accorded Formal Concurrence by the Central Electricity Authority (CEA) in November 2009, granted environment clearance by MoEF in February 2010, wildlife clearance by National Board for Wildlife (NBWL) in February 2012, Stage I forest clearance16 by MoEF in March 2012 and Stage II forest clearance by MoEF in May 2013. While the construction activities were set to begin in April 2011, construction is yet to begin according to the companys June 2013 Six Monthly Progress Report on Compliance Status of Environmental Clearance. The project has applied for registering with the Clean Development Management (CDM)17 of the United Nations Framework Convention on Climate Change (UNFCCC) for receiving credits for emission reduction. Social Impacts from Athena Demwe Lower HEP The total land requirement for the project is 1590 ha, including the submergence area of 1131 ha. Out of the total land, 174 ha is community Jhum or agricultural land, 720 ha is community forests, 192 ha is reserved forests and 502 ha is river bed forest. The lands under question are protected under the 6th Schedule of the Indian constitution, which provides for protection of tribal land in the North Eastern region of India against acquisition by non-tribals. However land was acquired for this project in 23 villages from 204 families (1349 individuals), all of whom belong to the Scheduled Tribe communities of Tayang and Thalai of the Miju and Digaru Mishmis. The 204 project-affected families also stand to lose a majority of the large livestock holding they currently rear. According to a 2012 report18 by Citizens Concern for Dams and Development, affected villagers have complained that public
14 15

Diurnal storage, meaning daily storage, refers to short-term or peak storage as opposed to seasonal storage. Catchment area is the area where water from a river drains into a body of water. 16 Forest clearances are granted under the Forest (Conservation) Act 1980. Stage I clearance is an in-principal approval on the basis of a prima facie review. The conditions relating to transfer along with land and funds for compensatory afforestation are stipulated. Stage II clearance follows the deposit of money for compensatory afforestation, mitigating probable environmental damage, etc. 17 CDM allows emission-reduction projects in developing countries to earn Certified Emission Reduction (CER) credits, each equivalent to one tonne of CO2, for trading with industrialised countries that are required to meet reduction targets under the Kyoto Protocol. http://cdm.unfccc.int/about/index.html 18 An Assessment of Dams in Indias North East Seeking Carbon Credits from Clean Development Mechanism of the United Nations Framework Convention on Climate Change. F ebruary 2012. Jiten Yumnam. Citizens Concern for Dams and Development.

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hearings for the project did not provide necessary information and that the hearings were conducted without sufficient notice. The report alleges that free, prior and informed consent of the affected people was not sought prior to initiating the project. Impacts of this project on the local people have been under estimated in the Impact Assessment report. According to a report by the Citizens Concern for Dams and Development, the impact of boulder mining which will be done in the downstream areas for dam construction has not been studied, undermining the importance of boulders serving as defence against floods. While the EIA report estimates that only 1590 ha will be impacted by the project, land to be used for the Catchment Area Treatment (CAT) has not been assessed for human and animal impacts. The CAT plantations on over 5767 ha will involve restrictions on land use to reduce siltation and increase life of reservoir. Also, as the project involves 1416 ha of forest land, about 2832 ha of degraded forest land will have to be afforested as compensation. The EIA report does not mention where the project will source this 2800 odd ha for compensatory afforestation. The Forest Rights Act 2006 (Scheduled Tribes and Other Traditional Forest DwellersRecognition of Forest Rights Act) was in operation when the Demwe Lower project was granted clearances. However, land was acquired for this project without recognising rights of the community as mandated by the Act and without seeking consent for diversion of forest land for non-forest purposes from Gram Sabhas as mandated by the MoEF. Environmental Impacts from Athena Demwe Lower HEP The Lohit River, a tributary of River Brahmaputra, has twelve hydro projects planned simultaneously along its waterway. Six of these are mega hydroelectric projects including 1750 MW Demwe Lower, 1500 MW Demwe Upper, 1250 MW Hutong II, 588 MW Hutong I, 1200 MW Kalai II, 1450 MW Kalai and six are small hydroelectric projects including 99 MW Gimliang, 32 MW Raigam, 98 MW Tiding I, 68 MW Tiding II, 22 MW Kamalang, 75 MW Dihing. The Expert Appraisal Committee19 (EAC) of the Ministry of Environment and Forests (MoEF) on River Valley and Hydroelectric projects prescribed a study of Lohit River basin to assess the cumulative impacts of the 6 mega projects. Inexplicably, the environmental clearance from MoEF for Athena Demwe Lower was de-linked to the completion of this study, negating the cumulative and compounded impacts of the multiple projects sited on a single river course. When this decision was taken, the EAC was headed by its Chairman P. Abraham who was also the director of PTC India, one of the promoters of the Demwe project. The Environmental Impact Assessment (EIA) for the Demwe Lower project did not factor in downstream impacts. Nevertheless ordering for a post-clearance study of downstream impacts, MoEF granted the project environmental clearance in February 2010.
19

Applications for environment and forest clearance of projects are placed before sector-specific EACs, constituted under the EIA Notification 2006, for scrutiny, technical appraisal and recommendation on clearance. The sectoral Committees are for industrial, thermal power & coal mining, non-coal mining, river valley, infrastructure & CRZ, and construction projects.

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Run-of-the-river is a method generally used for small hydro projects with little or no water storage and subject to seasonal river flows, serving as a peaking power plant. Peaking power plants are run only when there is a high or peak demand for electricity unlike base load plants which are operated continuously. Contrarily, the 1750 MW Demwe Lower HEP is a large dam project with live storage capacity of 171.2 MCM and total storage capacity of 516.38 MCM. The diurnal fluctuations from Demwe Lower HEP, as a result of its peaking operations, are a matter for serious concern. According to SANDRP (South Asia Network on Dams, Rivers & People), the daily fluctuation (calculated for the month of February) between 88 and 1729 cumecs20 will be disastrous for ecologically sensitive habitats in the downstream. Community settlements, fishing, winter agriculture in riverine tracts, river transportation and livestock rearing in grasslands are likely to be impacted by this unnatural daily fluctuation in flow of water. The affected people, represented by the North East Affected Area Development Society (NEADS), have filed a case21 challenging the environmental clearance with the National Green Tribunal (NGT). Arguing that the project will severely damage ecology, wildlife and livelihood of communities living upstream in Arunachal Pradesh and downstream in neighbouring Assam, the appeal challenges the granting of the environmental clearance without the completion of comprehensive studies to assess cumulative impacts. The case is pending before the NGT. In November 2011, the standing committee of National Board of Wildlife (NBWL) sent a two-member team comprising of Asad Rahmani, Director of the Bombay Natural History Society, and Pratap Singh, Chief Conservator of Forest (wildlife) of Arunachal Pradesh to the project area to assess the possible impacts of the project on wildlife. Their inspection report expressed serious concerns over the impact on biodiversity and on the downstream area in Assam, especially due to daily water fluctuation in the Lohit River. The report recommended against granting of clearance for the following reasons- Submergence of portions of Parshuram Kund Medicinal Plant Conservation Area (MPCA); - Submergence of 23 km of river length; - Loss of longitudinal connectivity between the Lohit River in the uplands and the plains; - Impact on Chapories or river islands of Lohit River; - Impact on migration of Golden Mahseer, a species of fish on the verge of extinction; - Submergence area in close proximity to Kamlang Wildlife sanctuary; - 43,000 trees planned to be chopped near the Kamalang Wildlife Sanctuary; - Impact on important habitats such as Dibru-Saikhowa National Park & Biosphere Reserve; - Impact on grassland ecology & grassland-dependent species such as critically endangered Bengal Florican, the Gangetic Dolphin & Asiatic Wild Buffalo; - Impacts in downstream areas.
20 21

Cumec, short for cubic meter per second, is a measure of flow rate. The case was filed before the National Environmental Appellate Authority and transferred to the NGT in February 2012.

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Additionally, media reports have exposed that the project misrepresented facts and details in its application for wildlife clearance. While the application to the NBWL states that the distance of the reservoir to Kamalang Sanctuary is 0.5 kms, the projects submission to the Forest Advisory Committee (FAC) mentions 50 m. The submission to FAC also mentions that the trees to be cleared are 1,24,000 in number and not 43,000 as stated to the NBWL. Disregarding strong recommendations against granting of clearance by members of the Standing Committee of NBWL, the MoEF granted the project wildlife clearance in February 2012. A month later, in March 2012, the MoEF granted the Demwe Lower HEP Stage I forest clearance and stage II forest clearance was granted in May 2013. Financial Issues in Athena Demwe Lower HEP The project has a planned total cost of Rs. 13,144.91 Cr with a Debt Equity Ratio of 75:25. The companys website claims to have achieved financial closure by the 3rd quarter of 2010 11 i.e. between October and December 2010. There is very little information publicly available on the financing of this project. Rural Electrification Corporation is the lead lender to the project and Power Finance Corporation has sanctioned a loan of Rs. 2300 Crore. The list of other banks contributing to the remaining portion of the debt is not known. A portion of equity or debt could be contributed by the Infrastructure Development Finance Company Limited (IDFC) and Industrial Finance Corporation of India (IFCI) since they hold stake in the promoting company - Athena Energy Ventures Private Limited. Despite being a public limited company, ADPLs website does not have Annual Reports which would necessarily have comprised some additional information. It is however known that the loan22 from the Rural Electrification Corporation was sanctioned to Athena Demwe Power Limited on 06 January 2010. At that time, the project had neither environmental nor forest clearance or the clearance from the Wildlife Board. Also the fact that the project achieved financial closure in 2010 indicates that other loans to this project were also sanctioned in the absence of the forest and wildlife board clearance. However, even though this project was sanctioned loans in mid 2010, it is yet to take-off. In the event that a project is long delayed, the loans to the project are affected. The project was granted forest clearance by the Ministry of Environment and Forest in May 2013, six years after the project was initiated and almost three years after the projects financial closure, because of pressure from Central Ministries and the Chief Minister of Arunachal Pradesh. As early as 2011, media reports revealed that the Finance Ministry was pushing for the granting of clearances to the project to remove uncertainty and prevent deterioration in asset quality of financial institutions, of particularly public sector banks which have given huge loans to Athena Demwe Power. The MoEF was also pressurised to go ahead with the project given its strategic location. The tens of dams planned on the
22

Refer Page 18 of the Athena Demwe UNFCC Clean Development Mechanism Project Design Document Form.

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tributaries of the Brahmaputra, including the Lohit, are said to be part of Indias strategy to counter similar projects by China on the other side of the border. These hurried plans to build dams in the North-East region are to enable India to establish its first-user rights over River Brahmaputra. Neither of these two rationales however justifies the irreversible and harmful impacts this project poses to the local people. The stiff resistance to these dams arising out of serious social and environmental impacts are concerns that financial institutions providing loans to these projects need to factor in their assessments.

Case Study No.3 - SASAN POWER

Special Purpose Vehicle Project Cost Lenders to Project - Sasan Power Limited - Rs. 19,400 Cr (increased to Rs. 23,000 Cr) - State Bank of India, Power Finance Corporation, Rural Electrification Corporation, Punjab National Bank, Life Insurance Corporation, Axis Bank, Union Bank, IDBI, India Infrastructure Finance Company-India, Bank of Baroda, Andhra Bank, Corporation Bank, United Bank, India Infrastructure Finance Company-UK Part of the loan is refinanced by US Exim Bank, Bank of China, China Development Bank and Exim Bank of China Social Concerns - Land has been acquired from Adivasi, Dalit and backward communities at low prices; families protesting the acquisition were arrested by the police to force the selling of land; the affected families have not been adequately rehabilitated; violation of Madhya Pradesh Rehabilitation Policy 2002; rights of people were not recognised as per the Forest Rights Act 2006; acquisition of land without proper consent from gram sabhas. Environmental Concerns - UMPP could emit 27,000 tonnes of carbon dioxide; over 7000 acres of forest land has been diverted for the mines. Legal Status - Numerous project-affected families have filed cases against the acquisition of their land for the project; Reliance Powers petition with the Central Electricity Regulatory Commission for revision of tariff of power is pending. CASE RATIONALE - Reliance Power refinanced nearly 75% of what was to be long term loans from domestic banks within a year of its sanction with loans from US and Chinese banks. Subsequently, Reliance Power is seeking revision of tariff of power from the plant on the basis that that the rupee had depreciated. The depreciation is affecting the project because of the huge loans from foreign banks. These refinanced loans have yet again been restructured in March 2013 on account of delay in commissioning of plant. With numerous reports of violations by Sasan Power and lack of due diligence by the MoEF coming to light, it is evident that the domestic banks had sanctioned large amounts of long term loans without adequately assessing the project.
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Sasan Power Limited (SPL) was incorporated in February 2006 as a wholly owned subsidiary of Power Finance Corporation Limited (PFC) in order to build, own, operate and maintain the Sasan Ultra Mega Power Project (UMPP). UMPPs are planned by the Government of India under the eleventh five-year plan to tackle power shortfall and bridge the gap. Power Finance Corporation (PFC), the financial institution under Ministry of Power, is the nodal agency for facilitating and auctioning UMPPs to competitive power producers. Of the four UMPPs awarded so far, Sasan Power, Jharkhand Integrated Power and Coastal Andhra Power were won by Reliance Power and Coastal Gujarat Power was won by Tata Power. Twelve more such Ultra Mega Power Projects are currently under development by PFC. Reliance Power won the bid for Sasan Power in 2007 through the competitive bidding process by matching the lowest price of Rs. 1.19 per unit quoted by the original bid winner, the Lanco-Globeleq consortium. A Power Purchase Agreement (PPA) was executed in 2007 with 14 procurers in seven States. Their off-take shares are as follows- Madhya Pradesh (37.50%), Punjab (15%), Uttar Pradesh (12.50%), Delhi (11.25%), Haryana (11.25%), Rajasthan (10%) and Uttarakhand (2.50%). Sasan UMPP is a 3960 MW (6x660) pit-head coal based power plant sited in Sidhi, Singrauli district, Madhya Pradesh. The project has been allocated three captive pit-head coal mine blocks, Moher (402 MT), Moher Amlori extension (198 MT) and Chhatrasal, having total reserves of almost 750 MT. The Sasan plant however requires only 460 MT of coal. The project has acquired approximately 10,000 acres of land, of which almost 7000 acres is for coal mines. The mines are located in forested areas, approximately 25 kms away from the main plant in Sidhi village. As per the MoU, the project was to be commissioned in May 2013 but Reliance Power sought an extension until June 2014 and Sasan Power synchronised the first unit in March 2013. Based on a complaint filed by the Western Regional Load Despatch Centre (WRLDC)23, the Central Electricity Regulatory Commission (CERC) ruled in June 2013 that Sasan Power had actually not commenced commercial operations as stated in March 2013, as the set testing parameters had not been met. Reliance Power challenged the order at the Appellate Tribunal for Electricity (APTEL) which set aside CERCs June order stating24 that the Commission had decided the issue on merits without giving an opportunity of being heard to the Appellant (Reliance Power). The CERC is to decide on the matter afresh. Social Impacts from Sasan Power Along with government, revenue and forest lands, private lands of 946.58 Ha has been acquired from Dalit, Adivasi and Backward Communities from the villages of Sidhi Kurd,
23

Along with WRLDC, the State governments of Punjab and Himachal Pradesh, which were to receive electricity from SPL, contend that Commercial Operation Declaration (COD) established by an Independent Engineers certificate was not in line with the provisions of the PPA. 24 Reliance Power wins appeal against CERC order on Sasan UMPP. 13 August 2013, The Economic Times.

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Sidhi Kala, Tiyara, Jhanjhi, Harrhawa and Gidda Kadi. The affected families 25 contest that they were promised compensation of Rs. 7.5 Lakhs per acre of land but paid very low prices, of lesser than Rs. 3 Lakhs per acre. The families were threatened and forced to receive award cheques for the land lost to the project. The phase of acquiring land involved violent clashes between the community, the authorities and project developers. Houses were forcibly broken using bulldozers and dumpers and people were arrested by the police to facilitate the process. Affected families from Harrhawa alleged that no prior notice was served on them when their houses were broken down. Around 50 families continued26 to live on land that Reliance Power enclosed with an illegal concrete wall. The villagers alleged that the company used the police to threaten and/ or arrest villagers who voiced out against the project. In about 15 reported cases, men from affected families were arrested on false charges and released only after their families gave an undertaking to leave their land. Gidda Kadi is a hamlet with largely Dalit and Adivasi families. About 50 Adivasi families of Gidda Kadi belonging to Gond, Baiga and Panika communities are affected by the project. The families in this village possess land records for the land they own. Many families had refused to receive the compensation cheques and have instead filed cases against the acquisition of their land by Sasan Power in the Bhopal High Court. Surya Vihar, the rehabilitation colony set up by Reliance Power, is sited in Basma Dand, an unpopulated area with fallow barren land, 15 kms away from Sidhi village. A 60 x 90 ft plot in Surya Vihar was allotted to those families who lost both land and house. The company set up 1400 plots and built 376 houses in the colony. The houses are single rooms measuring 10 x 12 ft, with a kitchen and a toilet. Electricity to the houses is supplied for three hours a day. Villagers reported that it was impossible to live in the deserted colony, in houses which could not accommodate even small families. The villagers arrived at a compromise with the District Collector who agreed to give families an option of receiving an empty plot in Basma Dand and Rs. 75,000 as cost of constructing house. As of 2011 a total of 62 families lived in Surya Vihar and only 20 families lived in the houses constructed for this purpose. The remaining 350 odd houses built by Reliance Power remain unused and wasted. In breach of the Madhya Pradesh Rehabilitation Policy 2002, which stipulates mandatory employment in the project for one person of every displaced family, and Sasan Power Limiteds own Resettlement Action Plan which guarantees the same, the project has predominantly employed migrant workers from neighbouring districts and states for both unskilled and skilled labour. Labour colonies set up in the vicinity of the plant to house the migrant workers are witness to this.

25 26

Information used in this section is based on visits made by the author of this report in September 2011. The 50 families continued to live in their houses located within the plant premises in September 2011.

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Community rights over forests around the main plant in Sidhi and the mines in Moher and Moher Amlori extension were not recognised according to the provisions of the Forest Rights Act 2006 and land was acquired for this project without seeking consent for diversion of forest land for non-forest purposes from the Gram Sabhas as mandated by the MoEF. Environmental Impacts from Sasan Power The 4000 MW coal-fired UMPP is located in Singrauli district, which is the 9th most Critically Polluted Area27 with a Comprehensive Environmental Pollution Index score of 81.73. The MoEF placed a temporary moratorium in January 2010 on consideration of environmental clearance for projects located in 43 Critically Polluted Areas, including Singrauli. This moratorium was lifted in June 2011 from Singrauli even though CPCBs Interim Assessment Report of 2011, disclosed that pollution levels in Singrauli had increased to 83.35. It is apprehended that the Sasan Power plant28 will significantly add to the existing levels of pollution as UMPPs emit approximately 27,000 tonnes of carbon dioxide per year. UMPPS in India are mandated to employ the super-critical technology to reduce emissions and increase efficiency. Arguing that employing super-critical technology reduces pollution, project proponents of UMPPs are availing Certified Emission Reduction (CER) units for trading in the carbon market by registering with the Clean Development Mechanism (CDM) Executive Board of the United Nations Framework Convention on Climate Change (UNFCCC). Sasan Power registered for Clean Development Mechanism credits in February 2011. Despite UMPPs being among the largest single sources of green house gas emissions in the world, along with substantial radioactivity and heavy metal release from fly ash, the Sasan project was granted the benefit of CDM merely because the use of super-critical technology will reduce the Co2 emission. According to a November 2011 report29, Sasan Power Limited misrepresented facts in the Project Design Document (PDD), a key document for validation and registration of a project with the CDM Board. Sasan Power was granted environmental clearance and forest clearance for the main plant from the Ministry of Environment and Forest in 2009. Environmental and forest clearance for Moher and Moher Amlohri were granted in December 2008 and May 2010. The Chhatrasal mine was denied permission for mining in January 2012 by a committee of the MoEF as over 965 ha of land of the proposed mine were good quality forests and the mine fell within MoEFs No-Go30 or inviolate list. Based on recommendations of the Empowered
27 28

Refer footnote 7 For further reading on the impacts of thermal plants in Singrauli, refer to report by Green Peace - The Coal Curse A Fact Finding Report on the Impact of coal Mining on the People and Environment of Singrauli . 29 The Indian Clean Development Mechanism: Subsidizing and Legitimizing Corporate Pollution - An Overview of CDM in India with Case Studies from various sectors. November 2011. National Forum of Forest People and Forest Workers (NFFPFW), NESPON and Society for Direct Initiative for Social and Health Action (DISHA). 30 The Ministry of Environment and Forests along with the Ministry of Coal initiated the classification of forested areas into two zones of Go and No-Go in 2009. The No-Go zone imposes a ban on mining activity in the concerned area on environmental grounds.

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Group of Ministers (EGoM) to the Prime Ministers Office , the project however received Stage I Forest Clearance in November 2012. Stage II clearance is awaited. Sasan Power Limited applied for consent for expansion of plant capacity by 1980 MW (3 x 660). The EAC deferred the proposal in September 2012 on grounds that the proposal was premature in its present form. The Committee in its minutes noted that primary information sought in the Terms of Reference (TOR) was answered perfunctorily with no details. The Committee stipulated that the project proponent carry out a long term study of the impacts of radio activity and heavy metal release from coal, not only for the expansion but also for the existing UMPP. This indicates that impacts from the project were not sufficiently assessed in the EIA report for the 3960 MW plant. Sasan Power Limited was mandated by the Forest (Conservation) Act 1980 to afforest 1385 ha of non-forest land in compensation for diverting the same amount of forest land for construction of its main plant and Moher & Moher Amlohri mine. A September 2013 report by the Comptroller Auditor General of India (CAG) on Compensatory Afforestation in India revealed that the Ministry of Environment and Forests had exempted Sasan Power Limited, in violation of the Forest (Conservation) Act 1980, from providing non-forest land of 1385 ha as compensatory afforestation. According to the report, SPL was allowed compensatory afforestation over double degraded forest land (as opposed to non-forest land) even though it was not eligible for such an exemption. Banking on Coal and Scams The viability of the Sasan project is heavily dependent on optimisation of the coal reserves allotted to the project. However, the project has run into trouble with more than one of their plans for coal use. For instance, Reliance Powers request for approval to pledge the mining lease of Moher and Moher Amlohri Extension coal blocks as security to lenders was rejected by the Coal Ministry in January 2012 on the grounds that there was no precedence and that the request for mortgage should come from the State Government. Reliance Power was required to mortgage the mining lease as per the financing agreement signed with the consortium of domestic banks. This agreement to mortgage the mining lease in return for loans had been reached without the approval of the Ministry of Coal. To maximise the use of coal allocated in excess of Sasan plants requirement, Reliance Power sought the diversion of surplus to its other power plant operated in the same state. In August 2008, an Empowered Group of Ministers (EGoM) allowed diversion of the excess coal from coal blocks allocated for Sasan UMPP to Reliance Powers Chitrangi Power Project. In an unprecedented move, Tata Power challenged this approval for diversion of surplus coal to Reliance Power in July 2011 at the Supreme Court claiming that it was detrimental to public interest. Power from the Chitrangi plant was set to be sold at Rs. 2.45 per unit as compared to Rs. 1.19 per unit for Sasan. Tata Powers affidavit stated that the tariff difference will burden consumers with Rs. 25,400 Cr for 26 years.
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This decision by the EGoM was questioned in September 2011, when the Comptroller Auditor General (CAG) of India in its report on Ultra Mega Power Projects alleged that the Ministry of Power gave undue benefit of Rs. 4,875 Cr (reduced from the initial estimate), spread over the next 25 years, to Reliance Power. The CAG report argued that the Government had changed coal licence norms to allow the diversion of surplus coal from one project to another. These concessions came after the execution of the bidding process agreements and no benefit from this transfer of coal was planned to be passed on to the consumer. However, the EGoM in a letter dated 02 February 2012 to the Power, Coal and Law Ministry warned that, any proposal to review the EGoMs decision could severely dent the confidence of the international lending community in Indian projects. The CAG report also argued against the allotting of coal blocks to private companies, as Coal India Limited (CIL) produced coal at half the declared mining cost of firms such as Reliance Power, Tata Power and Jindal Power. While Reliance Power pitched the expected cost of mining at Sasan to be as high as Rs. 1000 per tonne, CIL operated mines Amlohri and Nigahi, in close proximity to Sasan, cost about Rs. 450 per tonne. Bringing to end the assertion of Sasan UMPPs historically low cost of producing power, in January 2013 Reliance Power sought revision of tariff through two petitions filed with the Central Electricity Regulatory Commission (CERC). The company is seeking revision of tariff on the basis of a change in law during the construction period and due to unfores een depreciation of the Indian rupee. Financial Issues in Sasan Power The stated project cost of Sasan Power was Rs. 19,400 Cr and financial closure was achieved in April 2009. In 2013 the estimated project cost had risen to Rs. 23,000 Cr. The project was tied with a Debt Equity Ratio of 75:25, making it the largest loan on project finance basis in India. A consortium of 14 banks led by the State Bank of India and Power Finance Corporation financed the Rs. 13,848 Cr debt component. The breakup of the loan is as follows- State Bank of India (Rs. 3500 Cr), Power Finance Corporation (Rs. 1770 Cr), Rural Electrification Corporation (Rs. 1342 Cr), Punjab National Bank (Rs. 900 Cr), Life Insurance Corporation (Rs. 800 Cr), Axis Bank (Rs. 750 Cr), Union Bank (Rs. 750 Cr), IDBI (Rs. 500 Cr), India Infrastructure Finance Company-India (Rs. 400 Cr), Bank of Baroda (Rs. 300 Cr), Andhra Bank (Rs. 200 Cr), Corporation Bank (Rs. 200 Cr), United Bank (Rs. 200 Cr), India Infrastructure Finance Company-UK (USD 2,236 - dollar denominated loan). Under the Fifth Power System Development Project, the World Bank sanctioned USD 1 Billion to strengthen transmission network for large bulk power transfers from Sasan UMPP, Krishnapatnam UMPP and Tata Mundra UMPP.

