Potential investors in the National Thermal Power Corporation (NTPC), which is soon to be privatised through an initial public offering (IPO), are trying to work out how watertight guarantees of payments from power purchasers are.

On the one hand potential investors in the Indian power generator are told that payments are guaranteed by letters of credit (L/Cs) but on the other hand they are told that the ability of state electricity boards (SEBs) to open L/Cs may not continue indefinitely.

Poor financial performance

Around 99 per cent of power produced by NTPC is sold to SEBs and the power generator is obliged to supply power to them from its several power stations in accordance with terms of allocations determined by government.

In recent years the financial performance of the SEBs has deteriorated significantly and the state power purchasers have sometimes only been able to pay their power bills after raising cash by issuing bonds.

L/C agreements

Agreements also bind SEBs to issue L/Cs to secure payments to NTPC and the power generator can use an L/C to obtain payment if the SEB defaults. The power generator can also alter the quantity of power supplied to a board to match the amount it has paid.

But in its prospectus, NTPC issues a warning over the strength of L/Cs' role in this context. "We can not assure you that the SEBs will always be required to or be able to establish L/Cs to secure their payments to us. There could, for example, be a change in Government policy that might lead to a change in the requirement to establish L/Cs," the power generator says.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.