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Less than a year after availing the huge loans, in mid 2010 Reliance Power announced plans to re-finance31 loans to the project. The banks that had sanctioned long term loans to the project were to earn interests over a period of time. The refinancing of loans can potentially deny the banks of their retained earnings even while huge amounts of money were diverted from other profitable interests to this project for a period of more than one year. Standard Chartered Bank was roped in to raise capital from international banks, primarily the US Exim Bank, Bank of China, China Development Bank and Exim Bank of China. The new loans were to be raised in the form of vendor credit whereby loans are linked to the purchase of material. These loans were to save Reliance Power as much as Rs. 300 Cr per year on interest payments. The approval for receiving External Commercial Borrowing32 (ECB) from the RBI was granted in September 2011. The US Exim Bank rejected a request from Reliance Power in June 2010 to provide about USD 450 Million, to support the sale and export of mining equipment from Wisconsin-based Bucyrus International for Sasan Power, on environmental grounds. The US Exim Bank had established and implemented a carbon policy post a 2002 lawsuit filed by Friends of the Earth for the Banks failure to consider greenhouse gas implications in its financing activities . The new policy required the Banks Board of Directors to consider potentially adverse environmental impacts of high-carbon intensity transactions. The Bank claimed that the environmental impact of the Sasan project was far too adverse. The projected annual carbon dioxide emissions of 27,000 tonnes from Sasan were greater than the annual emissions of all fossil fuel projects approved by the Exim Bank in 2009. Three weeks post this public refusal to finance the Sasan project, in July 2010 the Exim Bank approved a USD 600 Million in loan guarantees to the project. The shocking reversal and compromise was a result of Reliance Powers assurance to additionally generate 250 MW of renewable energy on the project site to address low carbon policy concerns. The Exim Bank allowed Reliance Power to submit a new application which included an additional solar energy component. This however was not subject to the conditionality that the actual pollution levels from the Sasan power plant be lowered. In August 2010, US Exim Bank sanctioned USD 917 Million (nearly Rs. 4,300 Cr) to the Sasan project, the largest such loan to an Indian company. Apart from the US Exim Bank, Bank of China, China Development Bank and Exim Bank of China approved a loan of USD 1.1 Billion (over Rs 6000 Cr) to Reliance Power towards import of Boiler-Turbine Generator (BTG) from Shanghai Electric Group Company for the Sasan project in July 2012. The Sasan UMPP was awarded the Asia-Pacific Refinancing Deal of the Year 2011 by Project Finance and Infrastructure Finance Magazine.
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Refinancing refers to replacing an old debt with a new debt under different terms and conditions. ECB is a fairly new trend which allows Indian companies to raise funds from overseas banks through different debt instruments. This borrowing is monitored by the Reserve Bank of India. Companies use ECB to raise money from overseas allows for interest rate arbitrage i.e. taking advantage of the difference in price between two or more markets.

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In July 2012, the Government of India levied a 21 per cent import duty on power equipment33 in order to protect Indian power plants from cheap Chinese equipment. The Commerce Department has opposed the Power Ministrys attempts to protect existing projects such as Sasan UMPP from the duty hike. According to a 2011 report by Forbes India, between 2004 and 2007, Chinese firms sold equipments to 18 power plants in India and atleast six of the plants have faced critical problems. Despite being aware of these concerns on the quality of the equipment, Indian companies are continuing to purchase equipment from Chinese firms because of lower cost and the added benefit of low-interest loans from Chinese banks. The August 2013 report of the Central Electricity Authority (CEA), which evaluated the performance of power generation equipment supplied by Chinese firms, criticised the Chinese power equipment on all key operational parameters operating load factor, heat rate, auxiliary consumption, frequency of forced outages, breakdowns and safety mechanisms34. In August 2013, the Government of India approved new norms for bidding of Ultra Mega Power Projects on the recommendations of an Empowered Group of Ministers (EGoM) which bars companies from importing equipment for the projects. Two years after the refinancing, in May 2013, Reliance Power restructured the Rs. 14,500 Cr loan to the Sasan project. The restructuring has extended the repayment schedule to March 2015 with a marginal increase in the interest rate from 14.5 per cent to 14.7 per cent. The delay in commencing commercial operations required extension in the repayment schedule. The current exposure of Indian banks in the project include Rs. 3770 Cr with PFC, Rs. 3688 Cr with IIFCL-UK, Rs. 3500 Cr with SBI, Rs. 1342 Cr with REC and Rs. 900 Cr with PNB. According to a May 2013 news report35, at the time of this restructuring the estimated project cost was Rs. 23,000 Cr, showing an increase of Rs. 3600 Cr from the original cost of Rs. 19400 Cr.

Case Study No.4 - LAVASA HILL CITY

Special Purpose Vehicle
Project Cost

Lenders to Project

Social Concerns

- Lavasa Corporation Limited - USD 31 Billion (approx Rs. 1,68,000 Cr) - The project is financed by a total of 27 banks including the ICICI Bank, Axis Bank, Bank of India, Allahabad Bank, IndusInd Bank, Andhra Bank, United Bank of India, Jammu & Kashmir Bank, Deutsche Bank, Union Bank and L&T Infrastructure Finance Company. - Illegal acquisition of 609 ha of ceiling land; illegal acquisition of 190 ha of lands belonging to Adivasis; illegal transfer of 141 ha

33

India imports main plant equipment such as boilers and turbines mainly from China, South Korea & Russia. Chinese state-owned firms - Dongfang Electric Corporation, Shanghai Electric, Sichuan Machinery and Equipment and Shandong Electric Power Construction Corp export a majority. Reliance Power, Adani Power and Lanco are the top three importers of Chinese equipment for their power projects in India and as of Aprilend, 24,437 Mw of India's installed capacity was based on imported Chinese equipment. 34 CEA shock for Chinese power equipment. 12 August 2013. Business Standard. 35 Lenders restructure Rs. 14,500 Cr loan for Reliance Powers Sasan UMPP. 31 May 2013. The Economic Times.

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Environmental Concerns

Legal Status

of land belonging to Krishna Valley Corporation; misusing status of Special Planning Authority (SPA); rights of the people have not been recognised as per the Forest Rights Act 2006; acquisition of land without proper consent from gram sabhas. - Construction of township without clearance from MoEF; violation of EIA Notification 1994 and Environment Protection Act; construction on land without state clearance; illegal cutting of trees; illegal construction on forest lands. - Pending cases before the Pune District Revenue Authorities for illegal transfer of lands; pending criminal case before the Pune bench of Bombay High Court filed by Government of Maharashtra for violation of the Environment Protection Act; pending case before the National Green Tribunal challenging environmental clearance granted by MoEF to LCL; pending Public Interest Litigation case before the Bombay High Court for illegal allotment of Krishna Valley Corporation land; pending case before the Bombay High Court challenging the Special Planning Authority status granted to LCL.

CASE RATIONALE - Poor planning and bad judgement in a project like Lavasa with an enormous investment of Rs. 1,68,000 Cr has resulted in colossal chaos. Lavasa Hill City is a classic case where the illegalities were first deliberately ignored, then put under the carpet when raised by affected communities and finally legalised by Government authorities under pressure. Mere regularisation of violations is however not going to undo the social and environmental harm the project is causing and the continued resistance to the project from affected communities is proof of that. Lavasa project is caught in one too many violations for easy redressal. Even if one were to accept that banks provided loans to Lavasa Corporation before the violations came to light and in the absence of a robust mechanism to assess social, environmental and financial risks, on what grounds have banks approved another Rs. 600 Cr for work on the second phase of the project? Lavasa Corporation Limited (LCL), a subsidiary of Hindustan Construction Company (HCC), is setting up a township amidst seven hills surrounding a 60-km lakefront in Mulshi and Velhe taluks, Pune district, Maharashtra. It is being developed in four phases over approximately 25,000 acres of land with an investment of USD 31 billion (approx Rs. 1,68,000 Cr). Lavasa Hill City is a planned township, which proposes to accommodate a permanent population of three Lakh people, involving real estate, infrastructure, retail, healthcare, tourism and leisure, education and hospitality industries. LCL operates 35 subsidiary companies for business operations in the different sectors. The project was incorporated in 2000 as Pearly Blue Lake Resorts Private Limited, a business hotel, by Aniruddha Pradyumna Deshpande with a capital of Rs. 2 Cr. Through a notification
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in 2001 the State Government declared 18 villages in Mulshi and Velhe Taluka as hill station. The project was converted into a public limited company in March 2003 under the name of Lake City Corporation Limited. Hindustan Construction Company (HCC) Limited took over as promoters of the project, which was renamed as Lavasa Corporation Limited in June 2004. According to the companys 2010 draft Red Herring prospectus, HCC holds 64.99 per cent, Avantha Group holds 16.25 per cent, Venkateshwara Hatcheries holds 12.79 per cent and Vinay Maniar holds 5.95 per cent of LCL. The project was initiated in 2006 with a plan to complete Phase 1 in 2010 and commission the entire project by 2021. However, construction work for Phase 1 of Lavasa Hill City is yet to be completed. Lavasas September 2010 draft red herring prospectus, the company acknowledged to having 55 outstanding litigations against them. There are three public interest litigations, twenty civil proceedings, thirty revenue proceedings, one notice from the District Collector, and one notice from a Gram Sabha. LCLs promoters, HCC, have four criminal proceedings, thirty three civil proceedings (involving Rs. 139.7 Cr), twenty five industrial and labour related proceedings (involving Rs. 86 Lakhs), twelve share related proceedings, six tax related proceedings (involving Rs. 7.3 Cr) and one arbitration proceeding filed against them. Social Impacts from Lavasa Hill City The total water requirement for the Lavasa project is 45 MLD and the total power requirement is 500 MW. LCL had an agreement with Maharashtra State Electricity Distribution Company Limited for supply of power between 2008 and 2010, after which it entered into contracts with Tata Power. LCL was granted permission to construct ten checkdams within the submergence and catchment area of the Warasgaon dam. The total capacity of the dams is expected to be 1,031 mcft. The operation of these check dams are bound to reduce flow of water in the main reservoir. It must be noted that Warasgaon dam contributes to Khadakwasla dam, which provides water to the entire district of Pune. The Maharashtra Government has declared an area of approximately 23,014 acres in 18 villages in Mulshi and Velhe as hill station. As of September 2010, Lavasa Corporation held about 9460 acres of land. The villages from which Lavasa Corporation acquired lands are populated by Marathas and Scheduled Tribe communities of Dhangar, Koli, Thakar and Katkari. According to local and media investigations, land had been taken by force and fraud from several village communities. Land records had been changed without permission or knowledge of the actual owner and on enquiry the records were found missing from the district offices. According to the report by the Peoples Commission of Enquiry on Lavasa 36,
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The Peoples Commission of Enquiry on Lavasa was a collective initiative of the India Centre for Human Rights and Law, Mumbai, National Alliance of People's Movements, Shoshit Jan Andolan, National Centre for Advocacy Studies and Manav Hak Abhiyan. The report was the result of a two month enquiry by the commission whose members included Shri Y.P. Singh (Advocate, High Court of Mumbai and former CBI Official), Arvind Kejariwal (current Chief Minister of Delhi), Shri S. M. Mushrif (former Inspector General of Police, Mumbai) and Shri Nirmal Suryavanshi (Senior Advocate).

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LCL had looped in real estate agents to purchase land for sums as low as Rs.500 to Rs.5000. People were made to believe that the low payment made to them was only an initial token payment. In many cases, only one or two acres of land were purchased while making the registration for larger portions of land. In Mugaon village alone 67 Adivasi families lost 330 acres of land without receiving any compensation. The families, which were forcibly evicted from their land, filed a complaint with the District Revenue authorities in mid 2011. Lavasa Corporation acquired ceiling lands in violation of state rules. Local communities were allotted land by the State Government in 1964, under the Maharashtra Agricultural Land (Ceiling on Holding) Act 1961, which transferred surplus land to the landless and economically backward families. The District Collector transferred 372 ha of land in excess of ceiling, which had not been taken possession by the Government, to the company. Another 609 ha of ceiling land allotted to farmers was taken back for transfer to Lavasa. Also, Lavasa acquired Adivasi lands in excess of permission granted by district authorities. While the company had permission to purchase 102 ha, it took control of 292 ha. In 2002, the Khadakvasla Irrigation Division allotted 141.15 ha of Krishna Valley Corporation land to Vidya Pratishtan, allegedly for use by Lavasa Hill City, on a 30 year lease for an annual royalty of Rs. 2,75,250. The market price for leasing the same land is valued at Rs. 900 Cr. Vidya Pratishtan is an educational society headed by Mr. Sharad Pawar, president of the Nationalist Congress Party and the Union Cabinet Minister for Agriculture. The Maharashtra Krishna Valley Development Corporation (MKVDC) was headed, at the time the decision was made, by Mr. Ajit Pawar, nephew of Mr. Sharad Pawar. In 2006 Shamsunder Potare, a project-affected person filed a Public Interest Litigation in the Bombay High Court alleging that this land transfer was illegal and in violation of the Supreme Court judgement, which disallowed transfer of land acquired in public interest to private projects. In October 2007, the Bombay High Court issued notices to Vidya Pratishtan and to a company owned by Mr. Sadanand Sule, the son-in-law of Mr. Sharad Pawar, in connection with the alleged illegal allotment of plots belonging to MKVDC. The case is pending. The Maharashtra Government began the process of rectifying the violations in the land acquisition process for the Lavasa Hill City project in October 2010. The revenue department pointed to three kinds of irregularities in the project: Transfer of 141 ha of land through lease by the Maharashtra Krishna Valley Development Corporation (MKVDC) where permission from the revenue department, as mandated by state laws, was not sought. Acquisition of 609 ha of agricultural land from farmers for commercial purposes in violation of state procedures. Acknowledging this violation, the State Government has suggested that this transfer of ceiling land to Lavasa could be regularised with the imposition of a fine of Rs. 25 Cr.

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Acquisition of 190 ha of land belonging to Adivasis without permission from State authorities. Acknowledging the violation, in March 2011 the State Revenue Department ordered Lavasa Corporation to return Adivasi lands that had been acquired without following the due procedure.

In a first of its kind, Lavasa Corporation was granted the status of Special Planning Authority (SPA) in June 2008 by the NCP-led Maharashtra State Government. The granting of SPA under the Maharashtra Regional Town Planning (MRTP) Act allowed Lavasa Corporation to approve Lavasa Hill Citys plans and work. In the light of the massive environmental violations by the hill city project, the MoEF advised the State Government in 2010 to reconsider the special allowance of SPA status granted to Lavasa Corporation. In its March 2011 report, the Comptroller Auditor General (CAG) of India criticised the SPA status granted to Lavasa for lack of transparency and alleged that the SPA sanctioned illegal expansion of the project and had approved plans and layouts in violation of the Maharashtra Regional Town Planning Act and Development Control Regulations. In yet another case against Lavasa, in January 2012, two brothers belonging to affected families approached the Bombay High Court challenging the State Government's decision to grant Lavasa Corporation the authority to acquire land and act as a Special Planning Authority (SPA) for the hill city project. The petition sought the quashing of the 2008 notification issued by the Urban Development Department (UDD) contending that statutory powers like the planning authority cannot be delegated to a private company registered under the Companies Act 1969. If the status of Special Planning Authority granted to Lavasa Corporation were to be revoked, all the decisions and approvals made by the authority will be reviewed and plans made in violation of State and Central laws can stand to be cancelled. Over 2000 acres of the lands acquired for Lavasa are forest lands37 which are depended upon by the local communities for collection of non-timber forest produce. Lavasa cut down hundreds of trees for constructing38 roads on forest land without seeking prior permission from the Ministry of Environment and Forests as mandated by the Forest Conservation Act 1980. Community rights over forests have not been recognised according to the provisions of the Forest Rights Act 2006. Moreover, land was acquired for this project without seeking consent for diversion of forest land for non-forest purposes from the Gram Sabhas as mandated by the MoEF. Environmental Impacts from Lavasa Hill City In March 2004, the Maharashtra State Department of Environment gave the final clearance to LCL under the Maharashtra Hill Station Regulation of 1996. LCL did not apply for clearance from the Ministry of Environment and Forests (MoEF) although the Environmental
37 38

Report of the Peoples Commission of Enquiry on Lavasa. How Government Agencies Fast-Tracked Lavasa. January 2011. Rifat Mumtaz. Infochange India.

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Impact Assessment (EIA) notification of 1994 mandates central clearance for tourismrelated projects at an elevation of more than 1000 m from sea level and/ or involving an investment of over Rs. 5 Cr. Fifty eight ha of Lavasa City is above 1000 m and the project cost is higher than Rs. 5 Cr! In July 2005, the MoEF alerted the Maharashtra Environment Department that the LCL project required central clearance; this was refuted by both the State Government and LCL. This letter of rebuttal was found missing in 2010 from the files of the State Pollution Control Board and the State Environment Department. In November 2010, the Ministry issued a show cause notice to LCL under Section 5 of the Environment (Protection) Act 1986 asking why the illegal structures should not be demolished for violation of the Environment Protection Act. LCL was ordered to stop all construction on site. The Expert Appraisal Committee (EAC) of the MoEF had observed that construction had been undertaken without even the state environmental clearance on 681 ha of land and deviations had been made from the approved plan. Lavasa Corporation Limited moved the Bombay High Court in December challenging the notice issued by MoEF. The 13 January 2011 EAC report confirmed violation of environmental laws, including haphazard cutting of hills. The committee stated that the planning and development of the entire project needed to be reworked, a fresh Environment Impact Assessment was to be conducted and a revised proposal was to be submitted to the Ministry. In a dramatic reversal of judgment however, in June 2011 the MoEF indicated that it was willing to clear Lavasa's 1st phase, subject to five preconditions. Lavasa agreed to meet four of these, including setting up an environmental restoration fund, earmarking profit percentage for the Corporate Social Responsibility (CSR) and drawing up a revised development plan. The first condition, that the State Government take credible action against the company for violation of environmental law, remained a point of contention. In November 2011, Maharashtra Pollution Control Board filed a criminal complaint in the Pune bench of the Bombay High Court against nine directors and six officials of LCL for violation of the Environment Protection Act. Without more ado, Lavasa was granted clearance by MoEF. Subsequently, Lavasa Corporation challenged the Ministrys decision to impose conditions along with the environmental clearance at the National Green Tribunal (NGT). On the other hand, Dnyaneshwar Shedge, a project-affected person, challenged the environmental clearance granted by MoEF on the grounds that the decision was arbitrary. Both cases are pending before the tribunal. Conflict of Interest It has been established that the project developers were closely connected with high ranking political members in Maharashtra. Sadanand Sule, the son-in-law of Sharad Pawar, owned 21.97 per cent stake in Lavasa Corporation between 2002 and 2004. It is public information now that the company significantly benefited from the most important notifications, agreements and clearances granted by the Maharashtra Government in this
35

period. These included the State Governments notification declaring 18 villages of Mose valley as hill station, Urban Development Departments in-principle sanction for development of the villages as tourist resorts, agreements with the MKVDC for construction of mini-dams in the Warasgaon backwaters, agreement with the Maharashtra Tourism Development Corporation and the State Environment Departments clearance to develop a hill station. In April 2012, the Comptroller and Auditor General (CAG) of India charged Maharashtra State Government for favouring the developers of Lavasa Hill City by framing regulations and making amendments to existing laws with the sole purpose of illegally aiding the project. Financial Issues in Lavasa Hill City The Lavasa project has a planned total cost of USD 31 Billion (approx Rs. 1,68,000 Cr) which include the numerous real estate, infrastructure, retail, healthcare, tourism and leisure, education and hospitality industries. The loan portion of the project cost is financed by a total of 27 banks including the ICICI Bank, Axis Bank, Bank of India, Allahabad Bank, IndusInd Bank, Andhra Bank, United Bank of India, Jammu & Kashmir Bank, Deutsche Bank, Union Bank and L&T Infrastructure Finance Company Limited. Adding into the bargain against Lavasa, the Economic Offences Wing (EOW) of the Central Bureau of Investigation (CBI) implicated Lavasa Corporation in the multi-Crore loan scam in November 2010. The CBI alleged that Maninder Singh Johar, Director of Central Bank of India, had acted upon a bribe to sanction Rs. 400 Cr as loan to Lavasa Corporation despite unfavourable reports on the project. The investigation is pending with the CBI. In July 2010 HCC announced that Lavasa Corporation would raise Rs. 2000 Cr through an Initial Public Offering (IPO)39. Within four months Lavasa was forced to deter plans, in view of the show-cause notice issued by the MoEF in November 2010. In October-December 2011, HCC posted a net loss of Rs. 130 Cr and a consolidated debt of Rs. 8100 Cr. In this period Lavasa Corporation had defaulted in payment of both principal and interest on its loans. Media reports in the same period revealed that unlike State run banks, private banks were receiving payment on their working capital loans from LCL. By January 2012 Lavasa was downgraded to default grade by the rating agency CARE. The loans to Lavasa Corporation had considerably deteriorated by early 2012 and lenders along with HCC requested the RBI to treat a part of the loan to LCL as infrastructure funding. The loans provided to Lavasa were categorised as commercial real estate and banks' exposure to commercial real estate weighs higher risk demanding lenders to set aside higher capital. Additionally, the Corporate Debt Restructuring (CDR) Cell does not permit the
39

Initial Public Offering refers to the first sale of stocks by a private company to the public seeking capital to expand and to become publicly traded.

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restructuring of real estate sector loans and RBI guidelines demand that loans given to real estate companies be classified as non-performing asset (NPA) once restructured. If the RBI were to consider Lavasa as an infrastructure company, then HCC could approach the consortium of banks at CDR for a restructuring package and avoid its loans being treated as NPA. This request was rejected by the RBI in July 2012. HCC approached banks individually for restructuring measures and a substantial portion of the Rs. 850 Cr loan at banks is now treated as NPA. The terms of the restructuring involved a moratorium on repayment of principal for two years and interest rate concessions for the first few years. The State and Central authorities did not initiate action against Lavasa Corporation for over six years while continuing to grant clearances in the interim period. Several official bodies and individuals in the State and Centre deliberately shielded the project for unofficial reasons. Despite the grant of clearance by the MoEF in November 2011, the projects progress has been remarkably slow owing to problems arising out of a multitude of illegalities, violations and legal challenges.

Case Study No.5 - LAFARGE SURMA

Special Purpose Vehicle - Lafarge Surma Cement Limited (Lafarge Umiam Mining Private Limited and Lum Mawshun Minerals Private Limited) - USD 280 Million (approx Rs. 1515 Cr); cost of the project on the Indian side is USD 25 Million (approx Rs. 140 Cr) - International Finance Corporation, Asian Development Bank, German Development Bank, European Investment Bank, Netherlands Development Finance Company, Arab-Bangla Bank, Standard Chartered Bank, HSBC, Commercial Bank of Cylon PLC, Uttara Bank Limited, Standard Chartered-Dhaka, Citibank-Dhaka, Trust Bank-Dhaka - Citibank, Mumbai and Standard Chartered Bank, Mumbai - Mortgage of indigenous lands without permission; Indigenous communities have been dispossessed of their private and community lands without their knowledge and permission; constitutionally protected scheduled lands belonging to the indigenous communities in Meghalaya have been mortgaged to international financial institutions by a company registered in Bangladesh. - Submission of false information to obtain clearance from MoEF; illegal clearing of forest area for mining activity; illegal mining without necessary consent; illegal felling of trees. - Pending case against illegal transfer of land to LMMPL in the Guwahati High court filed by local community.
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Project Cost Lenders to Project

Other Lenders in India Social Concerns

Environmental Concerns

Legal Status

CASE RATIONALE Lafarges blatant violation of environmental and social norms of the country, even while being financed by international financial institutions and banks which have independent safeguards to alleviate social and environmental harm, goes to show that we cannot rely on international mechanisms to protect our human and environmental life. In a case of curious judgment, during Lafarges inability to service long term loans with international financial institutions as a result of court cases in India, Indian banks bailed out the company by providing short term loans. The company neither had a valid environmental clearance nor forest clearance at that time. Lafarge Surma Cement (LSC), a cross-international border project, was set up in Bangladesh in 1997 by Surma Holdings BV as a private limited company. Surma Holding BV, incorporated in the Netherlands, owns 59 per cent of Lafarge Surma. Lafarge Group of France and Cementos Molins of Spain each own 50 per cent share in Surma Holding BV. Lafarge Surma Cement became a public limited company in January 2003. With a project cost of USD 280 Million, this project was publicised as one of the largest foreign investments in Bangladesh. Lafarge Surmas 1.2 MTPA cement plant in Chhatak, Bangladesh depends entirely on limestone from quarries in Meghalaya, India. Limestone from Shella-Nongtrai in Sohra in Meghalaya's East-Khasi Hills district is transported to the cement plant in Chhatak, Bangladesh, via a 17 km-long cross-border conveyor belt. The quarries are operated by a Lafarge Surma subsidiary- the Lafarge Umiam Mining Private Limited (LUMPL). The mining rights however are owned by another LSC subsidiary, Lum Mawshun Minerals Private Limited (LMMPL), which has a 35-year agreement with the local villages for mining on about 100 ha and the liberty to use another 26.6 ha for mining-related activities. While LUMPL is a 100 per cent subsidiary of Lafarge Surma Cement (LSC), only 74 per cent of Lum Maushun Minerals Private Limited (LMMPL) is owned by Lafarge Surma. Two Meghalayans of Khasi origin own the remaining 26 per cent in LMMPL. The Nongtrai mines supply 2 MTPA of limestone to the cement plant. The method of mining is open cast with semi-mechanised light trippers. The Chhatak plant began producing cement in 2006. Social Impacts from Lafarge Surma The total lands acquired on the Indian side from Nongtrai and Shella village include 100 ha of land for limestone mining, 30 ha for the conveyor belt, 13 ha for shale mining and 7.6 ha for the crusher unit. The lands under question are protected under the 6th Schedule of the Indian Constitution, which provide for protection of tribal land in the North Eastern region of India against acquisition by non-tribals. Additionally, the Meghalaya Land Transfer Regulation Act 1971 prohibits transfer of tribal lands to non tribals except by a previous approval of the competent authority who shall accord such sanction subject to certain conditions which include welfare and development of tribals. Two Khasi locals played an important role in acquiring these lands and obtaining mining rights from the local indigenous Khasi people. Some parts of the land were leased and some bought from
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villagers of Nongtrai and Shella through the two Khasi natives who in turn transferred the rights to LMMPL, in which they hold 26 per cent shares. LMMPL then transferred the legal rights of the land, leased and purchased for mining and conveyor belt, as mortgage to international financial institutions (IFIs) for the USD 153 Million loan. The Deputy Commissioner of East Khasi Hills district, Shillong (Mr. D.P. Wallang, IAS), as competent authority under the Meghalaya Land Transfer Regulation Act 1971, granted the sanctions for land transfer and subsequent mortgage of these lands in favour of the six international banks. While the 'conditional permission for transfer of land was granted by Indian Government in 2001, the sanction for land transfer came in 2006. The Indian Governments position was that, "the permission was given on the condition that in the event of non-payment of the loan by the company, the mortgaged land can under no circumstances be transferred to a person other than a tribal permanent local resident of the state. This argument discounts the fact that no local Khasi person can arrange USD 153 Million plus interests to reclaim the land if the situation ever arose. Also, in violation of state laws and guidelines adhered to by the IFIs, the transfer of lands was completed by 2004. Lands were mortgaged in favour of the international consortium of lenders before appropriate State sanctions for the transfer was given in 2006. This breach has been admitted by the international funders. This transfer of land to LMMPL and the subsequent mortgage to IFIs have been deemed as illegal by the local people of Shella. The people of Shella, represented by Shella Action Committee (SAC), have been opposing the illegal occupation of land, the lease and mortgage of tribal lands to foreign banks and consider it a violation of the Indian Constitution. The Shella Action Committee has contended that they were unaware that their lands were transferred to LMMPL. A Public Interest Litigation (PIL) was filed by the Shella Action Committee (SAC) at the Guwahati High Court in May 2007 questioning the legality of the process through which LMMPL acquired lands in Shella and then used them as security for LSC to borrow money from foreign banks. The PIL alleges that the Company colluded with the ex-headman of Shella and Nongtrai Village Durbar (council) and fraudulently obtained transfer of lands in its favour by taking advantage of the absence of proper land records in the region. The competent authority failed to exercise due diligence while sanctioning the land transfer which ultimately led to land owners being dispossessed of their lands. The Guwahati High court had passed an interim order in 2007 along with issuing notices to the Union Ministries of Home, Finance and Forests, Chief Inspector of Mines, National Commission for Schedule Tribes and Reserve Bank of India among others for alleged dereliction in their constitutional duty to protect tribal lands and environment from local and foreign incursions. The case is pending before the Guwahati High Court.
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Environmental Impacts from Lafarge Surma The project received environmental clearance from the Ministry of Environment and Forest (MoEF) in 2001 on the premise that there was no diversion of forest land for the mining. A certificate to this extent, dated 13 June 2000, was prepared by the Khasi Hills Divisional Forest Office. Similarly, Environmental Resources Management India, a Delhi-based consultancy which prepared the Rapid Environment Impact Assessment for Lafarge, described the project site as an area of "uneven terrain with a rugged topography" where "the terrain undulation and the rock texture do not allow normal plant growth". It went on to add that it was an area of low botanical and floral diversity, covered with rocks and debris and nearly a wasteland". Shillong-based Divisional Forest Officer (DFO), A Lyndgoh, certified to the MoEF that the proposed mining was not in a forest area and that vegetation was sparse in the area with a tree crop density of 0.0009 per ha. The fact that the company had provided false information to avoid obtaining forest clearance and that the mining project had illegally cleared a huge portion of dense forest for their operations were discovered during a site inspection in 2006 by the Chief Conservator of Forests (CCF), Khazan Singh. The CCF alerted the MoEF that the lease area was surrounded by thick natural vegetation and that trees of huge girth were being felled by the company. No action has been taken against the DFO, A Lyndgoh, or the EIA consultant for fabrication of information and misleading the Government of India. In 2006 LSC initiated the process of seeking central clearance much after mining activity had commenced. With the mine already operational, the Public Hearing held in January 2006 was criticised by local people as a farcical formality. In 2007, MoEF stayed mining activity claiming that the company had not fulfilled the environment and forest clearance norms. Lafarge challenged this stay order at the Supreme Court. The report submitted by the Central Empowered Committee (CEC) before the Supreme Court strongly indicted the Khasi Hills Autonomous Council and the local DFO of falsely certifying the lands as non forest. Mining activity was stayed two times by the Supreme Court, in 2007 and 2010. The interim orders from the Supreme Court to stop all mining work at the site had also forced the shutdown of the cement factory in Bangladesh. The Government of India came under immense pressure from France and Bangladesh to regularise the irregularities in the project and allow it to resume work. The multilateral lenders who funded the project, including the IFC and ADB, represented to GoI that closure of the mine will result in the shutting down of the Bangladesh plant. The Government was warned that such an action could dilute the Bilateral Investment Promotion and Protection Agreement between the two countries. Though the project was not conceived out of an international treaty between the two countries, the Attorney General of India, on behalf of the Indian Government, argued for the granting of clearance citing strained diplomatic relations between India and Bangladesh.
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Upon the directions of the Attorney General, instead of a fresh Environmental Impact Assessment (EIA) the MoEF recommended comprehensive forest rehabilitation and conservation plan and a comprehensive Biodiversity Management Plan to mitigate the possible impacts of mining on the surrounding forest and wildlife. Based on a report by the High Powered Committee, the MoEF granted environmental and forest clearance with additional conditions in April 2010. LSC was ordered to pay Rs. 130 Cr towards afforestation and development of area, Rs. 88 Cr towards the Compensatory Afforestation Fund Management and Planning Authority (CAMPA) and Rs. 90 per tonne of limestone mined from the state, retrospective for all mining since 2007, to the Government of Meghalaya. LSC was permitted to resume mining by the Supreme Court in June 2011. Financial Issues in Lafarge Surma The share holding pattern of Lafarge Surma as of March 2011 are as follows 59 per cent by Surma Holding BV, 4 per cent by IFC, 10 per cent by ADB, 3 per cent by Sinha Fashions, 3 per cent by Islam Cement, and 21 per cent by others. The total cost of the Lafarge Surma project is USD 280 Million (approx Rs. 1515 Cr) and the cost of the project on the Indian side is USD 25 Million (approx Rs. 140 Cr). Lafarge Surma had secured loans for USD 153 Million from International Finance Corporation (IFC), Asian Development Bank (ADB), German Development Bank (DEG), European Investment Bank (EIB), Netherlands Development Finance Company (FMO), Arab-Bangla Bank (ABB) and Standard Chartered Bank. The security for these loans included the mortgage of over 100 ha of mining land in Meghalaya. The company faced stay orders for mining activity from the Supreme Court of India, in a case of violation of Indian environmental laws, between May-November 2007 and February 2010-July 2011, forcing the import of clinker (limestone lumps) to continue production and retain market share. The operation of the plant during this period resulted in loss, increasing burden on loans. The company reported that the international lenders rescheduled loans to the project in 2007 and in 2011; periods which directly coincide with the Supreme Court stay orders. Rescheduling is a practice which involves restructuring the terms of an existing loan in order to extend the repayment period. In 2011, Lafarge Surma had loans from IFC, ADB, DEG, EIB, ABB and Standard Chartered along with working capital loans from Standard Chartered-Dhaka, HSBC, Citibank-Dhaka, Commercial Bank of Cylon PLC, Uttara Bank Limited, and Trust Bank-Dhaka amounting to a total of BDT 10,687,716,830 (USD 134 Million). According to the companys reports40, Lafarge Surma faced inadequate cash flow to service its debts along with a high proportion of working capital loans at relatively high levels of interest. As of 31 March 2011, LSCs total consolidated borrowing was BDT 1,367 Cr (USD 174 Million) and the original equity of BDT 580 Cr (USD 74 Million) had substantially diminished resulting in an unsustainable Debt

40

Rights share Offer Document. September 2011. Lafarge Surma Cement Limited.

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Equity Ratio. To raise capital from the market, Lafarge issued Rights Share Offer in September 2011. Faced with capital crunch and the inability to service loans during the period of shutdown of mine and cement plant, Lafarge Umiam Mining (LMMPL) secured long term and working capital loans from Citibank-Mumbai and standard Chartered Bank-Mumbai amounting to a total of BDT 1,995,522,616 (USD 25 Million). During the sanction of these loans, the project was mired in a case in the Supreme Court of India for operating without an environmental clearance.

Case Study No.6 COASTAL ANDHRA POWER (Krishnapatnam UMPP)

Special Purpose Vehicle Project Cost Lenders to Project - Coastal Andhra Power Limited - Rs. 17,400 Cr - Rural Electrification Corporation, Life Insurance Corporation, UCO Bank, Union Bank, Andhra Bank, Corporation Bank, Punjab National Bank, Indian Overseas Bank, Andhra Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Vijaya Bank, Punjab & Sind Bank, Yes Bank and Indian Bank - Process of acquiring land for the project was objected by the local communities. - Project is sited on land with poor soil quality. - Pending case with the Delhi High Court and Indian Council of Arbitration regarding revision of tariff of power.

Social Concerns Environmental Concerns Legal Status

CASE RATIONALE - The CAPL project is a case of poor planning by Reliance Power, Power Finance Corporation and Central Electricity Authority. Six years after initiation and three years after financial closure, the project faces hurdles arising from multiple unresolved issues and is yet to take-off. A substantial portion of the Rs. 13,125 Cr loan sanctioned by 15 domestic financial institutions to the project is up in the air! Coastal Andhra Power Limited (CAPL) was incorporated in 2006 as subsidiary of Power Finance Corporation (PFC) to build, own, operate and maintain the 3960 MW Ultra Mega Power Project (UMPP) at Muthukur Mandal, Krishnapatnam, Nellore district in Andhra Pradesh. Reliance Power won the project in the International Competitive Bidding (ICB) held in November 2007 for CAPL by quoting the lowest tariff of Rs. 2.33 per unit. The project (referred to as Krishnapatnam UMPP) was transferred to Reliance Power in January 2008. CAPL signed a 25-year Power Purchase Agreements (PPA) with off-takers of power for its entire capacity; Andhra Pradesh (1600 MW), Tamil Nadu (800 MW), Karnataka (800 MW) and Maharashtra (800 MW). CAPL is a coal based thermal power plant using super critical technology imported from Shanghai Electric Group, China. The project was scheduled to go on-stream by September
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2013 with the commissioning of its first unit and scheduled to be fully commissioned by October 2015. The project was registered with Clean Development Mechanism in July 2011. The estimated cost of the project is Rs. 17,400 Cr (USD 4 Billion) with a Debt Equity Ratio of 75:25. The project achieved financial closure in July 2010. A consortium of over 15 banks and financial institutions financed the Rs. 13,125 Cr debt component of the project; IDBI Bank was the lead arranger and Power Finance Corporation (PFC) was joint lead arranger. The consortium includes IDBI, PFC, Rural Electrification Corporation, Life Insurance Corporation, UCO Bank, Union Bank, Andhra Bank, Corporation Bank, Punjab National Bank, Indian Overseas Bank, Andhra Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Vijaya Bank, Punjab and Sind Bank, Yes Bank and Indian Bank. The total land requirement for the project is 2412 acres, 1406 for the main plant and colony, 972 for the ash pond, 3 for the ash corridor and 31 for the water corridor. The process of land acquisition delayed the progress of the project considerably owing to protests against the thermal project from local communities. As of end 2010, the project was yet to acquire a remaining of 100 acres. The annual coal requirement of UMPP is 15 MT at 85 per cent Plant Load factor. Reliance Power, through its subsidiary Reliance Coal Resources Private Limited, had acquired 100 per cent interest in two coal companies in Indonesia holding three coal mines in South Sumatra. Along with other Indian power producers, Reliance Powers project suffered when the Indonesian Government implemented a coal export policy in September 2011, more than doubling the price of coal from USD 26 a tonne to USD 60. The increase in coal price would require the CAPL project to bear approximately an additional annual cost of USD 500 million. The developers of the project stopped work at the plant in July 2011. When this was brought to the notice of the authorities, Reliance Power stated that the project was unviable with the new coal prices and that lenders were unwilling to fund the plant. According to a petition with the Central Electricity Regulation Committee (CERC), CAPL had signed loan agreements with banks based on appraisal of the project at fixed price including fixed escalation of coal supply and was therefore unable to draw on debt under circumstances which affect cash flow. Subsequently, Reliance Powers requests for a tariff hike quoting the force majeure41 clause were rejected by the four State Governments. The 11 power procurers from Andhra Pradesh, Tamil Nadu, Maharashtra and Karnataka imposed a fine of Rs. 400 Cr for failing to implement the project. The state-owned power utilities threatened to encash the Rs. 300 Cr
41

Force majeure is a common clause in contracts that essentially frees parties from liability or obligation when an extraordinary event or circumstance, beyond the control of parties, prevents one or both parties from fulfilling their obligations under the contract.

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bank guarantees provided by Reliance Power, terminate the Power Purchase Agreements and recover the land allotted to the project. An interim stay order sought by Reliance Power in the Delhi High Court on the encashing of bank guarantees was dismissed in July 2012. The same month, Reliance Power appealed against the order of Delhi High Court and filed for arbitration against the 11 power distribution companies with the Indian Council of Arbitration. In November 2012, the Delhi High Court gave Reliance Power four months to reach an out-of-court settlement with the distribution companies. The case is pending. Reliances demand to re-negotiate tariff of power on the basis that they were faced with a force majeure situation arising out of increase in fuel price does not hold ground. The standard Power Purchase Agreement (PPA) for projects such as the UMPP excludes fuel from force majeure provisions. Conversely, fuel is mentioned under Clause (a) of Article 12.4 of the PPA which lists the Force Majeure Exclusions. Neither are decisions by foreign governments listed in the non-natural Force Majeure events specified in the PPA. Unresolved Issues in Coastal Andhra Power Re-negotiating tariff of power and increase in coal price are not the only issues plaguing the CAPL project. On 15 June 2011, prior to the announcement of new coal policy by Indonesian Government, an official team from the Ministry of Power, the Central Electricity Authority and the Andhra Pradesh Power Generation Corporation discovered that work on the project site had ground to a halt. The project is sited on land with poor soil quality. Reliance Power has reported that there was presence of marine sand at the site and absence of rock strata even after drilling 60-75 metres into the earth. This information was not included in the Detailed Project Report (DPR) and filling up the ground with layers will significantly increase the cost of the project. The project does not have approval from the State Government for a captive jetty to unload the imported coal. Reliance Power claims42 to have submitted the bid for the project assuming that a captive jetty was not mandatory as per the bid document. CAPL has also not succeeded in getting the required approval from the port authorities to set up the seawater intake system within the premises of the Krishnapatnam Port.

1.2 FLAWED MECHANISMS AND IMPLICATIONS

In recent years an increasing number of development and infrastructure projects are facing hurdles. Clearances granted by concerned authorities are being revoked due to large-scale violations or obfuscation of project information by project developers. Affected
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http://www.powergridindia.com/_layouts/PowerGrid/WriteReadData/file/LTOA/DocumentAndInformationo f_LTMTOA/PetitionBeforeCERCforGrantofRegulatory_ATSofKrishnapatnamUMPPPartB_and_PartC1Page18To8 0.pdf

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communities are opposing projects planned in their areas and challenging the projects validity in the courts. These and numerous other reasons are causing projects to fail their scheduled date of commissioning operations. Social and environmental matters of projects are dealt with by separate Ministries and their executive authorities. Banks have completely left the assessment of social and environmental impacts and risks of the projects they finance to the competence of agents appointed by project developers and government agencies. They are overlooking the fact that the various authorities, independent consultants and businesses have come under the scanner for serious flaws in due diligence and implementation of norms. As the case studies presented here elaborate, the entire chain of proceedings in the process of setting up projects - land acquisition, conducting of the public hearing, consultation with affected community, assessing impacts on human and environmental life, rehabilitating and resettling affected families and the granting of clearances - have inherent flaws and become open to dishonest and corrupt practices.

Social Impacts of Projects

Till 2013, independent India did not have a comprehensive legislation to govern land use and acquisition of land or formulate resettlement and rehabilitation measures for projectaffected persons. The colonial Land Acquisition Act (LA Act) 1894 continued to regulate acquisition of land for both public and private sector projects, even though it did not contain mechanisms for consultation with landholders, fixing land value or grievance redressal of affected communities. Even under the new law, Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act enacted in September 2013, for which the ground rules are yet to be formed, the powers relating to land acquisition are vested in the District Collector and decisions are based on executive authorisation rather than a mandate derived from a comprehensive legislation. Local democratic institutions have no role in the decision making process of projects proposed in their area. Numerous peoples groups and mass organisations including the National Alliance of Peoples Movements (NAPM) have argued that the public purpose43 clause used in the new law continues to allow for grabbing of land and resources by corporations. Project proponents are required by the Environmental Impact Assessment Notification 2006 to conduct social impact assessments as supplementary to the environment impact assessments. These assessments make little sense as this process is de-linked from the preparation and implementation of the Resettlement and Rehabilitation Plan for project43

Through the public purpose clause in the LA Act 1894, the British gov ernment enforced the principle of Eminent Domain to acquire land from private owners for construction of public and social infrastructure. The Indian State broadened the definition of public purpose through the 1984 amendment to the LA Act 1894, thereby allowing the state to acquire land for private projects. The Parliamentary Standing Committee on Rural Development on the draft land acquisition, rehabilitation & resettlement bill, in its May 2012 report, noted that this definition of public purpose was in direct contradiction to the objectives proclaimed in the preamble of the draft bill and recommended that public purpose be limited only to the public and social sector.

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affected communities. Also for the lack of an appropriate body to monitor social impacts, the Ministry of Environment and Forests (MoEF) plays the role, even though it is not structurally equipped to handle social concerns. Environmental clearances granted by the MoEF contain conditions relating to social security and improvement of local community. In the case of Lavasa, the 47 conditions laid in the environmental clearance includes social measures such as having a separate budget for community development activities, income generating programmes and vocational training for individuals to take up self-employment and jobs. Such conditions are rather futile as the Ministry of Environment and Forests neither has expertise, human resource nor training to oversee the implementation of these measures or the mechanisms to monitor the outcome of the measures. Cases such as that of the Renuka Dam project in Himachal Pradesh demonstrate that clearances are granted by the MoEF before social impact assessments are conducted or completed. Moreover, the social impact assessment studies are outsourced by project proponents to private consultancies who deliver poor and sub-standard reports; in many cases underestimating impacts, using false information, neglecting whole sections of affected populations and copy-pasting from previous reports. Improper assessment of impacts does not allow the devising of corrective measures to offset the impacts of large projects on communities. The absence of mechanisms to obtain consent from land losers and appraise impacts of projects on communities, agriculture, livelihood and local economy has given rise to several community led oppositions to projects, thereby affecting progress of projects. Of the cases studies presented in this report, all six have faced problems with the affected community on the issue of land acquisition and all six demonstrate a wide range of violations in the process of land acquisition and rehabilitation. In five out of the six cases44 where information is available - GKEL, Athena Demwe Lower, Sasan Power, Lavasa Hill City and Lafarge, impacts from the project on human and environmental life have not been assessed sufficiently. Also, in the five cases, communities have alleged that their consent was not sought through the mandatory consultation process. Four of these projects - GKEL, Lavasa hill City, Lafarge Surma, and Sasan Power are currently facing legal cases, filed by the affected communities, for wrongful acquisition of land. The process of land acquisition has become aggressive, with affected families either coerced or forced into parting with land. Middle-men, usually local thugs with political leverage, are being employed by project proponents to ensure completion of land acquisition. Lavasa Corporation has been charged with using real estate agents who mediated the purchase of lands through corrupt practices. Communities have contested the acquisition, as lands had
44

Both of this information is not known in the case of the Krishnapatnam UMPP.

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been transferred to Lavasa Corporation without their knowledge and permission. The land acquisition process for Lavasa Hill City is mired in more than one illegality. Lands belonging to the Maharashtra Krishna Valley Development Corporation (MKVDC) were allotted to the project without necessary permissions; over 600 acres of ceiling agricultural land was acquired from farmers in violation of state procedures and about 190 ha of land belonging to Adivasis was transferred to the project without state permissions. All three irregularities have been acknowledged by the State Government and the matters are pending with the respective authorities. While the matter of illegal allotment of Krishna Valley Corporation is being challenged before the Bombay High Court, the State Government has ordered Lavasa Corporation to return lands which were taken from Adivasis without following due procedure. The issue of diverting ceiling lands for the project is pending before the district and State authorities. The land acquisition process for the Krishnapatnam UMPP was delayed beyond schedule owing to protests by project-affected communities. Lands belonging to the indigenous communities of East-Khasi Hills in Meghalaya, which are protected under the 6th schedule of the Indian Constitution and Meghalaya Land Transfer Regulation Act 1971, were transferred to Lafarge Surma without their knowledge by corrupt local authorities. These indigenous lands, partly leased and partly bought through a subsidiary company, were placed as mortgage by Lafarge Surma to International Finance Corporation, Asian Development Bank, German Development Bank, European Investment Bank and Netherlands Development Finance Company in return for project loans. A case filed by the indigenous communities against this transfer and mortgage of their lands by Lafarge is pending before the Guwahati High Court. Villagers of Sidhi who are affected by the Sasan Power project were paid very low prices for the land that was acquired from them. Houses of families who refused to part with land were broken down using bulldozers and men from these families were arrested by the police, forcing a majority of the families to accept the compensation cheques. Many of these cases against protesting individuals are pending in the local police stations. Adivasi families of Gidda Kadi, one of the villages affected by the Sasan project, ave filed cases against the acquisition of their lands in the Bhopal High Courts. The award fixed for lands acquired for the GKEL project is Rs. 3.5 Lakhs plus solatium at 30% for an acre of land and Rs. 5 Lakhs plus solatium at 30 per cent for an acre of land with a house on it. The 2009 benchmark valuation for Mangalpur Gram Panchayat, where the project is sited, and the mean average rate for agricultural land in Mangalpur in the 3 years prior to acquisition are far higher than these rates. The Comptroller and Auditor General of India (CAG)45 which investigated irregularities in land acquisition process for projects in the State of Odisha has reported that there was under-assessment of compensation due to erroneous fixation of market value of land in the GMR Kamalanga case. Moreover, irrigated
45

Odisha State Audit Report (Civil) for the year ended 31 March 2010. Comptroller Auditor General of India.

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lands located within the Rengali Irrigation Project area were acquired from farmers for this private sector power project in complete violation of national laws and the clearance granted by the MoEF. The GKEL project has also acquired lands in excess of the extent stipulated by the MoEF. There are cases pending at the District Courts and Bhubaneswar High Court against acquisition of land for GKEL, filed by affected families. The District Collector of Dhenkanal, Odisha has stated on record that the socio-economic survey submitted by GKEL power project is inconsistent with the state guidelines. Likewise the Resettlement and Rehabilitation Action Plan put out by GKEL does not propose any concrete measure to rehabilitate affected families. The Action Plan contains vague information, with disbursement of compensation for land being the only tangible measure. A glaring example of the vagueness is the section titled Vocational Training and Selfemployment schemes which only states that some options may be considered. The highlight of the plan seems to be identification and reporting of the number of affected persons along with distribution of Identity Cards that acknowledge them as Project Affected. In the case of Sasan Power Limited, out of the 376 houses in the rehabilitation colony built for the affected families as few as 20 are occupied as the families of Sidhi, with an average size of 6 members, do not fit within the 10x12 ft single-roomed houses. Atleast in five cases - GKEL, Athena Demwe Lower, Sasan Power, Lavasa and Lafarge, it is known that affected communities stand to lose or have already lost their customary livelihoods. According to GKELs MoU with the Government of Odisha and the Rehabilitation and Periphery Development Advisory Committee (RPDAC) plan, the project was to employ local labour for 90% of unskilled and semi-skilled work, 60% of skilled work and 30% of supervisory and managerial positions. However, only about 10-15% of the workforce at GKEL comprises of local labour. The Comptroller and Auditor General of India (CAG) is currently investigating employment positions in projects by independent power producers in Odisha State due to increasing concerns of locals being neglected for jobs in such projects. The CAG, at present is also verifying whether projects, including the GMR Kamalanga Energy Limited, have abided by the employment clause stated in their MoUs. Similarly by predominantly employing migrant workers, Sasan Power Limited has violated the Madhya Pradesh Rehabilitation Policy 2002 which demands mandatory employment in the project for one person of every displaced family and Sasan Powers own Resettlement Action Plan which guarantees the same. In five out of the six cases, the projects have adversely impacted Adivasi/ indigenous communities. Customary and traditional rights, such as religious grounds and burial sites of the Adivasi communities which are intrinsically connected to their culture and identity, have been violated by the projects. The policies and legislations framed to safeguard and enhance the rights of Adivasi communities such as the 5th and 6th schedule of the Constitution, the Forest Rights Act 2006 (Scheduled Tribes and Other Traditional Forest Dwellers- Recognition
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of Forest Rights Act), Meghalaya Land Transfer Regulation Act 1971 and Panchayats (Extension to Scheduled Areas) Act 1996 (PESA) have been blatantly violated. In GMR Kamalanga Energy, Athena Demwe Lower HEP, Sasan Power and Lavasa Hill City, forest lands which are intrinsic to the lives of Adivasi communities were acquired without seeking the consent of gram sabhas as mandated by the MoEF and without recognising individual and community rights as per the provisions of the Forest Rights Act.

Environmental Impacts of Projects

The Ministry of Environment and Forests is under immense pressure to expedite the granting of environmental and forest clearances. Industry bodies such as the Federation of Indian Chambers of Commerce and Industry (FICCI) argue that the long wait for clearances is deterring Indias infrastructure and developmental projects. In late 2012 the Ministry of Finance proposed the setting up of a National Investment Board (NIB) to fast-track decisions on projects within a stipulated time frame. The board now renamed as the Cabinet Committee on Investment (CCI) was notified by the Government on 02 January 2013. The 20 January 2013 CCI meeting considered 12 coal mining projects out of which six did not have clearance from the MoEF. The committee directed the projects back to the Ministry and stipulated that decisions be taken within one month from then.

The committee is pushing for faster clearances with a Ministry that is already clearing projects at a pace faster than it is equipped to judiciously handle. The Expert Appraisal

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Committees46 of the MoEF take up project applications for clearance in bulk and clear an average of fifteen projects in one sitting. Information sought under Right to Information Act 2005 revealed that the EAC (Mines) had approved 410 mine plans in the first six months of 2009. Taking note of this information, a 2009 Delhi High Court order47 had prescribed that EACs limit the number of applications taken up for consideration in one meeting to five. However, with the Cabinet Committee on Investment demanding instantaneous decisions from the MoEF, judicious review of risks and impacts associated with a project will no longer hold priority. This graph48 depicting the decisions made by the EAC (Coal Mines) between January and June 2013 reveals that no proposal is declined by the Committee. Similarly, EAC (Thermal Power Projects) reviewed 6 projects between January and May 2013; all 6 were recommended for clearance. The EAC (River Valley Projects) reviewed 5 projects between February and May 2013; 3 were recommended for clearance and 2 were deferred by the Committee requesting Project Proponents to submit further information. This information tells that regardless of the scope and impacts of a project, they are either recommended for clearance or deferred by the Committee, requesting the Project Proponent to submit additional information for future appraisal. Another concern that has been raised is the credibility of the decisions made by EACs, as in several instances the committee has comprised of individuals with vested interest. In 2009 the 12 member Expert Appraisal Committee for Mines was chaired by a person who at that time was also the Director of four mining companies. The Expert Appraisal Committee on River Valley and Hydroelectric Projects prescribed a river basin study of Lohit River for 6 mega projects, including the Athena Demwe Lower HEP which constitutes 44 per cent of the proposed hydro power on Lohit River. The EAC however decided that the clearance for Demwe Lower will not be linked to the completion of the study. The Chairman of the EAC, P. Abraham, who facilitated this decision, was also the Director of PTC India, one of the promoters of the Athena Demwe project. He was asked to resign from his post as Chairman in June 2009 after several organisations raised the matter of conflict of interest with the MoEF. But the clearance granted to the Demwe Lower project stood its ground. In the two years that P. Abraham chaired the committee, several other projects of companies he was associated with also came before the EAC for clearance. It is also known that the Ministry of Environment and Forests grants clearances to projects due to pressure from other Ministries, governments and industry. In the Lafarge Umiam Mining case for example, the MoEF issued an order to stop all on-site work in 2007 when it
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Expert Appraisal Committees are constituted under the EIA notification 2006 to examine projects that apply to the Ministry for Environmental and Forest for clearance. 47 Writ petition (Civil) No. 9340/2009 before the Delhi High Court between Utkarsh Mandal vs Union of India. http://www.indiankanoon.org/doc/1910152/ 48 The graph is sourced from EIA Resource and Response Center. http://ercindia.org/

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discovered that the company had obtained environmental clearance for limestone mining in Khasi Hills by falsely claiming the project site was non-forested lands. While the company had deliberately misled the authorities into believing that the mining area was not forested, for five whole years between 2001 and 2006, the MoEF conducted no due diligence to verify this basic information submitted by the company. Lafarge Umiam challenged the MoEFs stop order in the Supreme Court of India. Under immense pressure from France and Spain where the parent companies are head quartered, Bangladesh where the cement plant was sited, the international financial institutions which had provided loans to the projects, and the Indian Ministries for Finance and Commerce, the MoEF agreed to grant post-facto forest clearance to the project in 2010 along with the imposition of a fine. Although the Supreme Court took cognisance of the projects violation of the Environment Protection Act, its final verdict permitted Lafarge Umiam to continue mining. However, the affected communities in Khasi Hills continue to oppose the project and there is a case pending before the Guwahati High Court against irregular acquisition of land for the mining activity. As a result, despite prevailing closure of the mine for over three years and a brief closure of the cement plant in Bangladesh, the project is far from being free of trouble. The Stage I forest clearance to Athena Demwe Lower HEP was granted by MoEF despite internal reports recommending against such clearance, under pressure from the Finance Ministry which cited the deterioration of the large loans given by banks to the project. The wildlife clearance for the project was granted despite recommendation against clearance from experts within the National Board for Wildlife. Similarly the MoEF denied permission for mining in Chhatrasal mine allotted to Sasan Power in January 2012 stating that the 1000 ha were forests of good quality. Under pressure from the Empowered Group of Ministers, the MoEF granted Stage I clearance to the mine in November 2012. Over 7000 acres of quality forestlands have been diverted for the Sasan Power coalmines alone. Lavasa Corporation is another case where a township was constructed over 5000 acres of land in Pune district of Maharashtra without the mandatory clearance from MoEF. Conditional clearance was granted to the project with the slapping of a heavy fine and filing of criminal charges against the project promoters. In four out of the six cases presented here, the Ministry of Environment and Forests (MoEF) has granted environmental and forest clearance to projects due to pressure from external agencies, in spite of recognising adverse and grave impacts to sensitive ecosystems and natural habitats. In three cases, clearances were granted post implementation of project and after major environmental violations were exposed. The Environment Protection Act does not have provisions for granting of clearance post the operation of a project!

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Environmental and social impacts of a project have to be assessed as per the Environmental Impact Assessment Notification 2006. The mechanisms for the same however are questionable as some of the cases presented here reveal. The Feasibility Report, Detailed Project Reports (DPR) and Environmental Impact Assessment (EIA), on the basis of which clearances are processed and granted by the MoEF, are carried out by independent private consultants hired on project basis by project developers. The authenticity of information and quality of assessment in innumerable EIA reports has been severely critiqued by local communities and environmental and social experts alike. The private consultants are known to use standard formats of reports for different types of projects and only change part information to cater to specific projects. EIA reports in the past have been found to be a shoddy copy-paste effort, sometimes even containing irrelevant information pertaining to an older project. SV Enviro Labs which was exposed in 2011 for lifting paragraphs directly from a report on mining in Assam for its EIA report on proposed laterite mining in Andhra Pradesh is one such case. The increasing frequency of fraudulent EIA reports prompted the MoEF to issue a circular49 in October 2011 declaring the project developers as directly responsible for information submitted in the EIA reports. According to the circular, If at any stage, it is observed or brought to the notice of this Ministry that the contents of the EIA report pertaining to a project have been copied from other EIA reports, such projects shall be summarily rejected and the proponent will have to initiate the process afresh. There is no evidence so far to suggest that this measure has improved the quality of reports. Project proponents are undermining impacts of projects in the EIA reports for easier granting of clearances. The EIA report for Athena Demwe Lower did not factor downstream impacts of the hydro project, which can adversely affect large tracts of agricultural lands, communities, fishing and the surrounding ecology, or factor cumulative impacts of multiple hydro projects on River Lohit. The Krishnapatnam UMPP is seated on marine sand which does not contain rock strata to allow construction. Layering of ground to make it suitable for construction of an ultra mega power project is cost intensive and will lead to inflation of the project cost. This information was not disclosed in the projects DPR or EIA. To avoid obtaining forest clearance from the Ministry of Environment and Forests, the EIA report for the Lafarge mining project claimed that the project was sited on land with no forest cover. Environmental Resources Management India, a Delhi-based consultancy had brazenly lied in the EIA report for Lafarge submitted to the MoEF. In the case of GMR Kamalanga Energys thermal power plant, a 2012 study Negotiating Power found that the environmental clearance was sought on the basis of false information. While the projects EIA report, prepared by SS Environics, claims that no irrigated land was acquired, 455.35 ha of ayacut land under the command area of Rengali Irrigation Canal and another 16.72 acres of land which was an intrinsic part of the Rengali Irrigation Project was acquired for the project.
49

MoEF Circular dated 05 October 2011. Ownership of EIA report and other documents by the project proponent. http://moef.nic.in/downloads/public-information/OM_IA_ownershipEIA.pdf

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Recently in January 2013, SS Environics, GKELs EIA consultant, was implicated by the Central Bureau of Investigation (CBI) for allegedly bribing a MoEF official for clearances of projects. The CBI is currently investigating past projects related to SS Environics. In all six cases, crucial information has been withheld by project proponents in the Environmental Impact Assessment reports and in four of the six cases, project proponents deliberately provided false information in the report to evade national procedures enacted to safeguard and protect the environment and conserve Indias pristine forest regions. A September 2013 report by the Comptroller Auditor General of India (CAG) on Compensatory Afforestation in India found serious shortcomings in regulatory issues related to diversion of forest land, abject failure to promote compensatory afforestation, the unauthorised diversion of forest land in the case of mining and the attendant violation of the environmental regime. The report also details numerous instances of unauthorised renewal of leases, illegal mining, continuance of mining leases despite adverse comments in the monitoring reports, projects operating without environment clearances, unauthorised change of status of forest land and arbitrariness in decisions of forestry clearances. According to the CAG, the MoEF failed to appropriately discharge its responsibility of monitoring of compliance of conditions of the Forest Conservation Act 1980 relating to diversion of forest land. Despite such gross non compliance with statutory conditions and orders of the Supreme Court, no action was initiated by MoEF. In fact the MoEF had invoked penal provision only in three cases during the period August 2009 to October 2012 and even this action was limited to issue of show cause notices. Fraudulent EIA reports and unlawful environmental clearances have been challenged across the country for over 20 years. However, the matter has gained interest of the authorities only in the last few years while in the meantime hundreds of projects have been granted environmental clearance and become operational. Institutionalised corruption affects regulatory processes, constituted to uphold the Constitution and legislations, by creating breaches for unlawful transactions. The reliance of banks solely on external mechanisms, which are not water tight, to assess social and environmental risks are having serious economic, environmental and social repercussions for the country and grave financial losses for banks. Financial institutions have to proactively plan sectoral investments along with rigorous management of social and environmental impacts from projects they finance.

1.3 FINANCIAL RISKS IN POORLY ASSESSED PROJECTS

Contrary to popular understanding that companies or project proponents setting up large scale projects bring in substantial amount of funds, this research finds that much of the funds are put forth by banks. A look into the Debt Equity Ratio (DER) of projects tells us that the average portion of debt in large sized projects is 75 per cent of the total project cost. In many cases, the remaining portion of equity is also tied up with financial institutions which
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buy stakes in the project. The six cases also show that a majority of the loans are from public sector banks, with SBI in the lead. Information on project finance loans are limited and in several cases, as little as Debt Equity Ratio and names of lenders are made public. Table 1: Financial information of the six case study projects
Project Cost (in Cr) GMR Kamalanga 5733 Energy Athena Demwe Lower HEP Sasan Power 13145 19400 DER 75:25 Lenders (known) State Bank of India, Infrastructure Development Finance Corporation, Andhra Bank, Bank of Baroda, Canara Bank, Central Bank of India, IDBI Bank Power Finance Corporation, Rural Electrification Corporation State Bank of India, Power Finance Corporation, Rural Electrification Corporation, Punjab National Bank, Life Insurance Corporation, Axis Bank, Union Bank, IDBI, India Infrastructure Finance Company-India, Bank of Baroda, Andhra Bank, Corporation Bank, United Bank, India Infrastructure Finance Company-UK, US Exim Bank, Bank of China, China Development Bank, Exim Bank of China ICICI Bank, Axis Bank, Bank of India, Allahabad Bank, IndusInd Bank, Andhra Bank, United Bank of India, Jammu & Kashmir Bank, Deutsche bank, Union Bank, L&T Infrastructure Finance Company Limited International Finance Corporation, Asian Development Bank, German Development Bank, European Investment Bank, the Netherlands Development Finance Company, Arab-Bangla Bank, Standard Chartered Bank, HSBC, Commercial Bank of Cylon PLC, Uttara Bank Limited, Standard Chartered-Dhaka, Citibank-Dhaka, Trust Bank-Dhaka, Citibank-Mumbai and Standard Chartered Bank-Mumbai Rural Electrification Corporation, Life Insurance Corporation, UCO Bank, Union Bank, Andhra Bank, Corporation Bank, Punjab National Bank, Indian Overseas Bank, Andhra Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Vijaya Bank, Punjab and Sind Bank, Yes Bank and Indian Bank

75:25 75:25

Lavasa Corporation

168000

Not known

Lafarge Surma [Lafarge Umiam + Lafarge Maushun]

1515

Not known

Coastal Andhra Power (Krishnapatnam UMPP)

17400

75:25

Any sustained delay to a projects progress is a risk on the loan sanctioned by banks. In the project finance mode, loan and interests are repaid from the revenue generated by the project. Projects embroiled in illegalities, violations and legal suits or facing resource crunch or opposed by affected communities due to adverse impacts are facing slow or no progress. Out of the six cases discussed here, five are facing civil, writ or arbitration cases and public interest litigations before courts and other authorities. Five of the projects are delayed, two of which have not even begun construction six years after initiation and three are still undergoing construction.
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There have been several instances where projects financed by us were ordered to be closed due to environmental considerations. Neglect or poor management of social and environmental issues arising or likely to arise from projects has been the primary reason for this. Management of social and environmental impacts by units have to be continuous and proactive. These have a cost aspect which also has to be suitably factored into the project costs. These two, environmental on the one hand and social/ health costs on the other are generally not included in the project cost while implementation or running the same has often resulted in active environmentalists/ NGOs/ local interest groups intervening leading to delays/ postponement and even abandoning of the project causing serious discomfiture to lenders. 11 March 2008. SBI Circular on Credit Policy and Procedures Table 2: Status of the six case study projects
Project Date of Initiation July 2006 Scheduled Date of Commissioning June 2011 Status Financial Closure May 2009 Restructure of Loan No Loan Quality

GMR Kamalanga Energy Athena Demwe Lower HEP Sasan Power

July 2007 February 2006 2006

Lavasa Corporation Lafarge Surma Krishnapatnam UMPP

1997 2006

Commissioned first unit in January 2013 April 2016 Construction yet to begin May 2012 Synchronised (extended to first unit in June 2014) April 2013 Phase 1 in 2010 Construction and all four of Phase I is in phases in 2021 progress 2006 In operation September 2013 Construction yet to begin

No Information Reports of Deterioration No Information Deteriorated

Oct-Dec No 2010 April 2009 Yes (Twice)

Before 2008 for phase I July 2010

Yes

Yes No

Deteriorated Reports of deterioration

Except for GMR Kamalanga Energy Limited and Sasan Power, the other four projects have openly reported deteriorating loan quality. The loan quality in the case of Sasan Power is unexplained but the two-time restructuring of the loan and the escalating project cost is indicative of a financial predicament. While facing cases before the Supreme Court for violation of major environmental legislations, both Lavasa Corporation and Lafarge Surma reflected losses. The Athena Demwe Lower HEP had secured all loans by the last quarter of 2010 but is yet to begin construction. The Demwe Lower HEP reveals serious lapses in risk assessment by public sector banks which sanctioned and transferred large loans to a project which did not even have the most basic clearances from the Government. While the date of sanctioning of loans to Athena Demwe for the Lower HEP is not known for all concerned banks, when the
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Rural Electrification Corporation had sanctioned loans on 06 January 2010 the project had neither environmental nor forest clearance. The case of Athena Demwe narrates a reversal of logic. Instead of sanctioning loans subsequent to following due diligence and the sanction of clearances by relevant Ministries, clearances are being requested to save the deteriorating quality of loans granted in injudicious haste. When Sasan Power achieved financial closure in April 2009, the project did not have clearances from MoEF for mining at the allocated coal blocks. The power projects around the country best demonstrate the effects of poor and haphazard planning. To grab ultra mega power projects (UMPP) in the competitive bidding process, companies quoted low prices allowing little margin to manage costs when impacted with adverse changes. While Reliance Power won the bid for three projects Sasan Power, Coastal Andhra Power and Jharkhand Integrated Power, Tata Power won the bid for Mundra UMPP. Each and every one these four UMPPs are currently before the Central Electricity Regulatory Commission (CERC) for revision of tariff of power. Reliance Power acquired two coal companies holding three coal mines in Indonesia to supply coal for its Krishnapatnam UMPP. The implementation of a new coal export policy by the Indonesian Government in 2011 which more than doubled the price of coal has caused the Coastal Andhra Power project to be indefinitely deferred. Coastal Andhra Power, the Special Purpose vehicle for the Krishnapatnam UMPP, claims that the project is unviable with the new coal prices and that lenders were unwilling to further lend to the project. The state power procurers who were to benefit from the project have imposed a fine of Rs. 400 Cr for failing to implement the project and threatened to encash the bank guarantees provided by the company. Reliance Power is now pursuing a petition with the Central Electricity Regulation Committee (CERC) for revision of tariff not only for the Krishnapatnam UMPP but also for its Sasan UMPP. Unlike the Krishnapatnam and Mundra UMPP, Sasan UMPP is not only dependent on domestic coal but has coal blocks in excess of requirement allotted to the project. The Rs. 19,400 Cr Sasan Power project began with a debt component of Rs. 13,848 Cr, the largest project finance loan in the country at the time of the projects financial closure. While the entire debt was secured by April 2009 from Indian banks, hurried plans for refinancing were announced by mid 2010. The US Exim Bank, Bank of China, China Development Bank and Exim Bank of China refinanced Rs. 10,300 Cr through vendor credit. In January 2013 when Reliance Power filed for revision of tariff with the CERC, it stated that the project was affected due to a change in law and by the depreciation of the rupee. Interestingly, the US Exim Bank initially denied the loan to Sasan Power on the grounds that the annual carbon dioxide emissions from the plant were far higher than the total emissions of all the projects approved by the Exim Bank in 2009. The US Exim Bank has a carbon policy which requires the bank to consider the green house gas emissions from a
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project prior to sanctioning loans. Indian banks on the other hand are in no position to appraise a project on the basis of such crucial impacts. Indian corporates, operating in India and abroad, have been increasingly accessing international debt markets to raise capital. While this is presumably being done to take advantage of the low interest rate in the international markets, in an environment of fluid exchange rate markets, corporates run the risk of incurring losses from adverse movement in exchange rates for their un-hedged exposures. The un-hedged exposures and an eventual increase in interest rates could put pressure on the corporates and eventually spill-over to their lenders. Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead, 16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India In March 2013 Reliance Power reported to again restructure the loan to the Sasan project. Delay in commencing commercial operations required extension in the repayment schedule. And going by media reports, Sasans outstanding loans amounts to Rs. 23,500 Cr (US Exim Bank, Bank of China, China Development Bank and Exim Bank of China, PFC, IIFCL, SBI, REC, and PNB). The project cost has escalated from Rs. 19,400 Cr to over Rs. 23,000 Cr in four years. The project does not yet have stage II Forest Clearance for mining from the Ministry of Environment and Forests! With an enormous cost of Rs. 1,68,000 Cr, Lavasa Hill City project was initiated in 2006. The first phase of the planned city progressed hastily till mid 2010 when the projects non compliance to environmental laws resulted in an order to stop work from the MoEF. Starting then, a stream of irregularities and blatant violations which include irregular use of the Special Planning Authority (SPA) status, construction without permission, illegal chopping down of trees and illegal acquisition of adivasi and ceiling lands were exposed by the affected community and other citizens organisations. As of September 2010, the company had 55 outstanding litigations filed against them. Lavasa Corporation defaulted in the repayment of interest on loans to banks and in the same period ending 2011, Hindustan Construction Company, the promoters of Lavasa, posted a net loss of Rs. 130 Cr and a consolidated debt of Rs. 8100 Cr. Several attempts to restructure the loan with the consortium of lenders at the Corporate Debt Restructuring Cell to prevent it from being treated as a non-performing asset failed, forcing HCC to restructure the loan with individual bankers. The terms of restructuring this loan include a two-year moratorium on the principal amount and interest rate concessions for the first few years. Plagued by numerous controversies and the negative stop-work order from the Environment Ministry, the pace of work at Lavasa Hill city did not pick up. Additionally, the threat of more negative orders from any of the tens of pending cases lurks over Lavasa. Work on the second phase has begun even while the first phase, which was scheduled to be completed by 2010, is still under construction. The delay in completion of the project,
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imposition of various large fines and accumulation of loans has also substantially increased the cost of the project. In the case of GMR Kamalanga project which is sited in a Critically Polluted Area, the International Financial Institution (IFC) channeled the loan through domestic financial institutions thereby skirting its own environmental and social safeguard principles. The affected community and environmental groups allege that the project is in violation of IFCs environmental and social safeguards (termed Performance Standards) and the project faces a complaint filed by the affected community before the Compliance Advisor Ombudsman (CAO) of the International Finance Corporation (IFC). The result of the complaint can be adverse for the project and its lending. Apart from cases against acquisition of land, the communities have also complained to the MoEF regarding the fraudulent EIA and violations of the environmental clearance. As per the October 2011 MoEF circular, in case the environmental clearance granted is based on false information in the EIA report, the environmental clearance could stand cancelled. In the cases of Athena Demwe Lower, Sasan Power, Lavasa Hill City and Lafarge, deteriorating quality of loans sanctioned by financial institutions were used as an argument to pressure for clearances. It is not in the interest or mandate of the Ministry of Environment and Forests to clear a project merely because a consortium of banks sanctioned hundreds of crores to a project without due assessment! Lenders to the Krishnaptnam UMPP refused to extend further installments on the sanctioned loan to the project after the project cost sky-rocketed owing to increase in coal price imported from Indonesia. The project is stalled and seeking revision of tariff with the Central Electricity Regulatory Commission (CERC). Indian Banks are not only lending to projects which are violating fundamental rights of people and crucial laws of the country, but are continuing to support such projects after the violations and adverse impacts are exposed. When Lafarge Surma was taken to Court by the Indian Government for violating one of the most crucial national environmental legislations and defaulted on repayment of loan to international financial institutions due to a stopwork order from the Supreme Court of India, Indian banks unconditionally bailed out the project with short term loans to the company. The banks provided loans to Lavasa Corporation in the absence of a robust mechanism to assess social, environmental and financial risks. But even if one were to accept that the loans were provided before the violations came to light, on what grounds have banks approved another Rs. 600 Cr for work on the second phase of the Lavasa Hill City project? If banks continue their association with such projects in their capacity as lenders, they are nothing but a party to the violations. This inclination of banks to sanction loans in spite of grave adverse impacts of the projects is an evident message to companies and project proponents that they will have unconditional and free access to finance, regardless of the
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risks and violations. By taking statutory clearances for granted in the process of sanctioning loans to projects, financial institutions are reflecting an utter disregard for constitutional and legal statutes instituted by the democratic state. The case studies also corroborate that the assessing, monitoring and regulating of social and environmental impacts from projects by financial institutions is utmost critical to protecting the loans sanctioned by financial institutions to the project. Regardless of the reasons a project cannot operationalise on schedule, the loans sanctioned to the project stand to be impaired. In such cases, are the losses borne by the financial institution or the project proponent or shared between both? And how do banks negotiate recovery of loan with project proponents?

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Chapter TWO
2.1 THE PROJECT FINANCE BUG
With regard to funding development and infrastructure projects, project finance has been the catchphrase of the decade. It is an innovative financing technique that is increasingly preferred and used for long term financing of large infrastructure and industrial projects. According to the International Project Finance Association (IPFA), project finance is defined as the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project. In other words, unlike traditional or corporate financing where lenders provide capital to the company on the basis of sufficient assets on its balance sheets, project finance loans are sanctioned to a Special Purpose Vehicle on the basis of the projected cash flow of the particular project. Repayment of loan is not based on the assets or balance sheet of the sponsoring company but on the projected revenues that the project being funded will generate on its completion. Non-recourse or limited recourse refers to a secured loan50 for which the borrower is not personally liable. So, in case of a default the lender can seize the collateral but the lenders recovery is limited to the collateral. In the project finance mode, project proponents typically create a legally independent subsidiary company, referred to as a Special Purpose Vehicle (SPV), with the narrow purpose of executing a single project - a power plant, a refinery, a highway corridor, a dam, an airport or a mine. The project is financed by the SPV through equity from multiple sponsors and large amounts of debt from a consortium of banks. The creation of an SPV and financing through non-recourse debt protects the assets of the parent company in case of default of loan or bankruptcy, thus allowing optimum risk allocation in favour of the parent company. Project Finance is a fairly new phenomenon in the Indian context. A major push for adopting project finance as a method of financing came in the 1990s but it wasnt until early 2000 that it became the mode preferred by corporations. The countrys pace of growth and infrastructure development alone cannot account for the startling increase in the volume of project finance loans in a short span. In 2005 alone, India's market share in project-financed transactions in the Asia-Pacific region increased from 2.8 per cent to 12.5 per cent. According to Thomson Financial, State Bank of India had moved up from the fifteenth position in 2004 to the first in 2005 in the Asia-Pacific project finance league tables51. State Bank of India (SBI) had helped some 16 Indian infrastructure deals worth USD 2.1 Billion during that period. This was the first time an Indian bank ranked first in project-financed
50 51

A loan backed by the pledging of assets by the borrower. A league table compares institutions or companies, banks in this case, by ranking them in order of ability or achievement to analyze financial data. Companies which collect this kind of data include Dealogic and Thomson Reuters. Thomson Reuters league tables list top financiers in a particular industry. Dealogic's league tables are rankings of investment banks in terms of the dollar volume of deals that investment banks work on.

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transactions in the region. It had been just one year since SBI had set up the Central Processing Cell (CPC) in 2004 at its Mumbai Corporate Office where projects larger than Rs. 2 Cr would directly be taken up for consideration and decided in a month. The CPC was setup to speed up project financing and sanction of loan proposals. Within another four years in 2009, India ranked on top in the global project finance market, ahead of Australia, Spain and the United States, according to a Project Finance International (PFI) study52. The domestic Indian market had raised USD 30 Billion (Rs. 1.38 Lakh Cr) accounting for 21.5 per cent of the global project finance market. This was a steep rise from the USD 19 Billion the Indian market had raised in 2008. In 2009 State Bank of India alone accounted for 67 per cent (USD 20 Billion) of the total debt in the Indian market through 36 deals and 35.2 per cent of the total volume of debt for the Asia-Pacific region. In this period, the SBI had funded or arranged funding for Sasan Power, Adani Power, Sterlite Energy, Vodafone and Unitech among others. The PFI study also revealed that in another first of its kind, investment bank SBI Capital Markets, a subsidiary of State Bank of India, topped the global loan chart beating top French, British and US banks. IDBI Bank, Infrastructure Development Finance Company (IDFC) and Axis Bank were acknowledged as leading financiers in the Asia-Pacific region. Loans to projects floated by Special Purpose Vehicles, which are technically delinked from the parent company, suggest that the loans are given in the absence of substantial collateral. The structuring of loans for projects in this mode does not seem to require the conditional clauses that marked traditional corporate financing. If repayment is primarily structured around the prospective revenues generated by the project, what happens to the loan in case the project does not progress as planned?

2.2 WHAT IS A BAD LOAN WORTH?

A banks strength and its healthy cash flow cycle are dependent on retained earnings which can be reinvested into business. Loans are assets reflected in a banks account books. A loan where instalment or interest is not paid for 90 days is deemed a non-performing asset (NPA). Once an account is classified as an NPA, banks cannot recognise interest from it. Apart from affecting profits in the current period, NPAs affect the net interest income (NII) and net interest margin (NIM)53 of the bank. Sustained NPAs have an effect on the overall competence of the bank - its Capital Adequacy Ratio (CAR)54, profitability, and brand value.
52

The study ranked 224 financial institutions with the sole mandate of lead arrangers of loans. The tables do not include property or real estate sector transactions, corporate loans and those guaranteed by sponsors or governments. 53 Net interest income is the difference between revenues generated by interest-bearing assets and the cost of servicing (interest-burdened) liabilities. Net interest margin is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. 54 CAR or Capital to Risk Assets Ratio (CRAR). is the ratio of a bank's capital to its risk. The Reserve Bank of India

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Paralleled with growth in industry and infrastructure, the NPA of Indian banks, particularly that of the public sector banks (PSB), have been witnessing a steady rise. Warning bells rang in October 2011 when Moody's Investors Service downgraded the State Bank of India's Bank Financial Strength Rating (BFSR) to 'D+' from 'C-'. This downgrade caused an immediate plunge of over 4 per cent in the share market price of the bank. Evidence of the banks increasing non-performing asset and deteriorating asset quality existed before this blow took SBI by shock. In March 2011, the Minister of State for Finance, Shri Namo Narain Meena, reported the gross NPA of Public Sector Banks for the period ending March 2011 at Rs. 71,047 Cr to the Parliament. The gross NPA of State Bank of India for the same period constituted Rs. 33,946 Cr or 32 per cent of total gross NPAs of Indian PSBs. Five months after this downgrade, the State Bank of India publicly declared that it would start to publish photographs and names of wilful defaulters in publications as a last resort to get them to pay their dues. In April 2011, customers of the Corporation Bank who had defaulted on repayment found their photo displayed on life-sized hoardings around cities. This imaginative strategy was meant to shame only individual wilful defaulters into paying back the loan money. According to Ramnath Pradeep, Chairman, Corporation Bank, the banks strategy was not illegal and can be applied onl y to individuals, since in the case of corporate borrowers it is not possible to publish photographs. State Bank did not even breathe about its corporate defaulters at that time. RBI defines a 'wilful defaulter' as a borrower who has defaulted repayment obligations to the lender even while holding the capacity to honour the said obligations or as one who has not utilised the finance for the specific purposes for which finance was availed. It is true that banks are finding it difficult to recover loans in the corporate as well as agriculture and retail segments. But a look at the NPA figures for SBI for the same period ending March 2011 reveals that out of Rs. 33,946 Cr, NPAs in the personal retail segment stood at Rs. 4870 Cr or only 14 per cent of the total. Where then is the rest of the money trapped? The perception that agricultural advances or priority sector lending carry more credit risk than the non-priority sector is entirely misplaced and needs to undergo a change. The smaller borrowers are per se not a cause of stress to the banks; rather it is a bias against them that turns them into weak accounts. Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead 16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India A majority of NPAs are contributed by corporate customers. In September 2011 the Parliament was informed by the Minister of State for Finance, Shri Namo Narain Meena that as of September 2010, over 5600 companies had defaulted to the tune of Rs. 51,000 Cr in

tracks banks to ensure that they can absorb a reasonable amount of loss and also monitors their compliance with statutory capital requirements.

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loans taken from public sector banks. According to the Reserve Bank of India and Credit Information Bureau (CIBIL)55, this included 4043 suit filed56 accounts amounting to Rs. 34,558 Cr and 1628 non-suit filed accounts amounting to Rs. 17,363 Cr. Crisil, a global analytical company, reported that 188 companies in India had defaulted in payment of interest and/ or repayment of principal in 2011-12, as against 105 in the previous financial year. A classic case in point being the Kingfisher Airlines, which alone caused SBI an exposure of Rs. 1700 Cr. Bad loans (or non-performing assets) in Indian banks had risen from Rs. 68,220 Cr in 200809 and Rs. 81,813 Cr in 2009-10 to Rs. 94,084 Cr in 2010-11. By March 201357 the bad loans reached Rs. 1,94,000 Cr! Banks are known to go soft on corporate customers and not take hard stands for realisation of loans in case of default. In cases of financial predicaments large corporations are also allowed by banks to restructure their loans. Any change in the terms and conditions of the loan or credit, especially in respect of its servicing, is called restructuring of loan. Restructuring allows banks to not classify the asset as NPA even in case of default. This technique used by banks to cite lower NPAs and exclude corporations from being in the defaulters list is referred to as evergreening of NPAs. Bad loans are restructured by banks with easier terms such as moratorium on payment, lowered interest rates and longer repayment periods to bail out defaulting corporations. Corporate Debt Restructuring (CDR) is a specialised institutional mechanism for restructuring large exposures involving more than one lender under a consortium of banks. In February 2012, the Indian Intelligence Bureau (IB) warned that the proportion of bad loans of Indian banks could increase from 5 to 10 per cent of their total loans mainly on account of restructured loans. More than half the bad loans fell in the restructured category. Restructured loans are technically not non-performing assets (NPA) but in most cases, it is only a matter of time before restructured loans become NPAs. Banks had resorted to restructuring a large number of impaired loans during the financial crisis in 2008-2009. The restructuring programme, which was based on financial projections, has largely proved to be incorrect today and it is speculated that many of those restructured accounts are now classified as NPAs. Indian banks are seeing a record amount of loans being restructured; with restructured assets standing at 4.68 per cent of the total loans in March 2012. According to data from the RBI, restructured loans were at Rs. 75,304 Cr in March 2009, Rs. 1,36,426 Cr in March
55

The RBI maintains a list of non-suit filed borrowers of banks and financial institutions (FIs), while Credit Information Bureau India Ltd (CIBIL) maintains database on suit-filed accounts of Rs. 1 Cr and above. 56 Suit filed account is one where the lender has filed a legal suit against the borrower. 57 Circular Letter No.27/42/2013/54. All India Bank Employees Association (AIBEA). 03 December 2013.

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2010, Rs. 1,37,602 Cr in March 2011 and Rs. 2,18,068 Cr in March 2012. These figures show that in the three years between March 2009 and March 2012, restructured standard advances grew by nearly 300 per cent. Data from the RBI also indicates that banks are using write-offs to reduce NPAs. The total reduction in NPAs for all banks in India between 2008 and 2013 is Rs. 3230 Billion58. Out of this, Rs. 869 Billion was due to upgradation, Rs. 1297 Billion was due to write-offs and only Rs. 1064 was due to actual recovery. To evade NPAs from reflecting in their books, banks also resort to certain adjustments which camouflage asset quality deterioration. Industry experts have concerned that such adjustments are made on a mutual understanding between corporate clients and banks whereby borrowers make some payment to the bank at the end of every quarter. Once reflected in the accounts of the quarter, this payment is reversed to the borrower. While it is undeniable that disclosing list of defaulters helps to keep track of such cases and ensure that further lending to a defaulter is avoided, why are banks providing cover to their corporate clients whose loans constitute a major bulk of bad loans? Banks contract bulk business from corporate accounts. For this and other inexplicable reasons, corporate accounts even with deteriorating asset quality are accommodated. Debt restructuring as a way out can only apply to genuine repayment problems arising out of situations which are beyond the control of the management. But the recent spate and volume of debts being restructured lead us to believe that the restructuring mechanism is misused by several corporations to manage their financial crisis. In August 201259, the RBI Deputy Governor, KC Chakrabarty, said, "While clearly there is cause for concern given the pace and quantum of restructuring over the last few years, the concerns are aggravated by the fact that the restructuring is neither being permitted in a transparent and objective manner by banks... Nor is it being resorted to in a nondiscriminatory manner".
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Write offs were initially introduced as a tool for banks to manage their tax liabilities on impaired assets. However, they subsequently emerged as a tool for banks to manage their reported gross NPA numbers . Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead 16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India 59 Corporate Debt Restructuring - Issues and Way Forward. Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the Corporate Debt Restructuring Conference. August 2012.

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Data from the RBI also supports the argument that banks are going easy on their corporate borrowers even while facing most strain from them. The ratio of restructured accounts to gross advances is the highest for the industries sector at 8.24 per cent (with medium and large industries sector standing at 9.34 per cent). The ratio for agriculture stood at 1.45 per cent and services stood at 3.99 per cent (with micro and small services being 0.94 per cent). While the ratio stood at 2.24 per cent for priority sector60 advances, it stood at 5.83 per cent for non-priority sector loans. According to the August 2012 RBI report, Statistics on restructured advances shows that the medium and large segments account for over 90 per cent of restructured accounts while the share of micro and small segments keeps dwindling over the years. The ground reality is that advances to smaller borrowers, with genuine needs get overlooked and slip into NPA which enables building of a perception that the quantum of non-performing assets is more in the case of small borrowers and hence promotes a rush towards large-ticket advances, ignoring the basic fact that the lower NPAs amongst larger borrowers is primarily on account of extensive restructuring/ write offs of such accounts. Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead 16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India Another matter of great distress is that the share of bad loans and restructured loans is higher for public sector banks as compared to their private sector competitors. Out of the total bad loans of Rs. 1,94,000 Cr in Indian banks in March 2013, the share of bad loans in public sector banks is Rs. 1,64,461 Cr or 85 per cent! As of August 2012, the credit growth rate for private sector banks at 19.88 per cent was higher that the credit growth rate for public sector banks which stood at 19.57 per cent.

60

Priority sector includes agriculture, small scale business, small business/ service enterprise, micro credit, education loan, housing loan.

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However, restructured accounts grew at a compound annual growth rate of 47.86 per cent in public sector banks as against 8.12 per cent for private sector banks. Further, as on March 2012, the ratio of Restructured Standard Advances to Total Gross Advances is highest for PSBs at 5.73 per cent, while the ratio is significantly lower for private and foreign banks at 1.61 per cent and 0.22 per cent, respectively. According to KC Chakrabarty, public sector banks bearing a disproportionate load of restructured assets indicate that the PSBs have not been as judicious as the private sector and foreign banks in the use of restructuring as a credit management tool. Between 2009 and 2013, the impaired assets ratio (which is the ratio of gross NPAs, restructured accounts and cumulative write offs to total advances) rose from 6.8 per cent to 12.1 per cent in the case of PSBs. In contrast, the ratio fell for new private sector banks and foreign banks and stood at 5.3 per cent and 6.4 per cent respectively in March 2013. Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead 16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India This data from the RBI establishes that public sector banks demonstrate an unprofessional bias towards their corporate borrowers and that restructuring of accounts is increasingly being resorted to avoid classification of accounts as NPA. This bias is also suggestive of corrupt practices within public sector financial institutions; which however can thrive only in the absence of stringent in-built mechanisms for due diligence and risk analysis. Based on a July 2012 report of the RBI Working Group to review the existing prudential guidelines on restructuring of advances by banks and financial institutions, the Reserve Bank announced new norms for restructuring of loans in January 2013, which increased the provisioning on restructured loans. Provisioning is an expense set aside as allowance for bad loans. The new norms will come into effect in 2015. Big business houses that secured huge loans from public sector banks post 2008 financial crisis, but defaulted on repayments or charted an escape route through multiple restructuring of bad loans, have now come under Central Bureau of Investigations scanner for suspected wilful misappropriation of public money, running into thousands of crores. CBI opens probe into firms defaulting on public sector bank loans, 16 August 2013, The Hindu The Central Bureau of Investigation (CBI) initiated an enquiry of defaulters of big loans from public sector banks in August 2013. According to the CBI Chief, Ranjit Sinha61, a bulk of the NPA is from the top 30 accounts which is learnt to be running into thousands of crores. The CBI is also scrutinising cases of loan restructuring by companies. Speaking at the 5th Annual Conference of Chief Vigilance Officers of Banks and Financial Institutions in August 2013, the
61

CBI starts inquiry against big loan defaulters. 21 August 2013, Times of India.

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CBI Chief, Ranjit Sinha62 pointed out that there appears to be reluctance on the part of banks to declare bad accounts as frauds despite there being clear cut manifestations. With rapidly deteriorating asset quality, the banks profit margins are affected , they go through capital crunch and fail to maintain the mandated Capital Adequacy Ratio. This can affect the resilience of banks and expose them to succumb in unforeseen circumstances. While private banks primarily look to the market for recapitalisation, Government of India pumps capital into public sector banks to help them regain a safe capital to risk assets ratio. The process of nationalisation of banks in India guaranteed that the Indian Government will fulfil all requirements of PSBs in the event of a breakdown . For example, the chain of events following concern over State Bank of Indias weakening asset quality, the downgrade by Moody's Investors Service in October 2011 and plunging of the banks market share value, culminated temporarily the very same month with a commitment from the Government of India to infuse Rs. 3000 - 4500 Cr in SBI. While SBIs asset quality had deteriorated primarily due to indiscreet use of project financing for its corporate accounts, the means for revival of asset quality is through tax payers money! Budgetary allocations for capitalisation of PSBs have been on the rise. The Government infused more than Rs. 15,517 Cr in 2012-13, Rs. 12,000 Cr in 2011-12 and Rs. 20,000 Cr in 2010-11 in state-owned banks to help them maintain a capital adequacy ratio of more than 8 per cent. Along with in-principle approvals for need-based capital infusion to PSBs for the next five years, the Union budget of 2013 committed to infusion of Rs. 14,000 Cr in 2013-14. According to C. P. Chandrasekhar63, Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, the Government has thus far infused Rs.743 billion into the public banking system, with much of it having been provided since 2010.

2.3 BANKING SECTOR REFORMS

The banking sector in India was nationalised in two phases in 1969 and 1980 to enhance their role in the advancement of the economy. During this period, twenty large commercial banks were nationalised allowing the Government of India control of over 90 per cent of the banking industry. The liberalisation policy adopted by the Indian Government in 1991, as a result of GATT (General Agreement on Trade and Tariffs) and Structural Adjustment Programme, compelled the formation of a committee to explore banking sector reforms. The first such committee, formed in August 1991 and headed by M. Narasimhan 64, brought out its report in November 1991. This was followed by the formation of another committee
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Press Release. 21 August 2013. Central Bureau of Investigation. http://cbi.nic.in/pressreleases/pr_2013-08-21-1.php 63 The Remaking of Indian Banking, 29 November 2013, C. P. Chandrasekhar, The Hindu 64 M. Narasimham has served as Governor of the Reserve Bank of India, Secretary in the Ministry of Finance, India's Executive Director at the World Bank and later at the International Monetary Fund.

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headed by M. Narasimhan in 1998 to review the interim progress of banking sector reforms. The Narasimhan Committee of 1991 recommended for increased autonomy in banking, deregulation of interest rates, reformation of RBIs role- segregation of its role as regulator and owner of banks, structural reorganisation of banks including merging of banks, creation of asset reconstruction companies to take over bad loans from banks, proper system to identify and classify Non-performing Assets (NPA), reduced Statutory Liquidity Ratio (SLR)65 and Cash Reserve Ratio (CRR), raising of capital adequacy norms, review of banking laws and opening up of sector to private domestic and foreign banks. The implementation of recommendations of the Committee, which began in 1992, had farreaching implications resulting in the granting of an autonomous status to banks, divesting of shares held by RBI66 in Indian banks, eliminating role of Government of India in regulating banks (leaving the RBI as sole regulator), merging of several Indian banks, and implementing Securitisation and Reconstruction of Financial Assets and Enforcement of security Interest Act 2002. The Narasimhan Committee was however criticised for targeting enhanced growth without focus on equitable growth or providing for poverty alleviation measures. One of the immediate outcomes was the consent from the Reserve Bank of India for the setting up of private banks. These private banks are referred to as the new private banks 67, to tell apart from the old private banks68 that existed before the 90s. Subsequently, foreign banks were also permitted to set up direct operations in the country. According to the 2012 records of the Ministry of Finance there are 26 public sector banks 69, 20 private banks, 82 regional rural banks, and 30 foreign banks operating in India. In addition, development financial institutions (DFI)70 and public financial institutions (PFI)71 promoted by the Government of India provide financial service, usually long term loans at concessional
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SLR is the amount a bank is required to maintain in the form of cash, gold and Government and other approved securities. CRR is the amount a bank is required to hold in the form of cash with the RBI. 66 The shares were transferred to the Government of India. 67 The new private banks include Axis Bank, Centurian Bank of Punjab (acquired by HDFC in 2008), Development Credit Bank, HDFC Bank, ICICI Bank, Induslnd Bank, Kotak Mahindra Bank and Yes Bank. 68 The old private banks include Bank of Punjab (merged with Centurion Bank and later acquired by HDFC), Catholic Syrian Bank, City Union Bank, Dhanlaxmi Bank, Federal Bank, ING Vysya Bank, Jammu & Kashmir Bank, Karnataka Bank, Karur Vysya Bank, Lakshmi Vilas Bank, Nainital Bank, Ratnakar Bank, South Indian Bank, Tamilnadu Mercantile Bank and United Western Bank (acquired by IDBI in 2006). 69 Public sector banks include State Bank of India, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce, Punjab & Sind Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India (UBI), Vijaya Bank and IDBI Bank Limited. 70 DFIs include Industrial Finance Corporation of India (IFCI), ICICI, Life Insurance Corporation (LIC), Unit Trust of India (UTI), IDBI, Rural Electrification Corporation (REC), National Bank for Agriculture and Rural Development (NABARD), Housing and Urban Development Corporation (HUDCO), Industrial Investment Bank of India (IIBI), Power Finance Corporation (PFC), Infrastructure Development Finance Corporation (IDFC) and State Financial Corporations (SFC). 71 A 1974 amendment to the Companies Act 1956 allows the Government of India to notify certain DFIs as Public Financial Institutions.

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interest rates, refinancing and investment options in particular sectors which are neglected or avoided by other financial institutions.

2.4 REWRITING DEVELOPMENT FINANCE - THE CHANGING TRENDS

The banking sector reforms of the 1990s changed the scope of finance and financial institutions in India. The role and significance of banks today is very different from that in the times of regulated economic growth of the pre-liberalisation era. Industry is de-licensed, barriers impeding growth are being removed and the public sector is rapidly being privatised. Sensitive sectors, those which essentially serve larger public interest, such as infrastructure, power, mining, food and water have been opened up for private capital. The banks operate in an atmosphere where accelerated growth is the priority and wildly erratic competitive markets are influencing the economy. Besides, the terms of lending to projects have been re-designed and huge sums are bet on sheer brand value of a company, the political clout of its promoter and the credibility of a corporation. Over the last decade Indian banks have tremendously boosted their capacity to fund development and infrastructure projects both within the country and in other developing countries. Alongside, global markets have been allowed to dip into our economy by facilitating foreign direct investment and external commercial borrowings72. Borrowings by Indian companies from overseas banks, meant to take advantage of lower interest rates, come with its share of conditionality. The August 2013 Central Electricity Authority report on performance of power equipment imported from China found the equipment to be substandard. Low interest loans from Chinese banks plays an important role in the import of such equipment by Indian power producers. The project finance epidemic is also encouraging public sector development financial institutions to lend to infrastructure and development projects at the cost of overstepping their very purpose and mandate. For instance, HUDCO (Housing and Urban Development Corporation Limited) was set up in 1970 as a fully-owned enterprise of the Indian Government for supporting and promoting housing projects aimed at low-income families in urban and rural areas. Similarly the Rural Electrification Corporation Limited (REC) was set up in 1969 as a public sector enterprise under the Ministry of Power to finance and promote rural electrification projects all over the country. RECs end is to provide financial assistance to State Electricity Boards, State Government Departments and rural electric cooperatives for rural electrification projects. In 2011 HUDCO financed three private power generation and related projects and REC regularly finances large private sector power projects including Athena Demwe Power, Sasan Power and Krishnapatnam UMPP. Institutions such as the HUDCO and REC were established to mobilise resources in the interest of strengthening public infrastructure and facilities, especially in rural areas.
72

ECB is an instrument that facilitates Indian companies to borrow from financial institutions outside India.

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Facilitating production of power by private companies is not the mandate of either institution. Likewise NABARD73, whose mission is to promote sustainable and equitable agriculture and rural prosperity through effective credit support and related services, was pulled up by the RBI in late 2012 for providing low interest soft loans to large private companies under schemes that were meant for small scale enterprises. Indian bankers are walking down the footprints of international financial institutions (IFI), tracing the financial trends established by them in the last two decades. The amount of capital secured from the International Financial Corporation for projects has considerably reduced over the years. However, by lending small amounts to a project, and its credibility in the process, IFC is setting trends for domestic financial institutions. The World Bank Group (WB) and the International Monetary Fund (IMF) were instrumental in breaking open essential sectors for private industry in developing countries. Banking norms in the country have since been eased to facilitate freer flow of finance to private corporations. Further pushing the boundaries, the private sector lending agency of the World Bank Group, the International Finance Corporation (IFC), has started using domestic financial institutions as Financial Intermediaries74 (FI) to channel finance to projects. The World Bank Group for instance is committed to the cause of climate change and claims to be moving away from funding fossil fuel based projects. In 2007 the IFC sanctioned a USD 1 Billion loan to India Infrastructure Fund (IIF) to invest in the energy and utilities sector, transport infrastructure sector and telecommunication infrastructure sector. This money was used to finance GMR Kamalanga Energy Limiteds 1400 MW coal-based thermal power plant in Odisha, Adhunik Power and Natural Resources Limiteds 540 MW coal-based thermal power plant in Jharkhand and three of Essar Powers multi-fuel power projects. Financial intermediaries are being used in cases where association with projects would potentially taint the image of the World Bank Group or be a violation of IFCs environmental and social safeguard policies. The use of FIs in project finance is creating a complex web of financial relations, masking the source of capital and establishing nontransparent and unaccountable pools of money.

2.5 RESERVE BANK OF INDIA (RBI)

The Reserve Bank of India, established under the colonial regime in 1935, is the supreme body with significant powers to develop the Indian Financial System. Until 1949, when the RBI was nationalised, it operated as a shareholder's bank. The Reserve Bank of India has the sole right to issue currency notes, is the banker to the Government, the banker to banks75, it oversees payments system, maintains the official rate of exchange, supervises and regulates
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As farmers suffer NABARD offers soft loans to corporates. 10 December 2012. The Hindu A financial intermediary is typically a bank or financial institution or a common fund, which receives bulk amounts of money from large international banks, public sector banks or the government to disburse to various sub-projects. 75 Scheduled banks are required to maintain a cash balance equivalent to three per cent of their aggregate deposit liabilities with the Reserve Bank. Banks can borrow from the Reserve Bank in times of banking crisis.

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financial institutions and controls credit and monetary policy. RBI is also the exclusive authority to regulate and supervise Indian banks, especially that of the public sector. Reserve Bank Act 1934, and the Banking Regulation Act 1949 give the RBI wide powers of supervision and control over commercial and co-operative banks. The Board for Financial Supervision (BFS), constituted in 1994, remains at the core of Reserve Banks supervisory and regulatory initiatives76. The RBI achieves much of the regulatory work, especially of financial institutions, through regular circulars on particular concerns. Circulars include subjects of disclosure norms, exposure norms, lending to priority sector, external commercial borrowings, income recognition, asset classification, wilful defaulters, norms for raising resources, classification and reporting of fraud, non-financial reporting, debt restructuring, securitisation, prudential norms, corporate social responsibility, etc. The approach of the existing regulative framework, enforced primarily through circulars, deals with different issues in isolation thereby allowing banks and corporations to circumvent guidelines and escape with little consequence. More importantly, the existing structure is lacking a credit risk management framework for assessing and managing environmental and social risks in project finance and development finance transactions. A study by Boston Consulting Group released in August 2011 rightly pointed out that Indian banks need a more enabling regulatory environment to be at par with global (banking) standards. The absence of a lending framework to evaluate environmental and social impacts of projects impedes understanding of the role of financial institutions on loss of livelihood, displacement, forced relocation of communities, resource depletion, environmental devastation, climate change and global warming that plague the globe. In December 2007 the Reserve Bank of India (RBI) issued a circular77 which asked banks to act responsibly and to contribute to sustainable development. The circular, in a first, referred banks to existing mechanisms such as the Equator Principles and stressed on the need for Indian banks to evolve institutional mechanisms to ensure sustainability. RBI proposed that banks commit to sustainability, accountability, transparency, to do no harm and bear full responsibility for the environmental and social impacts of their transactions. Though the circular is an initiative in the right direction, it served no further purpose. The RBI agrees on the basic premise that responsible banking is the new approach born out of the new market realities, that all these (environmental and social) impacts have ramifications to businesses and that there is much that banks can do to assist efforts to achieve sustainability. Banks are asked to integrate concepts of Corporate Social Responsibility (CSR) and sustainability with their business strategy. The ten point action plan at the end of the circular calls for commitment to sustainability, responsibility, accountability, transparency and to do no harm, without suggesting a framework within
76

Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. 77 Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting- Role of Banks.

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which these goals can be achieved. Expecting banks to achieve sustainable and responsible banking through CSR initiatives is akin to expecting corporations with a solid CSR policy on their website to not harm people and environment on the ground. Conflict of Interest at the Reserve Bank of India The Bank's affairs are governed by a central board of directors. The constitution of this Board is still governed by the colonial Reserve Bank of India Act 1934 and members of the board are appointed by the Government of India for a period of four years. The Board, headed by a Governor, has four Deputy Governors and fifteen non-official members. The non-official members include four representatives from local Boards headquartered at Mumbai, Kolkata, Chennai and New Delhi, one from within the Government, and a maximum of ten experts from various fields. In the present Board of Directors of the RBI78, five out of the ten positions in the expert category are occupied by persons directly representing corporate interests. The non-official members include Azim Premji who is the Chairman of Wipro Limited and member of the Indo-UK and the Indo-France CEOs Forum, G.M. Rao who is the Chairman of GMR Group, Nachiket M. Mor who has been on the Boards of ICICI and Wipro, Y.C. Deveshwar who is exChairman of ITC and member of the UK-India CEOs Forum and Kiran Karnik who is exPresident of NASSCOM and an Independent Director on the Board of a few companies. Past board of directors at the Reserve Bank of India also show similar trends and include Kumar Mangalam Birla of Aditya Birla Group, Ashok Ganguly of Hindustan Lever, Bhai Mohan Singh of Ranbaxy, D. Jayavarthanavelu of Lakshmi Machine Works, D. S. Brar of Ranbaxy, Jamshed Jiji Irani of Tata Sons, Lakshmi Chand of Essel Group, Narayana Murthy of Infosys Technology, Suresh Krishna of Sundaram Fasteners and TVS Group, Suresh Kumar Neotia of Ambuja Cement, Sanjay Labroo of Asahi Glass, Ratan Tata of Tata Group, Kushal Pal Singh of DLF and H. P. Ranina, a corporate tax lawyer. Individuals who hold large stakes and interests in private corporations are at the same time occupying the highest positions at the Reserve Bank of India, the supreme body to govern the Indian financial system. A case in point is Kumar Mangalam Birla, Chairman of the Aditya Birla Group who was on the Board of the RBI when Aditya Birla Nuvu of the Aditya Birla Group applied for a new banking license with the Reserve Bank of India. The corporations which seek financial benefits from public sector banks have their representatives posted at the board of the RBI, which regulates the banks. Apart from the duties and powers designated to a Director, the position holds discretionary powers which could very well be used for vested interests. In the influential position as Director of RBI, individuals also gain greater power and authority to push for relaxation of norms to enable growth on behalf of the corporate houses they represent.
78

Refer to Annexure 1 for complete list and profile of RBI Directors.

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Chapter THREE
3.1 PUBLIC SECTOR BANKS - A PANDORAS BOX!
For the purpose of this study, eleven public sector banks and financial institutions79 are considered for detailed analysis. The banks include the State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI), Canara Bank (Can), Union Bank of India (UBI), Indian Bank (IB), Corporation Bank (CB), Central Bank of India (CBI), State Bank of Mysore (SBM) and Life Insurance Corporation (LIC). Table 3: Basic statistics of the eleven public sector banks
Bank Market Cap80 (in Cr) 1,38,451.30 26,537.90 28,696.30 18,270.10 17,691.90 10,776.30 7,953.60 6,003.50 5,799.00 2,277.60 12,846.00 Earnings Revenue Net Aggregate Total Total 81 Per Share (in Cr) Income Deposit Loan NPA (in Rs) (in Cr) (in Cr) (in Cr) (in Cr) 184.31 1,20,873 11,713 10,43,647 8,67,579 39,676 154.02 40,631 4,884 3,79,588 2,93,775 8,720 127.40 33,096 5,007 3,84,871 2,87,377 4,465 49.85 31,802 2,678 3,19,413 2,49,733 5,894 74.10 33,779 3,283 3,27,054 2,32,490 4,032 34.07 23,477 1,787 2,22,869 1,77,882 5,450 39.57 13,463 1,836 1,20,804 90,324 1,851 101.67 14,510 1,506 1,36,142 1,00,469 1,274 5.95 20,545 535 1,96,173 1,47,513 7,273 78.88 5,598 369 1,503 - 2,96,325 3,692

SBI PNB BoB BoI Can UBI IB CB CBI SBM LIC

* Figures provided for market cap are the average of daily figures between April & September 2012 sourced
from Business Today. http://businesstoday.intoday.in/bt500/index.jsp?compid=1&type=COMP&year=2012 The other information is sourced from the 2011-12 annual reports of the respective banks.

Researchers of this report filed applications82 under the Right to Information Act 2005 with eleven public sector banks - State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI), Canara Bank (Can), Union Bank of India (UBI), Indian Bank (IB), Corporation Bank (CB), Central Bank of India (CBI), State Bank of Mysore (SBM) and Life Insurance Corporation (LIC). The information provided by the banks points to alarming trends in project finance and sanction of loans within public sector banks. It corroborates with arguments such as PSBs undeserving bias towards private sector corporations, steep increase in non-performing assets on corporate loans and over exposure to risky sectors.

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Despite recognising the need to study in detail the trends within public and private sector banks, this report being a pilot initiative focuses only on public sector banks. 80 Market capitalisation (or market cap) is the total value of the issued shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. 81 Earnings Per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. EPS is an important variable in determining a share's price. 82 Refer to Annexure 2 for questions posed to banks and the responses provided.

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State Bank of India is Indias largest commercial bank by assets, profits, deposits, branches and employees. The amount of money lent by State Bank of India to companies, especially to the private sector, which grew over five times from Rs. 58,467 Cr in 2003-04 to Rs. 2,96,362 Cr in 2010-11, is unparalleled in the industry. Table 4 lists the volume of loans sanctioned by four different public sector banks, including SBI, to Public Sector Undertakings (PSU)83 and Private Sector Companies (PSC). Table 4: Loans sanctioned by LIC, SBM, CBI and SBI to public sector undertakings (PSUs) and private sector companies (PSC) [Amount in Crores]
Financi al Year Total loan to PSUs & PSCs 1931 2720 4235 5776 3658 1761 LIC SBM CBI SBI % of % of Total loan % of % of Total loan Loan loans to loans to to PSUs & loans to loans to PSU & to PSCs PSUs PSCs PSCs PSUs to PSCs PSCs Nil 100 8233 73 27 64558 296362 Nil 100 9081 87 13 52177 230521 33 67 8154 78 22 50645 205723 47 53 8870 78 22 - 158214 93 7 - 160956 97 3 - 133000 74350 58467

2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04

In the five years between 2005-06 and 2010-11, Life Insurance Corporation scaled up loans to private sector companies from 3 to 100 per cent. In 2010-11, the entire bulk of its Rs. 1931 Cr loan to companies went to the private sector while the public sector undertakings which received up to 97 per cent of loans in 2005-06 did not receive any loans in the last years. In the year 2010-11, Union Bank of India (UBI) gave out Rs. 36,549 Cr in loans to companies with 49.64 per cent to public sector undertakings and 50.36 per cent to private sector companies. In the same year, Bank of India (BoI) loaned Rs. 1,29,810 Cr to companies, out of which as much as 77.37 per cent went to private sector companies.

83

Public Sector Undertakings are companies where the government holds the majority of shares. Private sector companies are those floated by private individuals or business houses.

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In their response to RTI queries, LIC stated that they provide loans only to public limited companies84 in the private sector. SBI however not only provides loans to both public limited and private limited companies in the private sector, the share of loans to private limited companies have greatly increased since 200304. Out of the total of Rs. 2,96,362 Cr to private sector companies in 2010-11, Rs. 1,36,577 Cr (46 per cent) was sanctioned to private limited companies. The NPA on loans to private limited companies is also greater than the NPA on loans to public limited companies in the private sector. In 2010-11, out of the total NPA of Rs. 9217 Cr on loans to private sector companies, Rs. 5828 Cr (63 per cent) were from loans to private limited companies. Table 5: SBIs non-performing assets in public sector undertakings and private sector companies
Financial Year State Bank of India [Amount in Crores] Total NPA on loans to Total NPA on loans to public private sector companies sector undertakings (PSUs) 9217 6 6822 235 4150 163 3423 91 3107 149 3430 33 5334 90 5620 109

2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04

In the eight year period when loans sanctioned by State Bank of India to private sector companies increased fivefold from Rs. 58,467 Cr to Rs. 2,96,362 Cr, the non-performing assets on its loans to private sector companies nearly doubled from Rs. 5620 Cr in 2003-04 to Rs. 9217 Cr in 2010-11. On the other hand, the banks non-performing assets on its loans to public sector undertakings reduced drastically from Rs. 109 Cr to Rs. 6 Cr. The banks total NPA in public sector undertakings for the eight years is Rs. 876 Cr as compared to Rs. 41,103 Cr in private sector companies.

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Private sector companies can be private limited or public limited. A private limited company is owned by individuals and its shares cannot be traded on the stock market. A public limited company can trade on the stock market to raise capital and its shares are freely transferable.

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Information from Indian Bank and State Bank of Mysore resonate similar trends of rising NPAs on loans to private sector companies. For five straight years between 2006-07 and 2010-11 Indian Banks NPA on loans to public sector undertakings were nought. The nonperforming assets in Union Bank of India and Bank of India are much larger than that for Indian Bank and State Bank of Mysore as shown in Table 5. Table 6: IB and SBMs non-performing assets in public sector undertakings and private sector companies [Amount in Crores]
Financial Year
2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05

Public sector undertakings Indian Bank SBM Nil 3 Nil 3 Nil 3 Nil 3 Nil -

Private sector companies Indian Bank SBM 740 251 510 208 459 102 486 133 546 164 179 187

Life Insurance Corporation refused to provide the information on its non-performing assets; Canara Bank, Central Bank of India and Punjab National Bank claimed not to have separate figures for NPAs on loans to companies. Bank of Baroda provided annual figures for total NPAs without any further sectoral classification. Corporation Bank provided information for this section but used terms of public sector undertakings and private sector company interchangeably with public limited company and private limited company, reflecting either a lack of clarity on catergorisation of loans or a deliberate attempt to misrepresent facts.

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Table 7: Non-performing assets in Union Bank of India and Bank of India

Financial Year 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 NPA [Amount in Crores] UBI BoI 3623 4357 2671 4481 1923 2190 1657 1783 1873 1930 2098 2219 2878 3451

The figures given by SBM show that loans sanctioned to companies have not jumped in short periods of time and the bank has remained fairly consistent in the amount and percentage of loans sanctioned to public sector undertakings and private sector companies for the period between 2007-08 and 2010-11. However, table 8 shows that the losses suffered by SBM between 2005 and 2011 on account of loan default correspond proportionately to the non-performing assets on loans sanctioned to private sector companies. This amount is also the loss in capital liquidity at the bank for that financial year. State Bank of Mysore is the only bank among eleven to provide figures for losses suffered by bank on account of loan default. Table 8: Losses suffered due to loan default by State Bank of Mysore [Amount in Crores]
Financial Year
2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05

NPA in public sector NPA in private Losses suffered on undertakings sector companies account of loan default 3 251 396 3 208 295 3 102 239 3 133 270 164 306 179 309 187 -

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Table 9: Sectoral increase and decrease in loans and NPAs in the eight year period between 2003-04 and 2010-11 along with loans and NPA for 2010-11 at SBI [Amount in Crores]
Sector Mining of Coal Mining / Extraction/Quarrying (incl coal) Manufacturing of Food Product Manufacturing of Beverages Manufacturing of Tobacco Products Manufacturing of Textiles Manufacturing of Apparel: Garment, Fur Tanning, Manufacturing of Leather & Leather Products Manufacturing of Wood & Plywood Manufacturing of Paper & Paper Products Publishing, Printing & Recorded Media Power Plants (coal, petrol, nuclear) Manufacturing of Chem & Chem Product Manufacturing of Medicinal Products Manufacturing of Rubber & Plastic Products Manufacturing of Non Metallic Products Manufacturing of Basic Metals (Steel & Non Ferrous) Manufacturing of Fabricated Metal Products Manufacturing of Machinery & Equipments Manufacturing of Office & Computer Machinery Manufacturing of Electrical Machinery & Apparatus Manufacturing of Radio, TV & other Communication Equipment Manufacturing of Surgical, Optical & Watches Manufacturing of Motor Vehicles & Trailers Manufacturing of other Transport Equipment Manufacturing of Furniture Recycling of Metal Waste Electricity, Gas, Steam and Hot Water Supply Distribution of Water Construction (Infrastructure & other) Loans > 16 times > 2 times > 7 times > 5 times > 8 times > 5 times > 5 times > 3 times > 5 times > 6 times > 2 times > 37 times > 2 times > 6 times > 5 times > 5 times > 8 times > 3 times > 12 times > 2 times > 4 times < 0.13 times > 5 times > 6 times > 2 times > 5 times > 10 times > 8 times > 88 times > 7 times NPA > 3 times > 2 times > 3 times > 5 times < 12 times > 1.04 times > 5 times < 3 times > 4 times > 6 times > 1.4 times > 22 times > 1.3 times > 1.1 times > 2 times > 2 times > 2 times > 1.03 times > 6 times > 5 times < 0.6 times < 3 times > 2 times > 3 times < 2 times > 5 times < 3 times < 11 times > 25 times > 5 times Loans in 2010-11 880 11,999 25,446 3,352 470 30,690 5,451 2,016 902 4,924 870 22,298 9,890 7,493 7,246 8,192 46,515 3,142 14,918 702 10,291 101 628 4,660 4,528 9,514 90 22,994 214 45,995 NPA in 2010-11 21 209 968 313 2 954 413 35 59 573 102 159 564 108 307 183 1,561 163 498 126 224 2 41 108 46 731 2 68 4 598

* > refers to the number of times the loan has increased < refers to the number of times the loan has reduced

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While State Bank of Indias loans to the private sector in the eight years between 2003-04 and 2010-11 grew over five times, the share of loans grew 37 times in the power industry, 16 times in coal mining industry, 8 times in steel and electricity industry, 7 times in construction and infrastructure and food manufacturing industry, 5 times in textiles industry and 2 times in mining and extraction and chemical industry. Table 10: Distribution of SBIs loans to private sector companies in selected sectors. [Amount in Crores]
Financial Year Mining of coal Mining / extraction/ quarrying (incl coal) Manufa cturing of food product Manufa cturing of textiles Power plants (coal, petrol, nuclear) Manufa cturing of chem & chem product Manufacturi ng of basic metals (steel & non ferrous) Electricity, gas, steam and hot water supply Constru ction (infrastr ucture & other) Total (loan to private corporati ons)
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2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04

880 942 2930 867 613 415 335 56

11999 12471 8461 8001 4143 2824 5263 5570

25446 22102 18474 14018 9697 7925 6077 3877

30691 24883 22747 19110 15934 12041 8465 6320

22298 23603 15672 4293 7328 6875 942 601

9890 10264 10495 11381 9897 8891 6908 4823

46515 34647 27748 20327 18015 12895 8815 5580

22994 13845 10853 7605 5851 3733 3715 2772

45995 36478 36479 23695 13085 10332 8230 6427

305534 252820 219631 161348 133635 101905 77426 53534

SBI has expanded massively and most prominently in power and allied coal mining sector along with distribution of water, recycling of metal waste, manufacturing of machinery and equipments, manufacturing of basic metals, construction and infrastructure and manufacturing of food. The same period in which SBIs loans to the power sector grew 37 times the sector was facing a multitude of problems mainly linked to the unpredictability, unavailability and high cost of coal. Coal mining is fraught with scams and large sized power projects around the country stand stalled with no clear-cut road map for progress. The crisis in the inflated power industry is reflected in the steep rise of non-performing assets in the sector on SBIs books.

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Please note that this total indicates the total of loans provided by SBI to the different sectors mentioned and are marginally different from the figures for total loans by SBI to private sector companies provided in Table 4.

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Ironically, the banks were found to be lending more to sectors that had high impairments, pointing to possible lacunae in credit appraisal standards. For example, while the Compounded Annual Growth Rate (CAGR) of credit for the period 2009-2012 for the banking sector was 19 per cent; the segments like iron and steel, infrastructure, power and telecom witnessed much higher credit growth despite the impaired assets ratio for these segments being significantly higher. Two Decades of Credit Management in Indian Banks: Looking Back and Moving Ahead, 16 November 2013, Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India The highest ratio of non-performing assets of Rs. 1561 Cr on loans to private sector companies in 2010-11 lies in the manufacturing of steel and non-ferrous metals sector followed by Rs. 968 Cr in food manufacturing, Rs. 954 Cr in textiles, Rs. 598 Cr in construction, Rs. 564 Cr in chemical manufacturing, Rs. 209 Cr in mining and extraction, Rs. 159 Cr in power, and Rs. 68 Cr in electricity. However, the NPAs in the period between 200304 and 2010-11 increased the most, 25 and 22 times, in distribution of water and power sector followed by a 6 time rise in paper and paper products and manufacture of machinery and equipment, 5 time rise in construction and infrastructure, beverage, garment, office and computer machinery and furniture industry. The NPAs tripled in the coal mining and food manufacturing industry, doubled in mining and extraction and steel industry, and marginally increased in the textiles and chemical industry. Table 11: Distribution of SBIs NPA on loans to private sector companies in selected sectors [Amount in Crores]
Financial Year Mining of coal Mining / extraction/ quarrying (incl coal) Manufa cturing of food product Manufa cturing of textiles Power plants (coal, petrol, nuclear) Manufa cturing of chem & chem product Manufacturi ng of basic metals (steel & non ferrous) Electricity, gas, steam and hot water supply Constru ction (infrastr ucture & other) Total NPA

2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04

21 27 13 17 9 96 12 8

209 47 82 89 74 137 61 124

968 728 517 489 352 391 424 347

954 966 688 401 504 734 833 909

159 18 12 30 25 6 3 7

564 427 441 463 421 334 503 443

1561 735 614 597 458 555 799 741

68 88 58 28 7 9 864 758

598 533 1884 165 145 193 229 111

9123 6637 6219 3720 3430 3920 5866 5013

The exposure to different sectors varies with banks and for instance, NPAs in the gems and jewellery sector is very high in certain banks. The figures show highest growth of NPAs in construction and infrastructure, followed by chemical industry, iron and steel, manufacturing, textiles, paper and paper products. Bank of Baroda and Life Insurance Corporation of India responded that they do not maintain sectoral bifurcation of data or industry-wise distribution of loan and NPA information. The Union Bank responded to the
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question with information pertaining to agriculture, small scale industry, other priority and non-priority sectors indicating that they do maintain information on loans to different sectors of the industry. Punjab National Bank, Canara Bank, Bank of India, Indian bank, Central Bank of India and Corporation Bank provided partial information on their sector wise exposure of NPAs.

3.2 STONEWALLING INFORMATION - A COMPLETE LACK OF TRANSPARENCY

In November 2010, the Central Information Commission (CIC) had ordered the Reserve Bank of India to disclose the names of top 100 defaulting industries of the country to an applicant and also upload the same on the banks website. While passing this order, the I nformation Commissioner had stated that the disclosure of this information was in larger public interest. However, reluctant to reveal the list of defaulters the RBI petitioned the Delhi High Court and obtained a stay on the order passed by the CIC. A similar attempt by researchers of this report to get information on loans to companies, defaulting industries, action taken against defaulting industries, NPA on project loans, policies to guide project loans, social and environmental guidelines for sanctioning project loans, etc from various public sector banks has been met with stiff resistance. All financial institutions, State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank, Union Bank of India, Indian Bank, Corporation Bank, Central Bank of India, Life Insurance Corporations, with the exception of State Bank of Mysore, refused to divulge complete information. Applications86 under the Right to Information Act 2005 were filed with 11 public sector banks on 14.09.2011 and 10.02.2012. Much of the questions were unanswered by the Public Information Officers (PIO) who sought refuge under the exemptions listed under the RTI Act. Appeals to the First Appellate Authority of the banks were met with similar hostility and cases are currently pending with the Central Information Commission (CIC). State Bank of Mysore was the only bank where the First Appellate Authority responded stating that the conclusions arrived by the PIO were not correct and that available information should be made available to the applicant. Interestingly, different banks provided information to different questions, different parts of questions and quoted different sections to deny information, implying the arbitrary usage of sections within the Act to deny information. While Punjab National Bank denied providing the amount of loans that are sanctioned annually to companies, Bank of Baroda, Canara Bank, Bank of India, Union Bank and Indian Bank claimed to not have centrally available information on the volumes of loans provided to companies. Similarly Central Bank of India claimed to not maintain separate records of loans to private sector and public sector undertakings.

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Refer to Annexure 2 for details of RTI application.

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If it is indeed true that the above mentioned banks do not maintain data of the volume and number of loans provided to public sector and private sector companies, then it is shocking that banks are operating and continuing to provide large project finance loans to companies in the absence of a consolidated understanding of their exposure on such loans. For instance, Bank of Baroda did not provide information on total loans advanced to companies as the same needs to be compiled from all branches of the bank. Bank of Baroda also does not have figures of non-performing assets for different sectors and industries. It goes to show that there is no mechanism within banks for standardised and scientific classification of loans and non-performing assets. This hostility by both financing institutions and project proponents in providing information on loans, date of sanctioning, the terms, interest rates, repayment periods, etc is most evident while attempting to understand the financial records of individual projects. For example, in the case of the Athena Demwe Lower hydro electric project which has a total project cost of Rs. 13,144.91 Cr, there is almost no information on where this money is coming from. What is known is that the Power Finance Corporation has sanctioned a loan of Rs. 2300 Cr and that the project got a loan from Rural Electrification Corporation. There is no publicly available information indicating which other financial institutions contributed to the remaining portion of debt. In some cases such as GMR Kamalanga Energy, Krishnapatnam UMPP and Lavasa Hill City, media reports inform of the total project cost and the number of banks that contributed to the debt portion of the costs. This however, is the maximum extent of information available to the public at large or project-affected communities. The Reserve Bank of India maintains a list of information that cannot be disclosed as per their Disclosure Policy87. Under the section on banking operation and development, Information on investment proposals, till the action is complete is listed as exempted under the Right to Information Act. The exhaustive list of exemptions in the same section does not include information on loan details to projects. In August 2010, the RBI refused to disclose names of the top 100 industrialists who had defaulted on repayment of loan to banks in response to a Right to Information application. The Central Information Commissioner (CIC), in the matter, ordered the RBI to provide the information to the appellant and directed the RBI to suo motu disclose complete information on such industrialists every year. Refusing to oblige, the Reserve Bank of India filed a writ petition against the CICs order in the Delhi High Court. Speaking up against the weakening of banking regulation, increasing default of loan by corporations and the RBIs refusal to disclose names of defaulters, the All India Bank

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www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2347

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Employees Association (AIBEA) in December 201388 disclosed figures for bad loans, restructured loans, write offs and the names of top 50 corporate defaulters in public sector banks. The Association also declared that they would publish a booklet with the the names of the top 30 defaulters in each Bank. Names of some of the top defaulters of Bank loans are given overleaf. Moves such as publishing photos of individual defaulters in newspapers and bill boards, when banks are keeping all details of loans to companies under wraps, with little will to check the large defaulters, can only be seen as a tactic to divert public attention from the bigger implications of poor banking policies. The practice of withholding all information under the pretext of commercial secrecy with the intention of protecting corporate clients leads to unaccountability and disposes institutions to malpractice and corruption. In November 2011, the Economic Offences Wing (EOW) of the Central Bureau of Investigation (CBI) charged senior officers of public sector financial institutions and banks for having received bribes from a financial services company Money Matters, which mediated with banks for large sized corporate loans. The CBI alleged that these loans were sanctioned by over-stepping mandatory regulatory conditions for loan approvals. The LIC Housing and Finance Limited, Bank of India, Central Bank of India and Punjab National Bank were indicted by the CBI for irregularly approving loans to companies such as Lavasa Corporation, Oberoi Realty, Ashapura Minechem, Suzlon Energy, DB Realty, Emaar MGF Land, Mantri Realty and Kumar Developers. Financial institutions and banks around the world have developed and implemented policies on disclosure and access to information which require them to publicly disclose details of their loans to all projects funded by them. Banks disclose loan details along with brief descriptions and environmental and social information of the project on their websites. Most banks disclose such information after the signing of the loan document. However, certain international banks are also in the practice of placing information pertaining to projects in public domain for a short period of time to seek public opinion after which a decision is taken on sanctioning of loan to the project. Indian banks not only do not have disclosure policies but are forcefully violating central norms for information disclosure to withhold information on corporate loans.

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Circular Letter No.27/42/2013/54. All India Bank Employees Association. 03 December 2013

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Chapter FOUR
4.1 DEMOCRATICALLY ACCOUNTABLE AND PUBLICLY TRANSPARENT INVESTMENT
The cases studies presented in the first chapter raise critical concerns on banking policies in India. It is evident from the cases discussed in this report that in their lending practices with regard to projects, public and private financial institutions in India, have adopted a passive position on environmental and social concerns; are not honestly and satisfactorily assessing social and environmental impacts and risks; demonstrate little regard for national policies and norms meant to safeguard social and environmental interests; and are not monitored and regulated by a central policy to ensure that investment is democratically accountable and publicly transparent. Banks are typically seen only as financing institutions; they are disassociated with the activities of the projects they finance and therefore are a green sector. But are banks really the green sector they are considered to be, if the flow of finance from them is reason for irrevocable social, economic and environmental damage? In the relentless pursuit of expanding business, financial institutions are evading responsibility and accountability and are functioning outside of the democratic strictures espoused in the country. Large projects by their sheer size, and due to unpredictable markets, socio-political circumstances and poor implementation, have inherent risks associated with it. Being key stakeholders of the projects which are made possible through their financing, banks must have a responsibility to finance only those projects that fulfil both regulatory requirements as well as social and environmental norms. Most of the asset quality deterioration for SBI has happened on projects under implementation or under construction, which have not been able to keep up the time lines because of environmental clearances and fuel supply, etc. Interview with Economic Times, 03 September 2013, Pratip Chaudhuri, Ex-Chairman/ Managing Director, State Bank of India Such impacts however cannot be merely viewed within the environmental and social context alone as the case studies have shown that these risks have the ability to affect the economic interests and long-term viability of the project. These risks can transform into cost escalations and result in unforeseen increase of the total project cost. For lenders, it is unquestionably an economic incentive to ensure that projects adhere to the necessary environmental and social norms as projects made unviable due to violations can potentially become a financial burden. In the project finance mode, banks would first and foremost want projects to achieve early financial closure and begin operation to generate cash flow so that debt can be repaid. Any sustained delay in the projects advancement translates to a
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risk on the balance sheet of the lender. On account of delayed projects such as Athena Demwe Lower HEP, Sasan Power, Lavasa Hill City, Lafarge Surma and Krishnapatnam UMPP, several banks are stressed with non-performing assets and restructured loans. Should the growth opportunities or the growth prospects become low, I do not think it affects the debt market as much as it would the equity markets, because the equity market participants give a price earning multiple depending on the growth prospect, but in the debt market we are more concerned about their ability to service the debt. Interview with Economic Times, 03 September 2013, Pratip Chaudhuri, Ex-Chairman/ Managing Director, State Bank of India

4.2 GLOBAL MECHANISMS FOR ACCOUNTABLE AND TRANSPARENT INVESTMENT

The need for investment to be responsible and ethical goes back as early as 1600s when religious groups campaigned against investing in businesses with destructive practices. In the latter part of the twentieth century, colossal damage to environment and human life, accentuated by incidents primarily rooted in negligence or incompetence such as the Three Mile Island nuclear accident in 1979, Bhopal gas tragedy in 1984, Chernobyl nuclear disaster in 1986 and the Exxon oil spill in 1989, cast doubts on corporate practices and prompted scrutiny of the banks funding the projects. Subsequently, responsible finance, ethical investment and sustainable development acquired a structure in the form of procedures, policies and guidelines. Faced with severe criticism from governments and civil society institutions in the third world, in the 1970s the World Bank Group was forced to institutionally frame policies to assess environmental and social impacts of projects they financed. Public pressure for accountability in World Banks funding, propagated by the Narmada Bachao Andolan (NBA) and the international campaign against the Sardar Sarovar dam on River Narmada, resulted in the formation of the World Bank Inspection Panel in 1993. The Morse Committee set up by the Bank to independently review the Banks role in the Sardar Sarovar Project reported severe human and environmental damage caused by the dam in violation of the Banks policies. The banks practice of transferring large amounts of money w ithout scrutinising social and environmental implications of projects was criticised by the Committee. In 1998 IFC launched a set of environmental and social review procedures and Safeguard Principles, which in 2006 was adapted into a Sustainability Framework with policies and procedures on social and environmental sustainability and performance standards which defines roles and responsibilities for managing projects. These standards include assessment and management of environmental and social issues, labour and working conditions, resource efficiency, community health, safety and security, land acquisition and involuntary resettlement, indigenous people, biodiversity conservation and natural resources and cultural heritage. In 1999, the World Bank Group instituted the Compliance
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Advisor Ombudsman (CAO), an independent recourse mechanism for International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA), to deal with complaints from project-affected communities with the goal of enhancing social and environmental outcomes on the ground. The UN Global Compact (UNGC)89 was initiated by the United Nations in 2000 as a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. This was meant as a joint financial sector initiative to discuss financial investment banks and fiduciaries social responsibility implementation requiring signatories to commit to the UN Global Compact and its ten principles of human rights, labour, environment and anti-corruption. The Principles for Responsible Investment (PRI) was launched in 2006 by the UNGC and the UN Environment Programme Finance Initiative (UNEPFI) in collaboration with the New York Stock Exchange (NYSE). PRI is a set of voluntary guidelines for investment entities to address environmental, social, and corporate governance (ESG) issues by placing financial social responsibility at the core of investment decision making. The Equator Principles (EPs) was launched in 2003 as a credit risk management framework for determining, assessing and managing environmental and social risk in Project Finance transactions. The financial institutions which adopt EPs commit to provide loans only to projects which comply with the prescribed social and environmental policies and procedures. The EPs were initially adopted by ten90 global financial institutions. Other international initiatives on accountable and transparent investment include the Global Reporting Initiative (1997), Collevecchio Declaration on Financial Institutions (2003) and the London Principles on Sustainable Finance (2002).

4.3 VOLUNTARY GUIDELINES LACK TEETH

Globally professed voluntary guidelines such as the UNGC, PRI and Equator Principles are based on the premise that institutions which adopt the principles will self regulate and monitor their investment to ensure that no harm or damage is done to human and environmental life. The experience in the last 20 years has shown that this trust on self regulation and commitment is both mistaken and undeserving. International banks which are signatories to UNGC or EP have violated the principles on their investment projects in India and other countries. For instance, several Global Compact companies such as Aventis, Nike, Rio Tinto, Norsk
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http://www.unglobalcompact.org/docs/news_events/8.1/GC_brochure_FINAL.pdf ABN AMRO Bank N.V., Barclays plc, Citi, Crdit Lyonnais, Credit Suisse First Boston, HVB Group, Rabobank Group, The Royal Bank of Scotland, WestLB AG, and Westpac Banking Corporation.

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Hydro and Unilever have violated91 one or more of the Principles of the Compact. Similarly, many of the 98 Indian businesses registered with the UNGC are repeat violators of environmental and social norms. Madras Aluminium Company (MALCO) has committed environmental, labour and human rights violations92 in Mettur, Tamilnadu; Tata Power has committed environmental and human rights violations93 in its Mundra UMPP, Gujarat; Hindustan Unilever Limited (HUL) has committed labour rights and environmental violations94 in its thermometer factory in Kodaikanal, Tamilnadu; Hindustan Construction Company has committed environmental and human rights violations at the Lavasa Hill City, Maharashtra; Jindal Steel acquired mining rights95 in Jharkhand through corrupt means. The Indian financial sector businesses registered with UNGC include the Infrastructure Development Finance Corporation (IDFC), Rural Electrification Corporation (REC) and Power Finance Corporation (PFC). IDFC, REC, and PFC have sanctioned loans to projects such as the Athena Demwe Lower HEP, Sasan Power, GMR Kamalanga Energy which have committed environmental, labour and human rights violations. Barclays bank96 which was one of the private banks responsible for developing the Equator Principles had associated with the Sardar Sarovar dam project. The project involves the flooding of one of Indias most productive agricultural regions and the forced relocation of an estimated 2 Million people. In 1993, the World Bank withdrew its funding from the Narmada dam project in response to uncompromising resistance by villagers and their efforts which exposed serious violations by the Bank. The Narmada project was in breach of the Barclays banks own Social and Environmental principles, the Equator Principles and Indian laws! The IDFC, the only Indian financial institution to sign on to the Equator Principles, has not only sanctioned loans to the problematic GMR Kamalanga Energy project but also acted as an intermediary to channel finance for the IFC to the project. Mechanisms such as the UNGC or EP or PRI are voluntary guidelines and for that very reason hold no capacity and authority for actual implementation. They are at best frameworks
91

The UN's Global Compact, Corporate Accountability and the Johannesburg Earth Summit. 24 January 2002. Bruno, Kenny. CorpWatch. 92 The Indian Peoples Tribunal report on environmental and human rights violations by Chemplast Sanmar and Malco industries at Mettur, Tamil Nadu. 93 The Real Cost of Power - Report of the Independent Fact-Finding Team on the Social, Environmental and Economic Impacts of the Tata Mundra UMM, Kutch, Gujarat. June 2012. 94 The Indian Peoples Tribunal Report on the Alleged Environmenta l Pollution and Health Impacts caused by the Hindustan Lever Mercury Thermometer Factory at Kodaikanal. June 2003. 95 Indian Billionaire Naveen Jindal in Trouble, Again. 12 June 2013. Forbes. 96 The Future of Responsible Lending In India. May 2009. Sophie A Hadfield-Hill.

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which can be voluntarily adopted but in the absence of enforcement and monitoring, banks cannot be held accountable for non-adherence to the standards. Moreover, becoming signatories to such voluntary frameworks allows financial institutions to pay lip service to the cause, preserve its public image and oppose a binding regulatory mechanism. On the other hand, the World Bank Groups investments are subject to the adherence of their safeguard policies. Even so, mechanisms such as the CAO within the World Bank are soft laws which provide limited recourse. Ironically, the World Bank Group has globally been amongst the most criticised for involvement in projects which entail massive human rights and environmental violations. The World Banks expertise in formulating policies for protection of environmental, social and corporate governance has not necessarily translated into good practices. Alongside the periodical review of their Sustainability Frameworks, which has slowly raised the bar of standards adopted, the Bank has also innovated newer means to finance projects in violation of its own policies and safeguards. IFCs large scal e investment into Financial Intermediaries (FIs), which absolves transparency and accountability, is one such example. The protection of a countrys limited natural resources and the rights of its people cannot be left to the discretion of voluntary guidelines and standards set by international institutions. It is however necessary to follow global leads in the direction of responsible banking to develop a country-based framework to ensure that public-sector and private-sector funds are not utilised for economically, environmentally and socially unviable projects.

4.4 REGULATION OF SOCIO-ENVIRONMENTAL NORMS IN LENDING IN INDIA

Indian banks are far behind the global scenario with regard to assessing environmental and social impacts of projects they invest in. A 2009 study97 which looked into the future of responsible lending in India found that awareness of international lending standards among Indian banks was minimal. The study found that whilst 46 per cent had heard of the Equator Principles, only 27 per cent (14 respondents)98 were well informed, and as 8 of these were respondents from foreign banks, this figure is disturbingly low . It was also pointed out that Indian bankers blame ignorance for their continued irresponsible funding of projects. Forty one per cent of respondents were also in favour of the Indian Government regulating the Equator Principles. The study mentions a CEO of a bank commenting, if we were told to sign it then we would agree to sign, if we have someone telling us then we will do it, if it is regulated then we would have to.

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The Future of Responsible Lending In India: Perceptions of the Environment and Sustainability. May 2009. Sophie A Hadfield-Hill. Department of Geography, University of Leicester. 98 Respondents in this study include senior bank management - directors, managers, executive officers, who are in decision making positions.

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The Veil of Internal Guidelines A common counter to the argument demanding a sustainable banking framework for Indian banks is the existence of internal guidelines within banks to ensure due diligence of projects with respect to risks, including social and environmental. Internal guidelines, as the name suggests, are guidelines with no mechanisms for oversight by an external body such as the RBI or Parliament and do not allow for real transparency and accountability. Very few, including Government authorities, are privy to a banks financial information or their guidelines. Moreover, an aggressive and competitive financial environment poses threats of singling out individual banks if they adopt internal guidelines with stringent monitoring of responsible implementation of projects. Information sought under the Right to Information Act 2005 shows that most banks have internal loan policies or Credit Risk Management99 policies apart from following the guidelines stipulated by the RBI. These policies vary in size and strength but are uniform in ignoring social and environmental risks. For instance, Union Bank of India has a loan policy covering basic tenets of credit including credit administration, method of assessment, etc. The due diligence procedure spelt out by Union Bank verifies only the project proponents credit reports, industry analysis, financial statements and market rating. State Bank of Mysores loan policy guides on issues such as exposure levels, credit appraisal standards, credit monitoring and supervision, risk management, review of loans, take over norms and NPA management. Indian Bank and Corporation Bank provided similar policies. LIC responded that they do not have an independent Credit Risk Management policy while State Bank of India, Central Bank of India, Punjab National Bank, Bank of Baroda, Bank of India and Canara Bank stated that the Credit Risk Management policy was for internal circulation only. Responses to the RTI from the 11 banks also indicate that they do not have a policy to specifically deal with Project Finance. Bank of India responded that they follow the guidelines set by RBI and other competent authorities. This response holds no ground given that the RBI does not have specific guidelines or circulars to deal with project finance. There are only two brief and vague references to project finance in RBI circulars; in the December 2007 RBI circular on Corporate Social Responsibility, Sustainable Development and NonFinancial Reporting- Role of Banks and in the July 2012 RBI circular on Loans and Advances100. In response to this question, the Union Bank of India and State Bank of Mysore provided the banks general loan policies which however did not contain any specific reference to project finance loans. Corporation Bank stated that Only technically feasible and financially viable projects are considered for bank finance. Before disbursing the credit
99

Credit risk is defined as the risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. 100 RBI Master Circular Loans and advances Statutory and Other restrictions. 02 July 2012. http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7380

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limits, the bank ensures the obtension of all statutory and legal clearances/ permission/ licenses and compliance of mandatory requirements. Life Insurance Corporation of India responded with a set of 6 broad guidelines for sanctioning loans to companies in the private sector. 1. Loans to private (limited) companies/ private entities/ private organisations are not considered. 2. Loans are given to public (limited) companies in the private sector for Greenfield and Brownfield project including infrastructure projects, refinancing of existing loans as well long term working capital and capex requirements. 3. Loans for projects and refinancing are considered on a consortium basis with other financial institutions and are based on the appraisal done by the lead banker in the consortium. 4. Loans are also granted to Special Purpose Vehicles floated by public sector companies and public limited companies, in consortium with other lenders, for the purpose of construction of roads, power projects, ports, etc. 5. The quantum of loan to be sanctioned is determined according to IRDA guidelines and on the basis of capital employed in the company. 6. The terms and conditions for disbursement of loan and repayment of the same would be as per the loan agreement/ financing documents and in line with the terms of sanction. The LIC guidelines for sanctioning of loans to companies are in effect generic and serve little purpose. For example, that LIC does not consider loans to private limited companies is an organisational decision and not a guideline. State Bank of India provided a brief description of the procedures followed for project finance loans. Procedures followed by State Bank of India while sanctioning Project Finance to private sector companies In-principle approval is for prima facie acceptability of projects and an indication of willingness of the Bank to finance the project if found acceptable on detailed due diligence. On approval of the same, broad terms of loan are advised to borrower. On receipt of a reference from the Branch/ company/ syndicator with basic information about the project, a view is taken on the project and a brief note on the major terms to be offered is put up for in-principle approval. On receipt of acceptance from the company of the in-principle term sheet along with the Detailed Project report (DPR), Financial Model and other project related documents/ information, the proposal is appraised on the viability/ feasibility parameters keeping in view its risk profile and ensuring its conformity to the Bank/ RBI guidelines/ instructions in this regard. Detailed discussions are also held with the company representatives/ consultants on project issues. Final approval is accorded by the appropriate credit committee of the Bank.
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The information from the 11 banks also reveals that either the banks do not have internal guidelines to assess social and environmental risks or have weak watered-down guidelines that are applicable to project finance. Out of the eleven banks which were asked for their internal guidelines to assess social and environmental risks, State Bank of India101 was the only one which had and agreed to provide it. Central Bank of India, Union Bank of India and Bank of Baroda refused to provide the information and sought refuge under section 8(1)(a)(d)102 and 7(9)103 of the Right to Information Act. Both Indian Bank and Canara bank responded that the question- Does Canara Bank/ Indian Bank have environment and social guidelines with regards to project finance? If yes, please provide copies of the same, was vague and could not be answered. Bank of India responded that it followed the guidelines prescribed by RBI. Again, RBI does not have a specific guideline to deal with social and environmental safeguards! Life Insurance Corporation of India (LIC), State Bank of Mysore (SBM), Punjab National Bank (PNB) and Corporation Bank responded that they do not have environment and social guidelines with regards to project finance. Responses from LIC, Corporation Bank and PNB includeWhile considering funding of projects, LIC insists on prior clearance from the Ministry of Environment and Forests (MoEF) and adherence to the conditions stipulated therein, whenever required. LIC also insists on the project fulfilling the Resettlement and Rehabilitation (R&R) obligations before sanction/ disbursement of loans. Only technically feasible and financially viable projects are considered for finance at Corporation Bank. The Bank ensures compliance of all statutory guidelines/ permissions/ licenses with regard to environmental and social guidelines while sanctioning credit. While appraising a project, PNB looks into the following social and environmental issues i.) Impact on increase in level of savings and income distribution in society and standard of living. ii.) Project contribution towards creation and rate of increase of employment opportunity, achieving self sufficiency, etc. iii.) Project contribution to the development of the region, its impacts on environment and pollution control.

101 102

Refer to Annexure 3 for SBIs Circular on Credit Policy and Procedures Department; 11 March 2008. Section 8(1)(a) states that there shall be no obligation to give any citizen information, disclosure of which would prejudicially affect the sovereignty and integrity of India, the security, strategic, scientific or economic interests of the State, relation with foreign State or lead to incitement of an offence Section 8(1)(d) states that there shall be no obligation to give any citizen information including commercial confidence, trade secrets or intellectual property, the disclosure of which would harm the competitive position of a third party, unless the competent authority is satisfied that larger public interest warrants the disclosure of such information 103 Section 7(9) states that information shall ordinarily be provided in the form in which it is sought unless it would disproportionately divert the resources of the public authority or would be detrimental to the safety or preservation of the record in question.

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State Bank of Indias circular from the Credit Policy and Procedures department dated 11 March 2008 is a basic frame to assess social and environmental risks for project finance loans. The circular justifies the need for such guidelines as on several instances projects financed (by SBI) were ordered to be closed due to environmental considerations. Neglect or poor management of social and environmental issues arising or likely to arise from projects has been the primary reason for this. The circular calls for recording significant environmental and sustainability implications while assessing projects. This is proposed through a form for filling in relevant information as an annexure to the proposal for loan. The circular checks - For necessary approvals such as site clearance from Ministry of Environment & Forests, No Objection Certificate (NOC) from Pollution Control Board & Atomic Energy Division, mining plan approval from Indian Bureau of Mines/ Ministry of Coal, forestry clearance under Forest (Conservation) Act 1980, clearance from Chief Controller of Explosives, commitment regarding availability of water & power from concerned authority; - If the project is mired in a court case; - If there were any issues raised during the public hearing; - Whether Resettlement & Rehabilitation (R&R) plan for affected/ displaced persons is finalised; socio-economic welfare measures for the nearby villages; - For details of pollution (air, water, noise, solid waste) control measures, existing/ proposed and efficiency of each of the systems. When it comes down to it, this method of collecting social and environmental information through a check list is rather futile if the bank does not conduct due diligence to verify the claims of project proponents. The Corporation Bank, Life Insurance Corporation of India and State Bank of India, which were the only banks which responded positively to the RTI query on internal guidelines for social and environmental risks, indicated that only projects already cleared by the respective Ministries are considered for loans. Although consistent with RBIs position , this claim is hollow, as on one hand there is no possible way of verifying if information on loans to projects is not made public and on the other particular cases show that loans are sanctioned prior to the granting of clearances. The 2009 Leicester University study on the Future of Responsible Lending in India had reported that four Indian financial institutions admitted to providing funds to infrastructure projects which had not been passed by the MoEF . Indian banks are severely lagging at developing a framework to ensure sustainable development and mitigate social and environmental risks. They are also non-signatories to the prescribed international best practices. In the absence of sufficient information on risks and issues anticipated in a project and norms and guidelines to comprehensively assess those risks, informed decisions are not being taken by loan sanctioning authorities in Indian banks.
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Chapter FIVE
5.1 CONCLUSION
With an aggregate deposit of Rs. 59,090,82 Cr in scheduled commercial banks in 2011-12, banks in India are seen as an easy avenue by large companies to procure loans for projects. On an average, 70 to 80 per cent of the total cost of a project is met through loans provided by banks. Public sector banks enjoy the confidence of a disproportionately large section of the people along with boundless financial and other support from the Government. This extensive confidence is misused by the banks management who do not seem to be operating in the interest of the banks investors. Defying the very rationale behind the nationalisation of banks, the banks have gradually moved away from public sector lending to private sector lending. Analysis of loan data from the 11 public sector banks studied in this report show that loans to private corporate projects are jumping at an aberrant pace. Loans to private sector companies by the State Bank of India have jumped 500 per cent in the seven years between 2004 and 2011. The data from public sector banks clearly establish that banks are greatly exposed to loans in the private sector. SBIs non-performing asset in 2010-11 was Rs. 6 Cr for public sector companies and Rs. 9217 Cr for private sector companies. Loans from banks are highest to the private sector and so are the non-performing assets and restructured accounts highest on their private sector corporate loans. Restructured accounts, especially on corporate loans, are growing two times faster in public sector banks as compared to private sector banks. This extensive difference in the restructured accounts of public and private sector banks indicate that the safeguarding of interests within public sector banks is immensely weak. With a disproportionate share of restructured accounts which can potentially turn into bad assets, Public Sector Banks are in a relatively weak market position. The All India Bank Employees Association (AIBEA) in December 2013 blamed lack of adequate regulation for the current financial distress, In the name of reforms and liberalisation, banking regulations are being de-regulated. One of the main adverse effects of this de-regulation is the increase in bad loans in banks, where big borrowers (are allowed to) take loans from banks and not repay. The Association demanded that names of defaulters of over Rs. 1 Cr be published; that wilful default of loan be made a criminal offence; that collusion and nexus be investigated; that recovery laws be amended to speed up recovery of bad loans; that stringent measure be taken to recover bad loans; and to not incentivise corporate delinquency. The exponential growth in the Indian industrial and infrastructure sector projected for the coming decade will rely largely on investment from financial institutions. The post
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globalization era of growth and development, where the private sector is encouraged and supported over the public sector, holds newer implications for financial institutions. Ingenious adjustments are being made to allow the private sector greater access to public resources and public coffers while the ensuing accountability is spread thin. Norms are being diluted, loopholes are exploited and checks are being reduced in number to facilitate this growth. Without a firm, democratically accountable and transparent system to regulate and oversee the rapid flow of finances into projects, the price we pay as a country for the interim damage can be far heavier than the benefits of growth itself. The Ministry of Environment and Forests is attempting to deal with the rapid increase in the number of projects awaiting clearances alongside pressure from the Commerce and Finance Ministries to clear greater number of projects in shorter spans. After a decade of complaining about the green norms which are stalling infrastructure and development projects, the Finance Ministry initiated plans for a central board which could potentially supersede the authority of the separate ministries. Formation of the Cabinet Committee on Investment (CCI), which can set deadlines for the granting of project clearances by Ministries, effectively means that a project has to be cleared at all costs and that the clearance is only a matter of time. It is ironic that with projects growing massively in size, the time period for clearances is being unwisely cut short. This shelving of regulatory mechanisms is also contributing to uncontainable large-scale corruption as seen in the recent 2G spectrum and coal-gate scams. Large tracts of private, agricultural, community, forests, government and other lands are being diverted rapidly to private sector development and infrastructure projects without proper assessment of its impact on communities, livelihoods, local economy and environment. Governments are facilitating this transfer of land to private sector projects under the guise of public purpose without safeguarding the interests of the citizens. Given the lack of a central framework to comprehensively deal with assessment of impacts, acquisition of land, change of land use and resettlement and rehabilitation measures, project-impacted communities are forced to endure unreasonable arrangements. Companies are making use of the huge gaps in the Indian regulatory system to push through projects with adverse impacts and huge financial risks. Even in instances where the project proponents and parent companies are taken to task for destructive impact of projects, no responsibility is placed on the lenders, whose money made the project possible. This weak link in regulating finance has lead to a catch-22 situation. As long as financiers ensure unbridled flow of funds, project proponents feel no need or pressure to address environmental and social issues. And banks continue to finance projects regardless of the potential harm it can cause because they do not have any guidelines to direct them otherwise. Social and environmental safeguards for financial institutions lending to various mega
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projects are largely nonexistent in India. Lack of grievance redressal mechanisms in banks also impedes any channel of communication between affected communities and lenders. Exploiting this gap in lending regulation in India, International Financial Institutions are making use of national financial institutions as financial intermediaries (FI) to channelize unaccountable and non-transparent lending to projects which are in violation of their internal safeguard principles. The six cases presented in this report draw clear lines between socio-environmental issues and financial stress. After already refinancing loans to Sasan Power in 2010-11, Reliance Power yet again restructured the loan in 2013 because it failed the date of commissioning the project. During the proceedings of court cases for environmental and social violations, both Lavasa Corporation and Lafarge Surma reported deteriorating loan quality, defaulted on payment of interest and principal to lenders and subsequently restructured their loans with lenders. The Krishnapatnam UMPP and Athena Demwe Lower HEP achieved financial closure in 2010 and portions of the sanctioned loan have already been transferred to the projects. Both these projects are yet to even begin construction. Instead of sanctioning loans to projects which have met the statutory requirements, banks are sanctioning loans to projects which not only have not gone through due process of seeking clearances but are in violation of several crucial legislations meant to safeguard human and environmental interests. As the cases of Athena Demwe Lower HEP, Sasan Power, Lavasa Hill City and Lafarge illustrate, deteriorating quality of loans sanctioned by financial institutions are used as arguments to pressure for clearances. The responsibility to safeguard loans lies with financial institutions and the responsibility to safeguard human and environmental life lies with the Ministry of Environment and Forests. The Ministry of Environment and Forest cannot be pressured to grant clearance to a project merely because banks need to recover the huge loans sanctioned to it. Unless financial institutions and banks holistically appraise risks associated with a project right at the beginning, they will be taken by surprise at every setback and be forced to make leeway to simply be able to see returns from the loan at some point in the future. By masking bad loans, obfuscating loan information and deliberately blocking access to information on their corporate clients, banks are active party to the creation of a sacrosanct bubble where loans to so-called development and infrastructure projects have become unquestionable. The result: increase in bad loans and poor financial performance within banks! The All India Bank Employees Association in December 2013 disclosed that nonperforming assets in banks reached Rs. 1,94,000 Cr. The share of NPAs in public sector banks alone is Rs. 1,64,461 Cr. It is the right of all citizens to be informed of where and how public money is spent. Money,
95

especially public money, cannot be doled out freely without accountability. The complete lack of information available on the projects financed by the banks also deters discussion on the developmental impacts of such lending. Depletion of natural resources and degradation of the natural environment are irreversible. The short-sighted coal mines of the 20th century which used unscientific methods for mining out coal from under the earth had not foreseen that the town of Jharia would continue to burn underground a century later. Thousands of Adivasi and other marginalised communities from Jharia in Jharkhand live on hot earth with little but the remnants of coal to fill their stomachs. They are waiting to be rehabilitated, as they have for many generations now. Financial institutions have to presume responsibility for the impacts of projects made possible through their lending. And environment and social equity has to be the common concern of the people of a region. Banks across the world are being targeted, charged and boycotted for encouraging dirty, polluting and harmful projects through their lending. Lending decisions which have far reaching consequences cannot be left solely to the intelligence of individual executives at banks. Instead of waiting to go the full circle, Indian banks should proactively endorse safeguard policies which regulate their investments to projects. Resources of the banking sector, especially that of public sector banks, are valuable and need to be utilised with foresight and prudence. Sustainable development is the collective responsibility of the Government, its people and the industry.

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5.2 RECOMMENDATIONS
Legislative Recommendations 1. In order to regulate and monitor corporate loans and project finance loans, the Parliament must pass and implement a legislation on the lines of Public Accountability, Transparency and Compliance with Social, Environmental and Sustainability Safeguards for Development and Infrastructure Projects in Lending. The legislation must aim to ensure that Loans are not sanctioned to projects which negatively impact human and environmental life; Lending is democratically accountable and publicly transparent; Lending is monitored and regulated through robust mechanisms; Banks are held liable for lending in violation of the principles and standards prescribed by the aforesaid legislation. 2. The transparency and accountability clauses will apply to all corporate loans. The social, environmental and sustainability safeguard clauses will apply to project specific loans. 3. The legislation should apply to all financial institutions operating in the country - public, private and foreign. 4. The legislation should mandate that lending be in compliance with the aforesaid legislation and should stipulate punitive action for financial institutions violating the legislation. 5. The aim of the social, environmental and sustainability safeguards prescribed in the legislation must be to guide financial institutions with identifying, assessing, regulating and monitoring environmental and social impacts of projects. The safeguards must stipulate appropriate and adequate due diligence mechanisms to ensure accurate assessment of environmental and social issues in a project prior to lending. The due diligence mechanism must be independent of the submissions made by the project proponent. 6. The legislation should mandate the compliance of a project to both I. The Indian environmental and social norms and policies; II. The safeguards prescribed by the aforesaid legislation. This compliance by projects must be a precondition for financial closure. 7. The Legislation should prescribe a Universal Disclosure Policy for financial institutions that mandates proactive disclosure of information on loans to projects. Information on loans must include a minimum of the date of financial closure, the date of loan sanction, period of repayment, interest on loan and updated repayment status. Financial institutions must immediately publish names of companies defaulting on loans. 8. The legislation must incorporate an independent mechanism to evaluate compliance by financial institutions with the legislation. This independent mechanism must involve a body jointly set up by the RBI and the Ministry of Finance, which includes auditors from CAG, banking, legal and environmental experts, social scientists and representatives of national bank employees trade unions. 9. The implementation of this legislation must not in any way be tied to or combined with Corporate Social Responsibility (CSR) initiatives and similar measures of financial institutions. The transparency and accountability measures and the environmental and social safeguards stipulated in this legislation must be independent of CSR initiatives.
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10. The legislation must require financial institutions to unconditionally withdraw its lending in case any aspect of conflict of interest, bribery, corruption or nepotism is established with regard to a project. 11. The legislation must mandate a decentralised mechanism for grievance redressal to address complaints at two levelsi. Grievance Redressal Authority at the centre - jointly appointed by the Ministry of Finance and Parliamentary Accounts Committee (PAC) ii. Grievance Redressal Committees within financial institutions The members of the Authority and Committees must include social scientists, members of social organisations, legal and technical experts as members. Regulatory Recommendations 1. The Reserve Bank of India must issue a circular to financial institutions stipulating A universal categorisation of projects by size [Large/ Medium/ Small] and impact 104 [Red/ Orange/ Green]. A scientific and standardised classification of corporate and project finance loans on the basis of whether it is sanctioned to a public sector undertaking or a private sector company. Further, the classification must specify whether a private sector company is a public limited company or a private limited company. 2. The Reserve Bank of India must issue a circular to financial institutions stipulating that banks show no bias whatsoever towards private corporate clients in the sanctioning of loans. The circular must instruct the Board of Directors of banks to penalise banking officials responsible for biased decisions. 3. The Reserve Bank of India must issue a circular prohibiting financial institutions from evergreening non-performing assets and camouflaging defaults by private corporate clients. 4. The Reserve Bank of India must black list companies which repeatedly default and/ or restructure loans with financial institutions. This list must be made public. 5. The RBI must issue a circular to financial institutions stipulating that parent companies be held liable for default of loan by their subsidiary Special Purpose Vehicles (SPV). 6. The Ministry of Finance must immediately ensure that senior management at banks are trained on the tenets of social and environmental concerns and impacts, to facilitate wellinformed and judicious decision making during sanctioning of loan. 7. The Ministry of Finance must ensure that appointments to the Board of Directors at the Reserve Bank of India, appointments to the Reserve Banks regional boards, and appointments of senior executives at nationalised banks do not conflict with their personal and/ or business interest. 8. The Ministry of Finance must implement strict measures to prevent revolving door of personnel between nationalised institutions and private corporations.

104

Industries are classified by the Ministry of Environment & Forests as red, orange and green on the basis of environmental impacts.

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ANNEXURE 1
List of Board of Directors at the Reserve Bank of India
Name
Dr. Raghuram Rajan

Detail
Raghuram Rajan who took charge as the Director of RBI in September 2013 has in the past been the Chief Economic Adviser in the Indian Ministry of Finance and the Chief Economist at the International Monetary Fund. Rajan has also chaired a Government of India committee on financial sector reforms in 2008. Dr. Chakrabarty has been the Chairman & Managing Director (CMD) of Punjab National Bank and Indian Bank. He was also the Chairman of the Indian Banks Association (IBA). Shri. Sinha has been associated with the Reserve Bank of India for 34 years. He was previously an Executive Director before taking charge as a Deputy Governor. Shri. Khan has been associated with the Reserve Bank for 32 years. He was the Chairman of RBI group on Rural Credit and Microfinance, based on which the RBI issued guidelines to expand banking outreach through Business Facilitators and Business Correspondents for spearheading financial inclusion in the country. Dr. Urjit Patel is an expert on economics and public finance in India, international trade, financial intermediation and regulation of infrastructure utilities. He has been an Advisor (Energy & Infrastructure) at the Boston Consulting Group, on deputation from the International Monetary Fund (IMF) to the RBI and a consultant Ministry of Finance. Dr. Kakodkar, is an Indian nuclear scientist and mechanical engineer. He was the Chairman of the Atomic Energy Commission of India and Secretary to the Government of India, Department of Atomic Energy. Before leading India's Nuclear Programme, he was the Director of the Bhabha Atomic Research Centre. Shri. Karnik has been the President of NASSCOM and was responsible for bringing Satyam Computers back on track after it suffered the corporate fraud. He serves as an Independent Director on the Board of a few companies. Prof. Rajeev is Chairperson, Centre for Public Policy and Professor of Economics and Social Sciences at the Indian Institute of Management, Bangalore. His work focuses on Indian Political economy and how people & societies make decisions about risks. Dr. Mor has worked with the ICICI Bank and was a member of its Board of Directors. He has also served as a Board Member of Wipro, Board Chair of the Fixed Income Money Market and Derivatives Association of India and as a member of the High Level Expert Group on Universal Health Coverage appointed by the Planning Commission. Shri. Malegam has been the President of Institute of Chartered Accountants of India. Currently he is a member of the Financial Sector Legislative Reforms Commission. He is also Director of National Stock Exchange of India, the Clearing Corporation of India Limited and of several large public limited companies. Shri. Premji is the Chairman of Wipro Limited. He is a member of the Prime Ministers Councils for National Integration and for Trade & Industry in India. He is also a member of the Indo-UK and the Indo-France CEOs forum. 99

Dr. K.C. Chakrabarty1 Deputy Governor Shri Anand Sinha1 Deputy Governor Shri H.R. Khan1 Deputy Governor

Dr. Urjit R. Patel1 Deputy Governor

Dr. Anil Kakodkar2 Non-official Director

Shri Kiran Karnik2 Non-official Director Prof M.V. Rajeev Gowda2 Non-official Director Dr. Nachiket M. Mor3

Shri Y.H. Malegam3 Non-official Director

Shri Azim Premji3 Non-official Director

Prof. Dipankar Gupta3 Non-official Director Shri G.M. Rao3 Non-official Director Ms. Ela Bhatt3 Non-official Director Dr. Indira Rajaraman3 Non-official Director

Shri Y.C. Deveshwar3 Non-official Director

Prof. Damodar Acharya3 Non-official Director

Shri. Rajiv Takru4 Shri Arvind Mayaram4 Non-official Director

Prof. Gupta used to teach at Jawaharlal Nehru University. In 1998 Professor Gupta started KPMGs Business Ethics division in Delhi and led this practice for over 5 years. Shri. Rao is the founder and Chairman of GMR Group, a leading Indian infrastructure developer. Ms. Bhatt is the founder of the Self-Employed Women's Association of India (SEWA). Dr. Rajaraman was a Member of the Thirteenth Finance Commission. She had held the Reserve Bank of India Chair at the National Institute of Public Finance and Policy and was on the Economics faculty of the Indian Institute of Management, Bangalore. Shri. Deveshwar was Chief Executive and Chairman of the Board at ITC. He led Air India as CMD between 1991 and 1994. He serves on the National Executive Committees of some of India's premier trade and industry bodies and is a member of the UK-India CEOs Forum instituted by Government of India and the United Kingdom. Prof. Acharya is an engineer and educationist. He has been Director of the Indian Institute of Technology Kharagpur since July 2007. His career includes experience at IIT Kharagpur, as Vice-Chancellor, Biju Patnaik University of Technology, Rourkela, and Chairman, All India Council of Technical Education (AICTE). Shri Rajiv Takru serves as Secretary with the Department of Financial Services (DFS) in the Ministry of Finance. Shri. Mayaram serves as Secretary, Department of Economic Affairs (DEA). He is former Officer of the Indian Administrative Service and has previously held other posts in the ministry of finance and Department of Rural Development. Mayaram had played a key role in developing public private partnership (PPP) policy among others.

Nomination made as per 8 (1)(a) of Reserve Bank of India Act, 1934- a Governor and [not more than four] Deputy Governors to be appointed by the Central Government; 2 Nomination made as per 8 (1)(b) of Reserve Bank of India Act, 1934- four Directors to be nominated by the Central Government, one from each of the four Local Boards as constituted by section 9; 3 Nomination made as per 8 (1)(c) of Reserve Bank of India Act, 1934 - ten Directors to be nominated by the Central Government; 4 Nomination made as per 8 (1)(d) of Reserve Bank of India Act, 1934- two Government official to be nominated by the Central Government. Source: http://www.rbi.org.in/scripts/AboutusDisplay.aspx

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ANNEXURE 2
Information provided by various banks to applications under the Right to Information Act 2005
Q.No Question to Banks 1 Total amount of loans given to companies in the last 6 years - Percentage of loans to public sector companies and private sector companies - Losses suffered due to loan default Number of notices issued to public sector companies for defaulting loan in last 6 years - Measure taken against defaulters - List of defaulters 3 Number of notices issued to private sector companies for defaulting loan in the last 6 years - Measure taken against defaulters - List of defaulters 4 Provide the Non-performing Assets at the end of each financial year for the period between 1990 and 2011 - for public sector companies - for private sector companies Provide sector-wise (Industry wise distribution of exposures) non-performing assets at the end of each financial year for the top 12 SBI Y No No 7(9) Y 8(1)(d) (e)(j) 7(9) PNB 8(1)(d) 8(1)(d) 8(1)(d) Y (part) Y Y Y BoB 7(9) 7(9) 7(9) 7(9) 7(9) 7(9) 7(9) BoI Y (part) Y (part) No 8(1)(d) (j) Y (part) 8(1)(d) (j) 8(1)(d) (j) Y (part) 8(1)(d) (j) Y (part) No No Y (part) Can 7(9) 7(9) 7(9) 7(9) 7(9) 7(9) 7(9) UBI Y (part) Y (part) Y (part) No No No No IB No No No No Y (part) 8(1)(d) (e) No CB Y Y No Y* Y* Y* Y* CBI Y (part) 7(9) 8(1)(a) 8(1)(d) 8(1)(d) 8(1)(d) 8(1)(d) SBM Y Y Y* Y* Y* Y* Y* LIC Y Y 8(1)(d) 8(1)(d) 8(1)(d) 8(1)(d) 8(1)(d)

Y 8(1)(d) (e)(j) Y (part) Y No Y

Y Y 7(9)

7(9) 7(9) Y (part) 7(9) 7(9) No

7(9) 7(9) 7(9)

No No Y (part) No No Y (part)

Y (part) 8(1)(d) (e) Y (part) Y Y Y (part)

Y* Y* Y

8(1)(d) 8(1)(d) 7(9)

Y* Y* Y

8(1)(d) 8(1)(d) No

7(9) 7(9) Y (part)

7(9) 7(9) Y (part)

Y Y Y

7(9) 7(9) Y

Y* Y* Y (part)

8(1)(d) 8(1)(d) 8(1)(d)

101

6 7 8

10

sectors for the period between 1990 & 2011 Provide a list of all industry research conducted in the last ten years Provide copy of Credit Risk Management Policy Provide copy of internal guidelines on prudential exposure to reduce credit risk (for capital market) What are the procedures followed while sanctioning project finance to a private corporation? Provide respective documents and internal guidelines for sanctioning loans. Are there environment and social guidelines with regards to project finance? If yes, please provide copies of the same.

Y Y 8(1)(d)

Y 8(1)(d) 8(1)(d)

7(9) 8(1)(d) 8(1)(d)

Y 8(1)(d) No

8(1)(d) 8(1)(d) Y

7(9) 8(d) Y

No Y No

8(1)(j) Y Y

8(1)(a) (d) 8(1)(a) (d) 8(1)(a) (d) 8(1)(a) (d)

Y Y Y

Y Y Y

8(1)(d)

8(1)(d)

No

No

8(1)(d)

No

7(9)

No

8(1)(a) (d)

Abbreviations SBI - State Bank of India Can - Canara Bank BoB - Bank of Baroda CBI - Central Bank of India UBI - Union Bank of India IB - Indian Bank PNB - Punjab National Bank BoI - Bank of India CB - Corporation Bank LIC - Life Insurance Corporation of India SBM - State Bank of Mysore Y - Information was provided; Y - information was provided after appeal; Y*- Part of the information sought was provided while the remaining was ignored; N - Information was not provided
Grounds for refusal of information Section 7(9) of the RTI Act - Information shall ordinarily be provided in the form in which it is sought unless it would disproportionately divert the resources of the public authority or would be detrimental to the safety or preservation of the record in question. Section 8(1) of the RTI Act - Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, (a) information, disclosure of which would prejudicially affect the sovereignty and integrity of India, the security, strategic, scientific or economic interests of the State, relation with foreign state or lead to incitement of an offence; (d) information including commercial confidence, trade secrets or intellectual property, the disclosure of which would harm the competitive position of a third party, unless the competent authority is satisfied that larger public interest warrants the disclosure of such information; (e) information available to a person in his fiduciary relationship, unless competent authority is satisfied that larger public interest warrants disclosure of such information; (j) information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information.

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ANNEXURE 3
SBI Circular on Credit Policy and Procedures
The Chief General Manager, State Bank of India, Circles/ CAG/ MCG CPP/NJ/CIR/113 Dear Sir, Project Finance: Submission of additional information. There have been several instances where projects financed by us were ordered to be closed due to environmental considerations. Neglect or poor management of social and environmental issues arising or likely to arise from projects has been the primary reason for this. Management of social and environmental impacts by units have to be continuous and proactive. These have a cost aspect which also has to be suitably factored into the project costs. These two, environmental on the one hand and social/ health costs on the other are generally not included in the project cost while implementation or running the same has often resulted in active environmentalists/ NGOs/ local interest groups intervening leading to delays/ postponement and even abandoning of the project causing serious discomfiture to lenders. 2. In view of the above, there is a need to consider and record the significant environmental and sustainability implications while assessing projects. Operating units should incorporate in their proposals certain minimum information on these aspects so that fully informed decisions can be taken by the appraising/ sanctioning authorities. Further due attention to these aspects would enable a proper assessment of the extent of compliance of the project with environmental/ social/ statutory requirements and assist in taking an informed decision on the extent of exposure to be taken. The association with such projects from the corporate Social responsibility point of view also is to be kept in mind. 3. It has therefore been decided that all proposals seeking project finance should invariably include an annexure (as enclosed). Apart from ensuring that the project proponent is aware of the obligations to environment and society, this would also assist the integration of social and environmental aspects of the project into the assessment of projects. Such information would also help in identification and mitigation of environmental and social impacts due to the project. 4. Please arrange to issue instructions to the Branches and their Controlling Offices in your Circle/ Business Group for meticulous compliance thereof. Yours Faithfully Sd/For Managing director and Chief Credits & Risk Officer 103 March 11, 2008

Annexure to the SBI Circular A. Whether the following approvals have been obtained? I. Site clearance from Ministry of Environment & Forests II. NOC from Pollution Control Board III. NOC from Atomic energy Division IV. Mining plan approval from Indian Bureau of Mines/ Ministry of Coal V. Forestry clearance under FCA 1980 VI. Clearance from Chief Controller of Explosives VII. Commitment regarding availability of water and power from the concerned authority B. Is there any court case relating to the project or related activities? If so, details thereof. C. Summary details of public hearing: date of hearing/ issues raised by the public/ response of the project proponents/ suggestions made by public hearing. D. Details about population to be displaced. Whether resettlement& Rehabilitation (R&R) plan has been finalised? If yes, acceptability levels observed and salient features of R&R plan for oustees. I. Site where the displaced people are proposed to be resettled & facilities provided thereof. II. Compensation package including funds earmarked. III. Agency/ authority responsible for their resettlement. IV. Period by which resettlement of Project Affected People will be over. E. Amount, if any, earmarked for socio-economic welfare measures for the nearby villages other than R&R plans. F. Details of pollution (air, water, noise, solid waste) control measures existing/ proposed and efficiency of each of the systems. G. What major occupational and community health and safety hazards (surface and U/G fire, inundation, explosion etc) are anticipated/ what provisions have been made/ proposed to conform to health and safety requirement? Details of personal protective equipment provided/ to be provided to the workers. Information on radiation protection measures, if applicable.

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